Exam 8: Making Capital Investment Decisions

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?

Uptown Furniture purchased a corner lot 5 years ago at a cost of $670,000.The lot was recently appraised at $640,000.At the time of the purchase,the company spent $45,000 to grade the lot and another $100,000 to pave the lot for commuter parking.The company now wants to build a new retail store on the site.The building cost is estimated at $1.6 million.What amount should be used as the initial cash flow for this building project?

The top-down approach to computing the operating cash flow

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

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

A project requires $1.208 million in new equipment that will be depreciated straight-line to zero over the 5-year life of the project.The firm expects to sell the equipment at the end of the project for 20 percent of its original cost.The discount rate is 13 percent and the tax rate is 35 percent.What is the after-tax salvage value of the equipment?

JADO Mfg.is trying to decide which one of two machines to purchase.Machine A costs $398,000,has a 5-year life and requires $113,000 in pretax annual operating costs.Machine B costs $510,000,has a 4-year life and requires $67,000 in pretax annual operating costs.Either machine will be depreciated using the straight-line method to zero over its life.Neither machine will have any salvage value.Whichever machine is selected,it will never be replaced.The discount rate is 12 percent and the tax rate is 34 percent.Which machine should be purchased and why?

The incremental cash flows of a project are best defined as

The Market is considering a project that will require the purchase of $1.27 million in new equipment.The equipment will be depreciated straight-line to zero over the 6-year life of the project.What is the value of the depreciation tax shield in Year 2 of the project if the tax rate is 35 percent?

Which one of these statements related to depreciation is correct for a firm with taxable income of $121,600 and after-tax income of $74,200?

Assume a firm has an ongoing need for a machine,and the current machine is operating efficiently.The firm should plan to replace this machine when it

Which of the following should be included in the analysis of a proposed project?

A project will increase annual sales by $183,000 and cash expenses by $99,000 for 4 years.The project has an initial cost of $115,000 for equipment that will be depreciated using MACRS depreciation.The applicable MACRS table values are 0.1429,0.2449,0.1749,and 0.1249 for Years 1 to 4,respectively.The company has a marginal tax rate of 35 percent.What is the depreciation tax shield for Year 3?

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?

Which one of these statements is correct?

Kay's Quilts is considering a project that will reduce inventory by $38,000,increase accounts payable by $55,000,and increase accounts receivables by 9 percent.Accounts receivable is currently $78,000.What is the cash flow at Time 0 for net working capital?

Assume an asset costs $38,700 and has a current book value of $18,209.The asset is sold today for $15,000 cash.The tax rate is 34 percent.As a result of this sale,the company's net cash flow will

DeCento's is analyzing two mutually exclusive machines to determine which one it should purchase.Whichever machine is purchased,it will be replaced at the end of its useful life.The company requires a return of 15 percent and uses straight-line depreciation to a zero book value over the life of the machine.Machine A has a cost of $386,000,annual operating costs of $29,000,and life of 4 years.Machine B costs $257,000,has annual operating costs of $19,000,and a life of 3 years.The firm currently pays no taxes.Which machine should be purchased and why?

Hill Motor Homes currently sells 1,160 Class A motor homes,2,170 Class C motor homes,and 1,600 pop-up trailers each year.It is considering adding a midrange camper and expects that if it does so the firm can sell 800 of them.However,if the new camper is added,the firm expects its Class A sales to decline by 8 percent while the Class C camper sales decline to 1,950 units.The sales of pop-ups will not be affected.Class A motor homes sell for an average of $179,000 each.Class C homes are priced at $64,500,and the pop-ups sell for $5,700 each.The new midrange camper will sell for $26,900.What is the erosion cost of the new camper?

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?