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Decision-Making and Scenarios Week 01 Quiz Answers

Evaluation Criteria: Module 1 Quiz Answers

Q1. If you had to select one criteria for choosing amongst projects, which would you select?

• Either Payback or Internal Rate of Return
• Net Present Value
• Internal Rate of Return
• Return on Investment
• Payback

Q2. You may use a spreadsheet like Excel to help you find the solution to this question.

How much money would you have to put in the bank today, assuming that the bank account paid interest at the rate of 5% per year, in order to be able to withdraw $10,000 at the end of Year 1, $20,000 at the end of Year 2 and $30,000 at the end of Year 3, and have nothing left in the account after the last withdrawal (round to the nearest dollar)?

• None of these are true
• $60,000
• $70,125
• $45,560
• $53,580

Q3. Suppose the bank paid you interest at the rate of 15% per year. What amount of money would you have to put in the bank today, in order to be able to withdraw $10,000 at the end of Year 1, $20,000 at the end of Year 2 and $30,000 at the end of Year 3, and have nothing left in the account after the last withdrawal (round to the nearest dollar)?

• $60,000
• None of these are true
• $71,125
• $32,154
• $43,544

Q4. Suppose that you wanted to be able to withdraw $10,000 at the end of Year 3 from a bank account that will pay you 5% interest in the first year, 7% interest in the second year, and 10% interest in the third year. What amount of money would you have to put in the bank today to be able to make that withdrawal at the end of Year 3 and have nothing left in the account after that withdrawal (round to the nearest dollar)?

• $8,092
• None of these are true
• $6,920
• $4,420
• $7,513

Q5. Suppose your firm is considering investing in a project that requires an initial investment of $200,000 at Year 0, and returns cash flows at the end of Years 1 to 3 of $50,000, $100,000 and $150,000 respectively. Further, assume your company’s cost of capital is 15%. What is the net present value of the project (round to the nearest dollar)?

• -$25,123
• $12,970
• None of these are true
• $17,720
• $100,000

Q6. Suppose your firm is considering investing in a project that requires an initial investment of $200,000 at Year 0, and returns cash flows at the end of Years 1 to 3 of $50,000, $100,000 and $150,000 respectively. Further, assume your company’s cost of capital is 15%. What is the internal rate of return of the project (round your IRR to the nearest tenth of a percent, e.g., 10.1%)?

• 24.1%
• 22.6%
• 19.4%
• None of these are true
• 15.0%

Q7. Suppose your firm is considering investing in a project that requires an initial investment of $200,000 at Year 0, and returns cash flows at the end of Years 1 to 3 of $50,000, $100,000 and $150,000 respectively. Further, assume your company’s cost of capital is 15%. In what year does payback occur for the project?

• Year 0
• Year 3
• Year 2
• Payback is never reached
• Year 1

Q8. Suppose your firm is considering investing in a project that requires an initial investment of $500,000 at Year 0, and returns cash flows at the end of Years 1 to 5 of $20,000, $40,000, $60,000, $80,000 and $350,000 respectively. Further, assume your company’s cost of capital is 8%. What is the net present value of the project (round to the nearest dollar)?

• -$25,552
• $0
• None of these are true
• -$102,551
• $90,000

Q9. Suppose your firm is considering investing in a project that requires an initial investment of $500,000 at Year 0, and returns cash flows at the end of Years 1 to 5 of $20,000, $40,000, $60,000, $80,000 and $350,000, respectively. Further, assume your company’s cost of capital is 8%. What is the internal rate of return of the project (round your IRR to the nearest tenth of a percent, e.g., 10.1%)?

• 7.9%
• 0.0%
• 2.3%
• None of these are true
• 9.4%

Q10. This question relates to a comparison of the projects described in questions 5 and 8.

Refer to the projects in questions 5 and 8. Which of the following best describes the actions you would take based on your analysis?

• Reject both projects
• Accept both projects
• Reject the project in question 5 and accept the project in question 8
• Accept the project in question 5 and reject the project in question 8

Decision-Making and Scenarios Week 02 Quiz Answers

How to Evaluate Projects: Module 2 Quiz Answers

Q1. Questions 1-5 in this Quiz refer to the following scenario: Your company uses recycled newspaper to make paper towels and is considering buying a machine that utilizes a proprietary de-inking technology that will reduce the cost of de-inking the recycled newspaper. The company can buy the machine for $300,000 and it is expected to have a five year life. In order to use the de-inking machine, the company has to train multiple employees how to use the machine appropriately. The cost of training is $10,000. Assume for simplicity that both of these components of the initial investment occur at Year 0 and that the company is otherwise very profitable and faces a 40% tax rate.

What is the after-tax cash flow associated with the initial investment in the project in Year 0?

• None of these are correct
• $300,000
• $310,000
• $186,000
• $306,000
• $180,000

Q2. Refer to the scenario in Question 1.

Assume that the company’s cost of producing paper towels falls by $100,000 per year for five years. Further assume that the company uses straight-line depreciation for tax purposes based on a five year life and an estimated salvage value of $25,000 for the machine. What is the change in the company’s taxes paid for Years 1 to 5, due to operating the machine?

• $18,000
• $40,000
• $10,000
• None of these are correct
• $27,000

Q3. Given the information in questions 1 and 2, what is the change in the company’s after-tax cash flows associated with operating the machine in Years 1 to 5?

• $100,000
• $27,000
• $82,000
• $45,000
• None of these are correct

Q4. Refer to the scenario in Question 1.

Given the information in questions 1 and 2, assume that, at the end of Year 5, the company will sell the machine. Further assume the company anticipates being able to sell the machine for $40,000, despite the fact that the depreciation was based on an assumed salvage value of $25,000. What is the change in the company’s after-tax cash flows associated with selling the machine at the end of Year 5?

• None of these are correct
• $15,000
• $34,000
• $40,000
• $19,000

Q5. Refer to the scenario in Question 1.

Assuming the company’s cost of capital is 12%, what is the NPV of purchasing the de-inking machine that is discussed in questions 1 to 4 (round to the nearest dollar)? For simplicity in calculating the NPV, assume that the cash flows occur at the end of each year.

• $8,884
• $19,526
• -$7,552
• None of these are correct
• $138,000

Q6. Questions 6-11 in this Quiz refer to the following scenario: Your company uses recycled newspaper to make paper towels and is considering buying a machine that utilizes a proprietary de-inking technology that will reduce the cost of de-inking the recycled newspaper. The company can buy the machine for $300,000 and it is expected to have a five year life.

In order to use the de-inking machine, it has to train multiple employees in how to use the machine appropriately. The cost of training is $10,000. In addition, the machine uses a special soap and the company buys enough inventory of the soap at Year 0 to last the first year at a cost of $50,000. Assume for simplicity that all three of these components of the initial investment occur at Year 0 and that the company is otherwise very profitable and faces a 40% tax rate.

What is the after-tax cash flow associated with the initial investment in the project in Year 0?

• $356,000
• $360,000
• $336,000
• $300,000
• None of these are correct
• $310,000

Q7. Refer to the scenario in Question 6.

Assume that the company’s cost of producing paper towels falls by $250,000 per year, excluding the cost of the soap in each of the next five years. Further assume that the company uses straight-line depreciation for tax purposes based on a five year life and an estimated salvage value of $0 for the machine. Note that at the end of Years 1 to 4, the company must buy another year’s worth of soap to be used in the following year. What is change in the company’s taxes paid for Years 1 to 5, due to operating the machine?

• $76,000
• $84,000
• $56,000
• None of these are correct
• $80,000

Q8. Given the information in questions 6 and 7, what is the change in the company’s after-tax cash flows associated with operating the machine in Years 1 to 4?

• $194,000
• $144,000
• $104,000
• None of these correct
• $200,000

Q9. Refer to the scenario in Question 6.

Given the information in questions 6 and 7, what is the change in the company’s after-tax cash flows associated with operating the machine in Year 5? Note that in Year 5, the company does not need to replenish its supply of soap since they will stop operating the machine at the end of Year 5. Ignore any salvage value associated with selling the machine when answering this question.

• None of these are correct
• $104,000
• $200,000
• $194,000
• $164,000

Q10. Refer to the scenario in Question 6.

Given the information in questions 6 and 7, assume, at the end of Year 5, the company will sell the machine. Assume the company anticipates being able to sell the machine for $40,000, despite the fact that the depreciation was based on an assumed salvage value of $0. What is the change in the company’s after-tax cash flows associated with selling the machine at the end of Year 5?

• $40,000
• $12,000
• None of these are correct
• $24,000
• $56,000

Q11. Refer to the scenario in Question 6.

Assuming the company’s cost of capital is 10%, what is the NPV of purchasing the de-inking machine that is discussed in questions 6 to 10 (round to the nearest dollar)? For simplicity in calculating the NPV, assume that the cash flows occur at the end of each year.

• None of these are correct
• $111,356
• $438,000
• $235,821
• $87,613

Decision-Making and Scenarios Week 03 Quiz Answers

Financial Statements and Forecasting: Module 3 Quiz Answers

Q1. Which of the following are on a Balance Sheet? (there can be more than one)

• Depreciation Expense
• Sales Revenue
• Accounts Payable
• Cash
• Retained Earnings

Q2. Which of the following are on an Income Statement? (there can be more than one)

• Retained Earnings
• Cost of Goods Sold
• Interest Expense
• Cash
• Selling, General, and Administrative Expense

Q3. Given the following information (not all of which is relevant), what is Net Income?

• Sales Revenue = $2000
• Dividends Paid = $100
• Cash = $300
• SG&A Expense = $200
• Cost of Goods Sold = $800

• $1100
• $900
• $1000
• $300
• $600
• $1200

Q4. Which of the following will have a bigger impact on income THIS YEAR?

• Spend $100 on research and development
• Spend $100 on purchases of equipment
• Spend $100 on purchases of inventory that is still not sold at the end of the year
• Spend $100 to pay off short term debt

• Spend $100 on purchases of inventory that is still not sold at the end of the year
• Spend $100 on research and development
• Spend $100 to pay off short term debt
• Spend $100 on purchases of equipment

Q5. Suppose you buy a machine for $200,000 that is expected to last for 10 years, with no salvage value at that time. If the firm uses straight-line depreciation, how much depreciation do they charge per year?

• $200,000
• $40,000
• $20,000
• $10

Q6. Which of the following statements are true about depreciation for tax purposes? (there can be more than one)

• It generally is based on Accelerated Depreciation
• It lowers your tax bill
• It depreciates assets faster than Straight Line Depreciation
• It’s part of the Financing Section of the Cash Flow Statement

Q7. Suppose Sales = $1000 and Receivables went up by $100. How much cash was collected from customers?

• $100
• $1000
• $900
• $1100

Q8. Suppose Inventory went down by $200 and purchases were $600. What was the cost of the units sold?

• $600
• $800
• $200
• $400

Q9. Suppose Net Income =$100, Depreciations = $20, and Working Capital increased by $30. What was Cash From Operations?

• $100
• $80
• $90
• $120
• $50
• $140

Q10. Suppose Net Income = $200 , Depreciations = $10, and Working Capital went up by $70. What was Cash from Operations?

• $280
• $80
• $260
• $140
• $200

Decision-Making and Scenarios Week 04 Quiz Answers

Calculating Value: Module 4 Quiz Answers

Q1. Setting up a spreadsheet so that all the assumptions are contained in a well-defined section is valuable because (more than one answer could be correct)

• It allows for easier re-calculation of results under alternative scenarios
• It makes the calculations more precise
• It makes it easier to blame someone else if things go wrong
• It minimizes the number of cells you ever change, thereby reducing the likelihood of inadvertent errors

Q2. Why does the process of generating forecasts of Future Financial Statements for a new product venture generally start with forecasting the Sales line? (more than one answer could be correct)

• Because many of the other business activities are determined based on forecasted volumes of sales
• Because Sales Revenues are the biggest numbers on the Income Statement
• Because Sales measures the profitability of the product venture
• Because Sales is the easiest line item to forecast in a new product venture

Q3. The discount rate we use in calculating the net present value of the expected future cash flows associated with the new product venture should: (more than one answer could be correct)

• Be lower for riskier ventures
• Be higher if we expect inflation to be higher
• Reflect the opportunity cost of using capital in our next best use
• Be higher if the initial start-up costs of the venture are higher

Q4. This question refers to the spreadsheet that we used in our lectures to analyze a New Product Venture. This spreadsheet is titled MODULE 4 – NEW PRODUCT VENTURE – BASE CASE.xls

If you’ve been exploring the spreadsheet, make sure everything is re-set to the initial set of assumptions in the spreadsheet. You can verify that everything is correctly reset by making sure the NPV = $26,624 and the IRR = 11.5%. With these settings in place for our New Product Venture’s forecasted financial statements, why is Cash Flow smaller than Net Income in Year 3?

• Because they’ve invested some of the cash in Working Capital
• Cash Flow is always smaller than Net Income
• Because Depreciation is not a Cash Flow
• Because they have to pay taxes

Q5. This question refers to the spreadsheet that we used in our lectures to analyze a New Product Venture. This spreadsheet is titled MODULE 4 – NEW PRODUCT VENTURE – BASE CASE.xls

In our New Product Venture’s forecasted financial statements, why is Cash Flow larger than Net Income in Year 6?

• Cash Flow is always larger than Net Income
• Because Depreciation is not a Cash Flow
• Because they’ve collected some of the cash that had been invested in Working Capital
• Because they have to pay taxes

Q6. This question refers to the spreadsheet that we used in our lectures to analyze a New Product Venture. This spreadsheet is titled MODULE 4 – NEW PRODUCT VENTURE – BASE CASE.xls

Suppose the tax rate that the New Product Venture will face changed to 0%. How should we expect the numbers in the spreadsheet to change? (there could be more than one). Note: You don’t have to do any re-calculations with the spreadsheet to answer this, but you can recalculate if you like.

• Cost of Goods sold will be smaller
• Present Value of cash flows will be higher
• Sales Revenue will be higher
• Tax Expense will be zero

Q7. This question refers to the spreadsheet that we used in our lectures to analyze a New Product Venture. This spreadsheet is titled MODULE 4 – NEW PRODUCT VENTURE – BASE CASE.xls

Make sure everything in the spreadsheet is re-set to the initial set of assumptions in the spreadsheet. You can verify that everything is correctly reset by making sure the NPV = $26,624 and the IRR = 11.5%. If we changed the tax rate to 0%, what is the NPV of the cash flows now?

• $26,624
• $54,676
• $0
• None of these are correct
• $124,676

Q8. This question refers to the spreadsheet that we used in our lectures to analyze a New Product Venture. This spreadsheet is titled MODULE 4 – NEW PRODUCT VENTURE – BASE CASE.xls

With a tax rate = 0% (as above), what Sales Volume per year causes the New Venture to Break Even? That is, it has an NPV of zero at that volume. Feel free to try to use Goalseek to solve this.

• None of these are correct
• Breakeven Volume = 1631 Units
• Breakeven Volume = 2000 Units
• Breakeven Volume = 1432 Units
• Breakeven Volume = 1978 Units

Q9. This question refers to the spreadsheet that we used in our lectures to analyze a New Product Venture. This spreadsheet is titled MODULE 4 – NEW PRODUCT VENTURE – BASE CASE.xls

Re-set everything in the spreadsheet. In particular, make sure that the tax rate is 40% and the initial sales volume is 2000. Check that everything is correctly reset by making sure the NPV = $26,624 and the IRR = 11.5%. Now let’s change Research & Development Costs in year 1 and 2 to be $60,000. What is the Internal Rate of Return (IRR) of the new product venture now?

• None of these are correct
• 3.0%
• 6.0%
• 0.0%
• 11.5%
• 3.7%

Q10. This question refers to the spreadsheet that we used in our lectures to analyze a New Product Venture. This spreadsheet is titled MODULE 4 – NEW PRODUCT VENTURE – BASE CASE.xls

Re-set everything in the spreadsheet. In particular, make sure that the tax rate is 40%, the initial sales volume is 2000, and the R&D costs are $20,000 in years 1 and 2. Check that everything is correctly reset by making sure the NPV = $26,624 and the IRR = 11.5%. Suppose we offer to let customers pay later in the hope that it stimulates more sales. Specifically, suppose customers only pay 80% of the purchase price in the year of the sale (and 20 percent the next year), but that this increases Sales volume per year to 2300 units. What is new Net Present Value of the proposed new product venture?

• $26,624
• None of these are correct
• $48,246
• $53,127
• $22,380

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