1. How should you use operating costs when calculating incremental cash flows?

(a) Subtract taxes as though operating costs were not tax-deductible. Then subtract operating costs.

(b)	Subtract operating costs, calculate taxes off of that number, and then add them back.

(c) Do not subtract operating costs, and then subtract taxes on operating income before operating costs.

(d) Subtract operating costs.

2. At the end of a project, the equipment purchased at the beginning is expected to have a positive market value that is equal to the book value. What would be the tax effect?

(a) The tax effect would be equal to the book value

(b) There would not be a tax effect; it would be zero

(c) The tax effect would be positive

(d) The tax effect would be negative

3. A company has new equipment costs of $3 million, which will be depreciated to zero using straight-line depreciation over 6 years. The company expects to bring in revenues of $8 million per year for 6 years with production costs of $1.7 million per year. If the company's tax rate is 27%, what are the incremental earnings (not cash flows) of this project in years 1-6? Enter your answer in dollars and round to the nearest dollar.