# You own a house that you rent for \$1,200 a month

## Question: You own a house that you rent for \$1,200 a month. …

You own a house that you rent for \$1,200 a month. The maintenance expenses on the house average \$200 a month. The house cost \$89,000 when you purchased it several years ago. A recent appraisal on the house valued it at \$210,000. The annual property taxes are \$5,000. If you sell the house you will incur \$20,000 in expenses. You are deciding whether to sell the house or convert it for your own use as a professional office. What value should you place on this house when analyzing the option of using it as a professional office?

\$89,000

\$120,000

\$185,000

\$190,000

\$210,000

A project will increase sales by \$60,000 and cash expenses by \$51,000. The project will cost \$40,000 and will be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project. The company has a marginal tax rate of 35%. What is the operating cash flow of the project using the tax shield approach?

\$5,850

\$8,650

\$9,350

\$9,700

\$10,350

Ben’s Border Café is considering a project which will produce sales of \$16,000 and increase cash expenses by \$10,000. If the project is implemented, taxes will increase from \$23,000 to \$24,500 and depreciation will increase from \$4,000 to \$5,500. What is the amount of the operating cash flow using the top-down approach?

\$4,000

\$4,500

\$6,000

\$7,500

\$8,500

The changes in a firm’s future cash flows that are a direct consequence of accepting a project are called _____ cash flows.

Incremental OR Stand –Alone OR, After Tax OR, Net Present Value OR, Erosion

The cash flow tax savings generated as a result of a firm’s tax-deductible depreciation expense is called the___________: After-tax depreciation savings OR, Depreciable Basis, OR Depreciation Tax Shield, OR Operating Tax Flow, After Tax Salvage Value

The payback period rule accepts all investment projects in which the payback period for the cash flows is: _______ Greater than one OR, Greater than the cutoff point OR, Less than the cutoff Point OR, None of these

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be: _______ Accepted because the internal rate of return is positive OR, Accepted because the profitability index is greater than 1 OR, Accepted because the profitability index is negative OR, Rejected because the internal rate of return is negative OR, Rejected because the net present value is negative

The internal rate of return for a project will increase if: _______ The initial cost of the project can be reduced OR, the total amount of the cash inflows is reduced OR, each cash inflow is moved such that it occurs one year later than originally projected OR, the required rate of return is reduced OR, the required rate of return is reduced.