Q: Which of the following is the correct formula for calculating Net Working Capital (NWC)?

$$\text{NWC} = \text{Current Assets} - \text{Current Liabilities}$$

Question 1

Which of the following best describes the purpose of capital budgeting in financial accounting?

Accepted Answer

To analyze incremental cash flows of investments and decide which projects to accept.

Question 2

A company is considering replacing an old machine with a new one. The old machine has a book value of $$10,000 and a market value of 15$$,000. If the company uses the old machine for the new project instead of selling it, what is the opportunity cost that should be included in the capital budgeting analysis?

Accepted Answer

$15,000

Question 3

Which of the following costs should NOT be included when estimating incremental cash flows for a new project?

Accepted Answer

Sunk costs from prior R&D expenditures

Question 4

A firm invests $$1,000,000 in equipment with a five-year life and uses straight-line depreciation. What is the annual depreciation expense?

$$	ext{Annual Depreciation} = \frac{	ext{Cost}}{	ext{Useful Life}}$

Accepted Answer

$$200,000$$

Question 5

A project generates incremental EBIT of $$800,000 and depreciation expense of 200$$,000. If the tax rate is 20%, what is the incremental free cash flow?

$$	ext{Incremental Earnings} = 	ext{EBIT} 	imes (1 - 	au)$$
$$	ext{FCF} = 	ext{Incremental Earnings} + 	ext{Depreciation}$$

Accepted Answer

$$840,000$$

Question 6

Which of the following statements about depreciation in capital budgeting is TRUE?

Accepted Answer

Depreciation reduces taxable income, creating a tax shield that increases free cash flow.

Question 7

A company expects to recover all net working capital invested in a project at the end of the project’s life. How should this recovery be reflected in the cash flow analysis?

Accepted Answer

As a cash inflow in the final year

Question 8

A firm is evaluating a project with the following cash flows: Initial outlay of $$500,000, annual free cash flows of 150$$,000 for 5 years, and a terminal value of $$50,000. If the discount rate is 10%, what is the Net Present Value (NPV)?

$$	ext{NPV} = \sum_{t=1}^{5} \frac{150,000}{(1+0.10)^t} + \frac{50,000}{$$(1+0.10)^5$$} - 500,000$

Accepted Answer

$$62,092$$

Question 9

Which of the following is an example of an externality that should be included in a capital budgeting analysis?

Accepted Answer

A decrease in sales of an existing product due to the introduction of a new product

Question 10

A company sells equipment at the end of a project for $$312,500. The equipment’s book value is 100$$,500 and the tax rate is 40%. What is the after-tax cash flow from the sale?

$$	ext{Capital Gain} = 312,500 - 100,500$$
$$	ext{Tax} = 	ext{Capital Gain} 	imes 0.40$$
$$	ext{After-tax Cash Flow} = 312,500 - 	ext{Tax}$$

Accepted Answer

$$227,700$$

Question 11

Which of the following is the correct formula for calculating Net Working Capital (NWC)?

Accepted Answer

$$	ext{NWC} = 	ext{Current Assets} - 	ext{Current Liabilities}$$

Question 12

A project requires an initial investment of $$2,000,000 and is expected to generate free cash flows of 600$$,000 per year for 5 years. If the required rate of return is 8%, should the company accept the project based on NPV?

$$	ext{NPV} = \sum_{t=1}^{5} \frac{600,000}{(1+0.08)^t} - 2,000,000$$

Accepted Answer

Yes, if NPV is positive

Question 13

Which of the following is NOT a step in the capital budgeting process?

Accepted Answer

Calculate the company’s total assets

Question 14

A company is considering a project that will require an increase in inventory of $$100,000 and an increase in accounts payable of 40$$,000. What is the net increase in net working capital required for the project?

Accepted Answer

$$60,000$$

Question 15

If a project’s NPV is highly sensitive to the discount rate, what type of analysis should be performed to assess the impact of this variable?

Accepted Answer

Sensitivity analysis

Question 16

A company launches a new product and incurs a $$10 million operating loss in the first year. If the company’s pre-tax income from other operations is 320 $$million and the tax rate is 20%, what is the total tax owed with the new product?

$$	ext{Taxable Income} = 320,000,000 - 10,000,000$$
$$	ext{Tax Owed} = 	ext{Taxable Income} 	imes 0.20$$

Accepted Answer

$$62,000,000 ($$with new product)

Question 17

Which of the following is a correct statement regarding sunk costs in capital budgeting?

Accepted Answer

Sunk costs are costs that have already been incurred and should not be included in project analysis.

Question 18

A project has the following free cash flows: Year 0: -$$1,000,000; Year 1: 400$$,000; Year 2: $$400,000; Year 3: 400$$,000. If the discount rate is 10%, what is the project’s NPV?

$$	ext{NPV} = -1,000,000 + \frac{400,000}{(1+0.10)^1$} + \frac{400,000}{(1+0.10)^2$} + \frac{400,000}{(1+0.10)^3$}$$

Accepted Answer

$$48,280$$

Question 19

Which of the following is a real-world example of an opportunity cost in capital budgeting?

Accepted Answer

The foregone rental income from using company-owned warehouse space for the project

Capital Budgeting: Incremental Cash Flows, Depreciation, and Project Evaluation

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