Exam 8: Making Capital Investment Decisions

Peter's Boats has sales of $711,000 and a profit margin of 7.8 percent.The annual depreciation expense is $59,000.The tax rate is 35 percent.What is the amount of the operating cash flow if the company has no long-term debt?

The initial cost of a machine is $727,000 with annual operating costs of $39,600.Each machine has a life of 5 years before it is replaced.Ignore taxes.What is the equivalent annual cost of this machine if the required return is 16 percent?

The book value of an asset is primarily used to compute the

Sunk costs include any cost that

A proposed project will require $410,000 in fixed assets that would be depreciated straight-line to zero over the 3-year life of the project.These assets have an expected aftertax salvage value of $110,000 at the end of the project. The project would require $48,000 of net working capital,all of which is recoverable,along with $220,000 in annual expenses.What is the minimum annual price you should bid on this project if you require a rate of return of 17 percent and have a tax rate of 30 percent?

A new 5-year project will require $194,000 for fixed assets,$58,000 for inventory,and $42,000 for accounts receivable.Short-term debt is expected to increase by $46,000.The fixed assets will be depreciated straight-line to zero over the project's life and have an expected after-tax salvage value of $2,900.The net working capital returns to its original level at the end of the project.The tax rate is 34 percent,and the required return is 13 percent.What is the cash flow recovery from net working capital at the end of this project?

When compiling the relevant cash flows for a project,the after-tax value of any asset sold any time during the life of the project should be treated as a

Which one of these statements related to MACRS depreciation is correct?

Aaron's Paint paid $412,000,in cash,for a piece of equipment 3 years ago.Last year,the company spent $28,000 on equipment upgrades.The equipment is being depreciated using the straight-line method over seven years.The company no longer uses this equipment in its current operations and has received an offer of $164,000 from a firm that would like to purchase it.If the company should decide to use this equipment in an upcoming project,what cost,if any,should be assigned to the project for this equipment?

The most valuable investment given up if an alternative investment is chosen is referred to as a(n)

Global Enterprises is considering a new 5-year project that will require $872,000 for new fixed assets,$210,000 for inventory,and $80,000 for accounts receivable.Short-term debt is expected to increase by $140,000.The fixed assets will be depreciated straight-line to zero over the project's life.At the end of the project,the fixed assets are expected to be sold for 30 percent of their original cost,and the net working capital will return to its original level.The tax rate is 35 percent.What is the initial cost of this project?

All else equal,an increase in which one of the following will increase the operating cash flow?

A new machine,with a 4-year life,has an initial cost of $1,200 and annual costs of $380.The equivalent annual cost of this machine is best described as the

The incremental cash flows of a project are best defined as

A project is expected to create operating cash flows of $37,600 a year for 3 years.The initial cost of the fixed assets is $98,000.These assets will be worthless at the end of the project.Also,$3,200 of net working capital will be required throughout the life of the project.What is the project's net present value if the required rate of return is 14 percent?

Which one of the following is an example of an incremental cash flow for Project A?

Assume a machine costs $129,000 and lasts 3 years before it is replaced.The operating cost is $7,200 a year.Ignore taxes.What is the equivalent annual cost if the required rate of return is 14 percent?

Sun Lee's Furniture just purchased $387,269 of fixed assets classified as 5-year property for MACRS.The MACRS table values are 0.2000,0.3200,0.1920,0.1152,0.1152,and 0.0576 for Years 1 to 6,respectively.What is the amount of the depreciation expense for the third year?

Thornley Co.is considering a 3-year project with an initial cost of $636,000.The equipment is classified as MACRS 7-year property.The MACRS table values are 0.1429,0.2449,0.1749,0.1249,0.0893,0.0892,0.0893,and 0.0446 for Years 1 to 8,respectively.At the end of the project,the equipment will be sold for an estimated $279,000.The tax rate is 35 percent,and the required return is 17 percent.An extra $23,000 of inventory will be required for the life of the project.Annual sales are estimated at $379,000 with costs of $247,000.What is the total cash flow for Year 3?

Riverton Sails is considering expanding its sail production operations to include awnings.The expansion would use land currently valued at $898,000 that was purchased for $779,000 cash.The expansion would require modifications costing $18,400 to some unused equipment along with the purchase of $314,800 of new equipment.The unused equipment is debt-free,fully depreciated,and has a market value of $27,900.What is the Time 0 cash flow for this expansion project?