How does net working capital affect the NPV of a 5-year project if working capital is expected to increase by $25,000 and the firm has a 15% cost of capital?
A. NPV will increase by $9,322.
B. NPV will increase by $12,571.
C. NPV will decrease by $25,000.
D. NPV will decrease by $12,571.
94. In capital budgeting analysis, an increase in working capital can be shown as:
A. a cash inflow at the beginning of the project.
B. an outflow at the beginning and an equal inflow at the end of the project.
C. an inflow at the beginning and an equal outflow at the end of the project.
D. a decrease in the initial amount invested.
95. Changes in net working capital can occur at:
A. the beginning of a project.
B. the end of a project.
C. any time during the life of a project.
D. the beginning of any accounting period.
96. What effect is expected at the end of the life of a project that initially required a $20,000 increase in net working capital?
A. The $20,000 must now be paid by the firm.
B. The firm receives a $20,000 cash inflow.
C. Taxable income is reduced by $20,000.
D. No effects are expected from sunk costs.
97. The "recovery" of an additional investment in working capital is assumed to:
A. occur at the end of the project's life.
B. occur at the beginning of the project's life.
C. occur whenever the project first shows a profit.
D. be a sunk cost.
98. Which of the following changes would be likely to increase the NPV of a project?
A. Increasing the firm's opportunity cost of capital
B. Permitting a net decrease in working capital
C. Spreading the total cash inflows over a longer interval
D. Increasing the project's estimated expenses
99. A new, more efficient machine will last 4 years and allow inventory levels to decrease by $100,000 during its life. At a cost of capital of 13%, how does the net working capital change affect the project's NPV?
A. NPV increases by $38,668.
B. NPV increases by $61,330.
C. NPV increases by $100,000.
D. NPV increases by $138,668.
100. A new project requires an increase in both current assets and current liabilities of $125,000 each. What is the overall impact on net working capital investment?
A. An increase of zero
B. An increase of $125,000
C. An increase of $250,000
D. An increase of $62,500, when averaged over the life of the project
101. What is the NPV of a project that costs $100,000, provides $23,000 in cash flows annually for 6 years, requires a $5,000 increase in net working capital, and depreciates the asset straight-line over 6 years while ignoring the half-year convention? The discount rate is 14%.
102. A project that increased sales was accompanied by a $50,000 increase in inventory, a $20,000 increase in accounts receivable, and a $25,000 increase in accounts payable. Assuming these amounts remain constant, by how much has net working capital increased?
103. A 5-year project requires an additional commitment of $100,000 in net working capital. What is the opportunity cost associated with this investment?
B. The present value of $100,000, discounted at the firm's cost of capital.
C. The present value of $100,000, discounted at the firm's cost of capital, and "borrowed" for the life of the project.
D. No opportunity cost is involved.
104. Which of the following statements regarding investment in working capital is incorrect?
A. Investment in working capital, unlike investment in plant and equipment, represents a positive cash flow.
B. The cash flow is measured by the change in working capital, not the level of working capital.
C. The working capital may change during the life of the project.
D. Working capital is recovered at the end of the project.
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