Exam 10: Project Analysis and Evaluation

Home Furnishings Express is expanding its product offerings to reach a wider range of customers.The expansion project includes increasing the floor inventory by $430,000 and increasing its debt to suppliers by 70 percent of that amount.The company will also spend $450,000 for a building contractor to expand the size of its showroom.As part of the expansion plan, the company will be offering credit to its customers and thus expects accounts receivable to rise by $90,000.For the project analysis, what amount should be used as the initial cash flow for net working capital?

Which one of the following is an example of a sunk cost?

Champion Bakers uses specialized ovens to bake its bread.One oven costs $689,000 and lasts about 4 years before it needs to be replaced.The annual operating cost per oven is $41,000.What is the equivalent annual cost of an oven if the required rate of return is 13 percent?

Assume a firm sets its bid price for a project at the minimum level as computed using the discounted cash flow method.Given this, what do you know about the net present value and the internal rate of return on the project as bid?

Danielle's is a furniture store that is considering adding appliances to its offerings.Which of the following should be considered incremental cash flows of this project? I.utilizing the credit offered by a supplier to purchase the appliance inventory II.benefiting from increased furniture sales to appliance customers III.borrowing money from a bank to fund the appliance project IV.purchasing parts for inventory to handle any appliance repairs that might be necessary

Crafter's Supply purchased some fixed assets 2 years ago at a cost of $38,700.It no longer needs these assets so it is going to sell them today for $25,000.The assets are classified as 5-year property for MACRS.What is the net cash flow from this sale if the firm's tax rate is 30 percent?

Sailcloth & More currently produces boat sails and is considering expanding its operations to include awnings for homes and travel trailers.The company owns land beside its current manufacturing facility that could be used for the expansion.The company bought this land 5 years ago at a cost of $319,000.At the time of purchase, the company paid $24,000 to level out the land so it would be suitable for future use.Today, the land is valued at $295,000.The company has some unused equipment that it currently owns valued at $38,000.This equipment could be used for producing awnings if $12,000 is spent for equipment modifications.Other equipment costing $490,000 will also be required.What is the amount of the initial cash flow for this expansion project?

Keyser Mining is considering a project that will require the purchase of $875,000 in new equipment.The equipment will be depreciated straight-line to a zero book value over the 7-year life of the project.The equipment can be scraped at the end of the project for 5 percent of its original cost.Annual sales from this project are estimated at $420,000.Net working capital equal to 20 percent of sales will be required to support the project.All of the net working capital will be recouped.The required return is 16 percent and the tax rate is 34 percent.What is the value of the depreciation tax shield in year 4 of the project?

You own some equipment that you purchased 4 years ago at a cost of $225,000.The equipment is 5-year property for MACRS.You are considering selling the equipment today for $87,000.Which one of the following statements is correct if your tax rate is 35 percent?

Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero?

The equivalent annual cost considers which of the following? I.required rate of return II.operating costs III.need for replacement IV.economic life

Which one of the following statements is correct?

All of the following are related to a proposed project.Which of these should be included in the cash flow at time zero? I.purchase of $1,400 of parts inventory needed to support the project II.loan of $125,000 used to finance the project III.depreciation tax shield of $1,100 IV.$6,500 of equipment needed to commence the project

A project will produce an operating cash flow of $14,600 a year for 7 years.The initial fixed asset investment in the project will be $48,900.The net aftertax salvage value is estimated at $12,000 and will be received during the last year of the project's life.What is the net present value of the project if the required rate of return is 12 percent?

Automated Manufacturers uses high-tech equipment to produce specialized aluminum products for its customers.Each one of these machines costs $1,480,000 to purchase plus an additional $52,000 a year to operate.The machines have a 6-year life after which they are worthless.What is the equivalent annual cost of one these machines if the required return is 16 percent?

In a single sentence, explain how you can determine which cash flows should be included in the analysis of a project.

Three years ago, Knox Glass purchased a machine for a 3-year project.The machine is being depreciated straight-line to zero over a 5-year period.Today, the project ended and the machine was sold.Which one of the following correctly defines the aftertax salvage value of that machine? (T represents the relevant tax rate)

Phone Home, Inc.is considering a new 4-year expansion project that requires an initial fixed asset investment of $3 million.The fixed asset will be depreciated straight-line to zero over its 4-year tax life, after which time it will have a market value of $225,000.The project requires an initial investment in net working capital of $330,000, all of which will be recovered at the end of the project.The project is estimated to generate $2,640,000 in annual sales, with costs of $1,056,000.The tax rate is 33 percent and the required return for the project is 15 percent.What is the net present value for this project?

The net book value of equipment will:

Jasper Metals is considering installing a new molding machine which is expected to produce operating cash flows of $73,000 a year for 7 years.At the beginning of the project, inventory will decrease by $16,000, accounts receivables will increase by $21,000, and accounts payable will increase by $15,000.All net working capital will be recovered at the end of the project.The initial cost of the molding machine is $249,000.The equipment will be depreciated straight-line to a zero book value over the life of the project.The equipment will be salvaged at the end of the project creating a $48,000 aftertax cash flow.At the end of the project, net working capital will return to its normal level.What is the net present value of this project given a required return of 14.5 percent?