1. A firm is considering a project which would increase accounts receivable by $10,000,

accounts payable by $55,000, and inventory by $30,000. Which of the following is

true?

a. Net working capital has increased.

b. Sales will increase.

c. Net working capital has decreased.

d. This is a net use of cash.

2. If a firm suffers reduced profits to the point of moving into a lower tax bracket, one

would expect the depreciation tax shield, all else the same, to become .

a. More valuable.

b. Less valuable.

c. Unchanged, since depreciation doesnt change.

d. Unchanged, because changes in tax rates dont matter once a project is in place.

3. Your firm disposes of an asset which is worthless in the open market, but still has

remaining undepreciated book value. The tax benefit to the firm from the writeoff of

this asset is equal to:

a. The tax rate multiplied by the remaining book value.

b. The remaining book value divided by the tax rate.

c. The salvage value multiplied by the tax rate.

d. There is no tax benefit to be realized, since the asset is worthless.

4. You are evaluating whether to retire your current computer modem product and

replace it with a new modem that incorporates new features. Which of the following

would not be relevant to your decision-making process?

a. $50,000 spent on research and development costs over time on the older modem.

b. A loss in revenues of $30,000 from terminating the old modem line.

c. Equipment you own with a market value of $30,000 that can be used to build the new modems.

d. $25,000 in salvage value you will receive for scrapping the old modems obsolete production equipment.