Deck 14: Cash Flow Estimation and Capital Budgeting Decisions

Question 1

Which of the following is NOT relevant to the cash flow estimates that are associated with a capital budgeting evaluation?

A)The associated financing costs.
B)The economic life of the project.
C)The effect of inflation.
D)The terminal cash flow.

Answer 1

The associated financing costs.

Question 2

A company is considering taking over a firm that has a very good company image.The company image cannot be assessed in financial terms and has no direct link to the change in cash flows.How should the company's image be classified within the context of this decision?

A)Opportunity cost
B)Sunk Cost
C)Externality
D)Intangible

Answer 2

Intangible

Question 3

Incremental cash flows are of primary interest in capital budgeting decisions because:

A)they are more relevant than intangible costs and benefits.
B)they are able to correct for a portion of the uncertainty due to the long time horizon.
C)the change in the company's future cash flows is what is being estimated.
D)they are the easiest cash flows to identify.

Answer 3

the change in the company's future cash flows is what is being estimated.

Question 4

The incremental cash flows for a project are estimated as:

A)accounting profit before taxes.
B)cash flows before taxes.
C)cash flows after taxes.
D)accounting profit after taxes

Question 5

Which of the following should be recognized in a capital budgeting decision?

A)Externalities.
B)Intangible considerations that cannot be measured.
C)Opportunity costs.
D)Sunk costs.

Question 6

Which of the following is NOT an incremental cash flow?

A)Research and development costs for the new product, which have already been undertaken.
B)Reduction in sales of an existing product line as a result of the introduction of the new product line.
C)Tax saved by claiming CCA on new asset purchases
D)Proceeds from the sale of old equipment.

Question 7

A real estate company purchased land and started breaking ground for a new condominium complex.The housing market crashed, and the amount spent may not be recovered completely.What are the costs involved with the development of the land classified as:

A)An opportunity cost.
B)A sunk cost.
C)An incremental cost
D)A financing cost

Question 8

Which of the following would NOT be included in a capital budgeting evaluation?

A)Incremental cash flows
B)External benefits
C)Effects of price level changes
D)Taxes

Question 9

A pharmaceutical company has discovered a new drug that treats gastrointestinal disorders.The R&D costs for the drug were $3 million.In the testing phase of this new drug, the company further discovered that there is a possibility that the drug would be effective against migraine headaches if they invest another 10% in R&D.When evaluating the capital budgeting decision for the migraine remedy, what portion of the R&D costs for the drug should be attributed to the migraine budget?

A)0% of the total R&D costs of $3.3 million.
B)$300,000 of the R&D costs that are still to be incurred.
C)$1.65 million of the total R&D costs of $3.3 million.
D)It cannot be determined until the drug is further tested.There may be more uses for this drug and further testing is required.

Question 10

A real estate company purchased land and started breaking ground for a new condominium complex.The housing market crashed, and the amount spent may not be recovered completely.How should the recoverable costs be classified?

A)An opportunity cost.
B)A sunk cost.
C)An incremental cost
D)A financing cost

Question 11

Which of the following should be ignored in a capital budgeting decision?

A)The effect of all project interdependencies.
B)Social investments required by law.
C)Inflation.
D)Externalities.

Question 12

A pharmaceutical company has discovered a new drug that treats gastrointestinal disorders.In the testing phase of this new drug, the company further discovered that the drug is effective against migraine headaches.The R&D costs for the drug were $3 million.When evaluating the capital budgeting decision for the migraine remedy, what portion of the R&D costs for the drug should be attributed to the migraine budget?

A)0% of the R&D costs.
B)50 of the R&D costs.
C)100% of the R&D costs.
D)It cannot be determined until the drug is further tested.There may be more uses for this drug and further testing is required.

Question 13

Which of the following would be considered relevant cash flows in a capital budgeting evaluation?
I.Increased after-tax income.
II.Tax savings due to increased capital cost allowance.
III.Increased expenditures on inventory for the new project.
IV.Benefits that accrue to the local community.

A)I, II, and III.
B)I, II, and IV.
C)I, III, and IV.
D)I, II, III, and IV.

Question 14

Which of the following is NOT appropriate for estimating the cash flows associated with capital expenditure decisions?

A)Discount nominal cash flows with nominal discount rates, and real cash flows with real discount rates.
B)Include associated interest and dividend payments.
C)Use after-tax cash flows with an after-tax discount rate.
D)Use the marginal or incremental cash flows arising from capital budgeting decisions.

Question 15

Which of the following statements is correct?

A)Investment in net working capital is not depreciated because it is a sunk cost:
B)Investment in net working capital is not depreciated because it is not a depreciable asset.
C)Investment in net working capital is not depreciated because it is not an operating cash flow.
D)all of the above.

Question 16

Which of the following should NOT be considered in the capital budgeting decision?

A)Working capital requirements.
B)Initial cash outlay.
C)Opportunity costs.
D)Sunk costs.

Question 17

Use the following statements to answer this question:
I.When we are dealing with cannibalization of a project, we should ignore the old product.
II.Increases in incremental cash flows can be gained from decreases in expenses.

A)I and II are correct.
B)I and II are incorrect.
C)I is correct and II is incorrect.
D)I is incorrect and II is correct.

Question 18

A firm is considering a project that has cash flows indexed to the consumer price index.What discount rate should be used?

A)Nominal discount rate
B)Yield to maturity
C)Change in consumer price index
D)A rate that uses the consumer price index in its measure

Question 19

Which of the following is NOT an example of cannibalization?

A)Kellogg's introduces a new type of cereal.
B)Ford rolls out a new model of car.
C)Molson brings out a new beer.
D)Canadian Tire allows Tim Horton's to operate a concession stand in their retail outlets.

Question 20

A Canadian oil company is considering whether or not to develop a site it has been exploring for the past six months.One of the arguments for developing the site is that considerable time and money have already been expended.This cost should not be included in the capital budgeting decision because it is:

A)an opportunity cost.
B)a sunk cost.
C)an operating cost
D)a financing cost

Question 21

Which of the following is NOT a component of the expected annual after-tax cash flows?

A)The additional depreciation expense that results from the capital cost of the investment.
B)The additional taxes paid that result from the capital budgeting decision.
C)The incremental increase in after-tax operating income of the project.
D)The incremental tax savings that result from the initial investment outlay.

Question 22

You are given the following information on a project:
$\bullet$ initial capital cost = $500,000
$\bullet$ installation costs associated with the capital asset = $25,000
$\bullet$ R&D costs already incurred = $50,000
$\bullet$ estimated salvage on equipment to be replaced = $80,000
$\bullet$ increase in raw materials inventory = $10,000
Which of these amounts is included with working capital?

A)$500,000
B)$80,000
C)$10,000
D)$25,000

Question 23

Unique Style Inc.is considering a five-year expansion project that requires an initial investment of $500,000 for the purchase of a new machine with a CCA rate of 30%.The projected sales revenue and related costs are $450,000 and $180,000 per year, respectively.The project's fixed costs are an additional $48,000 per year.The appropriate discount rate is 8%.The firm's marginal tax rate is 40%.What is the after-tax cash flow in year three, assuming accelerated investment incentive is applicable for CCA in year 1?

A)$156,300
B)$168,900
C)$191,400
D)$197,700

Question 24

La Montrealaise Transportation Company is considering a project, which requires the purchase of a fleet of trucks costing $500,000.It will need to spend $65,000 to modify the trucks before they can be put into operation.The associated opportunity costs are $35,000.In addition, the company will need to spend $10,000 on additional spare parts inventory.What is the initial capital cost associated with the investment opportunity?

A)$500,000
B)$565,000
C)$575,000
D)$610,000

Question 25

According to the Canada Revenue Agency (CRA):
I.The purchase cost of a capital asset is to be capitalized and expensed as capital cost allowance over future periods.
II.Any modification costs of a capital asset must be expensed immediately.

A)I and II are correct.
B)I and II are incorrect.
C)I is correct, II is incorrect.
D)I is incorrect, II is correct.

Question 26

Which of the following is NOT a component of the initial cash flow of a capital investment analysis?

A)The change in the net working capital requirements.
B)The initial capital cost of the asset.
C)The original cost of a capital asset that was incurred several years ago.
D)The opportunity costs associated with the project.

Question 27

Which of the following is correct with respect to working capital and capital budgeting?

A)Working capital is ignored in the capital budget.
B)Working capital has a different discount rate.
C)Working capital is assumed to be recuperated at the end of the life of the project.
D)Working capital does not affect cash flow.

Question 28

What is the difference between the initial cash flow and the purchase price of an asset?

A)Set up costs only
B)Capital costs
C)Other capital costs and net working capital requirements
D)None of the above

Question 29

Which one of the following represents a change in net working capital?

A)The level of inventory in the project.
B)The difference between the account receivables at the end and beginning of the project.
C)The difference between the account payables at the end and beginning of the project.
D)The difference between current assets and current liabilities.

Question 30

The following information was reported last year:

What was the effect of the change in net working capital on cash flow for the year?

A)-$19,138
B)-$15,338
C)$19,138
D)$15,338

Question 31

Use the following two statements to answer this question:
I.The initial after-tax cash flow refers to the total cash outlay that is required to initiate an investment project and can be depreciated for tax purposes.
II.The capital cost of an investment refers to all costs incurred to make an investment operational, which includes the additional working capital requirements.

A)I and II are correct.
B)I and II are incorrect.
C)I is correct, II is incorrect.
D)I is incorrect, II is correct.

Question 32

Why do we add the result from the CCA tax shield to the NPV analysis?

A)Tax shield is a cost.
B)The CCA tax shield represents tax cash flow saved by depreciating the asset.
C)The CCA tax shield represents tax cash flow saved by expensing the interest.
D)None of the above

Question 33

You are given the following information on a project:
$\bullet$ initial capital cost = $500,000
$\bullet$ installation costs associated with the capital asset = $25,000
$\bullet$ R&D costs already incurred = $50,000
$\bullet$ estimated salvage on equipment to be replaced = $80,000
$\bullet$ increase in raw materials inventory = $10,000
What is the initial cash outlay of the project?

A)$535,000
B)$590,000
C)$615,000
D)$665,000

Question 34

The following equation represents the:

A)Present value of the salvage value.
B)Present value of the terminal value of the asset.
C)Present value of the taxes owed on the capital gain resulting from the sale of an asset.
D)The present value of the depreciation.

Question 35

If an asset becomes fully depreciated for tax purposes before the end of the project life, what happens to the salvage value?

A)The salvage value is ignored in the capital budget.
B)The salvage value is amortized further.
C)The salvage value is discounted at the date of the disposal of the asset.
D)The asset's life is extended.

Question 36

La Poutine Cheese Products Inc.is considering a project that requires an initial cash outlay of $290,000, made up of $235,000 for the purchase of new equipment, $13,000 for the installation costs, and $42,000 for additional inventory.In addition, the R&D associated with the project was $5,000 and its opportunity costs are $28,000.What is the capital cost associated with the investment opportunity?

A)$235,000
B)$248,000
C)$290,000
D)$318,000

Question 37

Use the following two statements to answer this question:
I.The use of declining balance CCA means that the tax deductions will last forever and the asset is never fully depreciated.
II.The half-year rule results in CCA expense that is lower in year 1 and highest in year 2.

A)I and II are correct.
B)I and II are incorrect.
C)I is correct, II is incorrect.
D)I is incorrect, II is correct.

Question 38

Because CCA is a non-cash item, in estimating the annual after-tax cash flows, we deal with it using one of the following two approaches:
I.Deduct CCA from operating income, then deduct the associated taxes payable, and finally add the amount of the CCA tax savings back.
II.Multiply the CCA by the company's effective tax rate and add this amount to the after-tax operating income.

A)I and II are correct.
B)I and II are incorrect.
C)I is correct, II is incorrect.
D)I is incorrect, II is correct.

Question 39

Unique Style Inc.is considering a five-year expansion project that requires an initial investment of $500,000 for the purchase of a new machine with a CCA rate of 30%.The projected sales revenue and related costs are $450,000 and $180,000 per year, respectively.The project's fixed costs are an additional $48,000 per year.The appropriate discount rate is 8%.The firm's marginal tax rate is 40%.What is the after-tax cash flow in year three, assuming half-year rule is applicable for CCA in year 1?

A)$162,600
B)$168,900
C)$191,400
D)$197,700

Question 40

Montreal Sun Printing is looking at an opportunity of setting up a new production facility, which requires the purchase of a new printing press that costs $1 million.The costs to install the machine are $60,000.The new facility is to be built on a piece of land that the company bought for $150,000 five years ago.The market value of the land is $250,000.The R&D costs associated with the investment opportunity were $50,000.In addition, the company will need to purchase $40,000 additional inventory for the project use.How much of these costs can be categorized as a sunk cost?

A)$250,000
B)$60,000
C)$50,000
D)$200,000

Question 41

Laurentide Resort Corporation is considering a seven-year project that requires an initial investment of $525,000 and generates annual after-tax operating cash flow of $225,000.The asset has a CCA rate of 30% and an expected salvage value of $65,000.The firm's marginal tax rate is 40%.What is the CCA tax savings for year 5 assuming accelerated investment incentive is applicable for CCA in year 1?

A)$11,885
B)$18,368
C)$37,816
D)$45,919

Question 42

Suppose a project requires a capital investment of $300,000.The project will last for six years, at which time the asset will be sold for $90,000.The asset will be depreciated on a declining balance basis at a CCA rate of 20%.The firm's marginal tax rate is 40%.The firm's required rate of return is 8%.Assume the asset class remains open after the asset is sold.What is the present value of the CCA tax savings for the project assuming accelerated investment incentive is applicable for CCA in year 1?

A)$63,472.64
B)$65,950.56
C)$66,335.32
D)$72,684.53

Question 43

Champlain Transportation Inc.is considering a five-year project that requires an initial capital investment of $1 million.The project is expected to generate operating revenue of $500,000 per year, and the associated operating expenses are estimated at $250,000 per year.The capital asset belongs to asset class 9, which has a CCA rate of 30%.The firm's marginal tax rate is 35%.What is the after-tax cash flow for year 1 assuming accelerated investment incentive is applicable for CCA in year 1?

A)$215,000
B)$267,500
C)$302,500
D)$320,000

Question 44

The following information is from last year's financial statements:

What was the net cash flow if the reported sales revenue and costs for the same period were $582,366 and $437,265, respectively?

A)$113,980
B)$140,132
C)$150,070
D)$158,260

Question 45

Champlain Transportation Inc.is considering a six-year project that requires $800,000 for the purchase of a capital asset with a CCA rate of 30%.The project is expected to generate sales revenue of $600,000 per year.The project's variable and fixed costs are estimated at $240,000 and $50,000 per year, respectively.The firm's marginal tax rate is 35% and cost of capital is 12%.Ignoring CCA, what is the present value of the after-tax operating cash flows?

A)$828,449
B)$962,069
C)$1,274,536
D)$1,480,107

Question 46

Maple Syrup Food is considering a six-year expansion project that requires an initial investment of $350,000 for the purchase of a new capital asset with a CCA rate of 20%.The costs to install the asset are $25,000.The projected annual sales revenue and costs are $200,000 and $90,000 per year, respectively.The appropriate discount rate is 10%.The firm's marginal tax rate is 40%.What is the fourth year CCA expense assuming accelerated investment incentive is applicable for CCA in year 1?

A)$33,600
B)$38,400
C)$40,320
D)$43,200

Question 47

Ontario Courier Service is considering investing in a capital asset that costs $64,000.The project also requires an investment in net working capital of $8,000.The project will generate annual after-tax operating income of $20,800 for the next four years.The asset has a CCA rate of 20%, with the half-year rule applicable in the first year and is expected to sell for $7,200 at the end of four years.The firm's cost of capital is 15% and marginal tax rate is 35%.Assume the asset class remains open after the asset is sold.What is the after-tax cash flow (ECF)in the final year of the project?

A)$7,398
B)$15,200
C)$21,855
D)$23,002

Question 48

Monteregie Auto Services is considering an opportunity to invest $550,000 in a capital asset that will generate additional after-tax operating income of $200,000 per year.The asset has a six-year life, a CCA rate of 20%, and an expected salvage value of $60,000 at the end of the 6^th year.The project has a beta of 1.5.The company's cost of capital is 12% and marginal tax rate is 35%.The risk-free rate is 4.5% and the market risk premium is 6%.Ignoring CCA, what is the present value of the after-tax operating cash flows?

A)$512,526
B)$534,483
C)$788,501
D)$822,281

Question 49

Canadian Donuts is looking at a new investment opportunity, which will require the purchase of a capital asset of $1 million and additional raw materials inventory of $50,000.The project is expected to generate operating revenue of $750,000 per year, and the associated operating expenses are estimated at $350,000 per year.The project has a five-year economic life.This capital asset belongs to asset class 8, which has a CCA rate of 20%.How much CCA would Canadian Donuts claim in year 3, assuming half-year rule is applicable for CCA in year 1?

A)$115,200
B)$128,000
C)$144,000
D)$180,000

Question 50

Champlain Transportation Inc.is considering a five-year project that requires an initial capital investment of $1 million.The project is expected to generate operating revenue of $500,000 per year, and the associated operating expenses are estimated at $250,000 per year.The capital asset belongs to asset class 9, which has a CCA rate of 30%.The firm's marginal tax rate is 35%.What is the after-tax cash flow for year 1 assuming half-year rule is applicable for CCA in year 1?

A)$215,000
B)$267,500
C)$302,500
D)$312,500

Question 51

Laurentide Resort Corporation is considering a seven-year project that requires an initial investment of $525,000 and generates annual after-tax operating cash flow of $225,000.The asset has a CCA rate of 30% and an expected salvage value of $65,000 at the end of the projects life.The firm's marginal tax rate is 40%.What is the tax savings from CCA in year 5 assuming half-year rule is applicable for CCA in year 1?

A)$15,126
B)$18,368
C)$37,816
D)$45,919

Question 52

Suppose a project requires a capital investment of $300,000.The project will last for six years, at which time the asset will be sold for $90,000.The asset is a Class 8 asset, with a CCA rate of 20%.The firm's marginal tax rate is 40%.The firm's required rate of return is 8%.Assume the asset class remains open after the asset is sold.What is the present value of the CCA tax savings for the project assuming half-year rule is applicable for CCA in year 1?

A)$63,472.64
B)$65,950.56
C)$66,335.32
D)$66,720.08

Question 53

Hull Small Business is considering an expansion project that requires $135,000 for the purchase of capital assets and $35,000 for additional inventory.The project will generate after-tax operating income of $50,000 per year.The project has a five-year economic life and a CCA rate of 20%.What is the ending UCC upon termination of the project assuming half-year rule is applicable for CCA in year 1?

A)$44,237
B)$49,766
C)$55,706
D)$62,669

Question 54

BC Travel Services is considering a new ten-year project that will generate additional sales revenue of $200,000 per year.The associated costs are $120,000 per year.The project is somewhat riskier than the company's current operations, and hence requires a risk premium of 2%.The company's cost of capital is 12% and marginal tax rate is 40%.What is the present value of the after-tax operating cash flows?

A)$250,374
B)$271,211
C)$417,289
D)$452,018

Question 55

Hull Small Business is considering an expansion project that requires $135,000 for the purchase of capital assets and $35,000 for additional inventory.The project will generate after-tax operating income of $50,000 per year.The project has a five-year economic life and a CCA rate of 20%.What is the ending UCC upon termination of the project assuming accelerated investment incentive is applicable for CCA in year 1?

A)$38,707
B)$49,766
C)$55,706
D)$62,669

Question 56

The Beer Brewing Company is interested in a new eight-year project.The project calls for an initial cash outlay of $1,000,000: $850,000 for new equipment, $100,000 for installation costs, and $50,000 for additional net working capital.The asset has a CCA rate of 30% and an expected salvage value of $75,000.The project will generate additional operating profit of $325,000 per year.What is the UCC at the end of year 3 assuming accelerated investment incentive is applicable for CCA in year 1?

A)$395,675
B)$256,025
C)$354,025
D)$416,500

Question 57

The Beer Brewing Company is interested in a new eight-year project.The project calls for an initial cash outlay of $1,000,000: $850,000 for new equipment, $100,000 for installation costs, and $50,000 for additional net working capital.The asset has a CCA rate of 30% and an expected salvage value of $75,000.The project will generate additional operating profit of $325,000 per year.What is the UCC at the end of year 3 assuming half-year rule is applicable for CCA in year 1?

A)$395,675
B)$325,850
C)$354,025
D)$416,500

Question 58

The following information was reported last year:

What was the change in net working capital for the year?

A)$2,674
B)-$22,850
C)-$2,674
D)$22,850

Question 59

Toronto Skates Corp.is considering a five-year project that requires an initial investment of $250,000.The project is expected to generate operating incomes of $60,000 in year 1, $90,000 in year 2, $150,000 in year 3, $100,000 in year 4, and $80,000 in year 5.The asset belongs to asset class 7, which has a CCA rate of 15%.The firm's marginal tax rate is 35% and cost of capital is 10%.Ignoring CCA, what is the present value of the after-tax operating cash flows?

A)$205,272
B)$233,739
C)$315,804
D)$359,598

Question 60

Canadian Donuts is looking at a new investment opportunity, which will require the purchase of a capital asset of $1 million and additional raw materials inventory of $50,000.The project is expected to generate operating revenue of $750,000 per year, and the associated operating expenses are estimated at $350,000 per year.The project has a five-year economic life.This capital asset belongs to asset class 8, which has a CCA rate of 20%.What is the CCA expense for year 3, assuming accelerated investment incentive is applicable for CCA in year 1?

A)$112,000
B)$128,000
C)$144,000
D)$180,000

Question 61

Mont Royal Lighting Corporation is considering investing $100,000 in machinery that would generate operating cash flows of $30,000 in year 1, $60,000 in year 2, $10,000 in year 3, $50,000 in year 4, and $40,000 in year 5.The equipment has a CCA rate of 30% and is expected to have no salvage value at the end of five years.Assume the asset class remains open after the asset is sold and the half-year rule applies in the first year.The firm's marginal tax rate is 38%.If the appropriate discount rate is 10%, what is the project's NPV?

A)$16,087.86
B)$20,903.24
C)$70,564.72
D)$75,380.11

Question 62

Use the following two statements to answer this question:
I.Expansion projects are projects that would add something extra to the firm in terms of sales or cost savings.The incremental cash flows arising from such investment decisions are the new cash flows.
II.Replacement projects are projects that involve the replacement of an existing asset with a new one.The incremental cash flows arising from such investment decisions are the new operating expenses.

A)I and II are correct.
B)I and II are incorrect.
C)I is correct, II is incorrect.
D)I is incorrect, II is correct.

Question 63

Maritimes Toy Corporation (MTC)is considering investing in a piece of new equipment worth $50,000.The equipment will increase operating revenue by $10,000 per year for ten years.The equipment is expected to have no salvage value at the end of ten years, and capital cost allowance is claimed at 20% on a declining balance.The corporate tax rate is 38%, and MTC's opportunity cost of capital is 9%.Assume the asset class remains open after the asset is sold and assuming accelerated investment incentive is applicable for CCA in year 1? The project's NPV is approximately

A)$2,352
B)$3,434
C)$27,821
D)$22,434

Question 64

Which of the following should be treated as incremental cash flows when deciding whether to go ahead with a new pharmaceutical drug?

A)The cost of research and development undertaken for developing the new drug in the past five years
B)The annual accounting depreciation charge on new asset purchases
C)The decrease in taxes resulting from capital cost allowance on new asset purchases
D)None of the above

Question 65

Maritimes Toy Corporation (MTC)is considering investing in a piece of new equipment worth $105,000.The equipment will increase operating revenue by $12,000 per year for ten years.The equipment is expected to have a salvage value of $6,500 at the end of ten years, and capital cost allowance is claimed at 20% on a declining balance.An initial investment in working capital of $8,000 is estimated for this investment.The corporate tax rate is 38%, and MTC's opportunity cost of capital is 9%.Assume the asset class remains open after the asset is sold and the accelerated investment incentive is applicable for CCA in year 1? The project's NPV is approximately

A)-$1,929
B)-$31,194
C)-$31,964
D)-$32,478

Question 66

A manufacturing company is considering purchasing a new machine to replace the existing one to improve production efficiency.The new machine will cost the company $200,000 and is expected to sell for $15,000 in ten years.The old machine has a market value of $50,000 today and could be sold for $5,000 in ten years.Both machines have a CCA rate of 30% and the asset class will remain open, and the half-year rule applies in the first year.With the new machine, the company expects $50,000 savings in operating expenses per year.The company's tax rate is 40% and the cost of capital is 15%.What is the present value of the incremental CCA tax savings generated by the replacement decision? Include the half-year rule.

A)$36,403
B)$36,732
C)$48,866
D)$49,196

Question 67

Amazing Lace has an opportunity to invest in a ten-year project that requires an initial investment of $2 million in a capital asset with a CCA rate of 20%.The initial net working capital requirement is $200,000, which will remain unchanged throughout the life of the project.The capital asset is expected to sell for $75,000 when the project terminates.Assume the asset class is closed upon termination of the project.The firm's cost of capital is 10.5% and marginal tax rate is 40%.What is the ending after-tax cash flow (ECF)assuming accelerated investment incentive is applicable for CCA in year 1?

A)$208,363
B)$275,000
C)$320,162
D)$341,637

Question 68

Toronto Skaters is considering the purchase of a new computer system for $150,000.The asset has an economic life of four years, a CCA rate of 45%, and expected salvage value of $10,000.The project also requires an investment in net working capital of $7,500, which will be recovered at the end of the project.The project is expected to generate after-tax operating income of $80,000 per year.Assume the asset class remains open after the asset is sold and the half-year rule applies in the first year.The firm's cost of capital is 18% and marginal tax rate is 40%.What is the NPV of the project?

A)$104,845.95
B)$18,763.97
C)$105,330.16
D)$108,477.53

Question 69

Canadian Auto Shop Services has an opportunity to invest $550,000 in a new project that will generate additional operating profit of $200,000 per year.The asset has a six-year life, a CCA rate of 30%, and an expected salvage value of $60,000.The company's cost of capital is 12% and marginal tax rate is 35%.The risk premium for this type of project is 1.5%.Assume the asset class remains open after the asset is sold and the half-year rule applies in the first year.What is the project's NPV?

A)$108,680
B)$137,415
C)$384,655
D)$425,214

Question 70

Use the following two statements to answer this question:
I.Sensitivity analysis examines how an investment's NPV changes as we change the values of more than one input variable at a time.
II.Scenario analysis examines how an investment's NPV changes as we change the value of one input variable at a time.

A)I and II are correct.
B)I and II are incorrect.
C)I is correct, II is incorrect.
D)I is incorrect, II is correct.

Question 71

Replace the old machine with a new machine if:

A)the net cash inflows of the old machine are greater than the net cash inflows of the new machine.
B)the net cash inflows of the new machine are greater than the net cash inflows of the old machine.
C)the NPV of replacement is negative.
D)none of the above.

Question 72

Use the following statements to answer this question:
I.Replacement projects are projects that involve the replacement of an existing asset.The incremental cash flows are the difference between the cash outflows and the cash inflows of the two projects.
II.The discount rate of the two projects must be the same.

A)I and II are correct.
B)I and II are incorrect.
C)I is correct, II is incorrect.
D)I is incorrect, II is correct.

Question 73

Amazing Lace has an opportunity to invest in a ten-year project that requires an initial investment of $2 million in a capital asset with a CCA rate of 20%.The initial net working capital requirement is $200,000, which will remain unchanged throughout the life of the project.The capital asset is expected to sell for $75,000 when the project terminates.Assume the asset class is closed upon termination of the project.The firm's cost of capital is 10.5% and marginal tax rate is 40%.What is the ending after-tax cash flow (ECF)assuming half-year rule is applicable for CCA in year 1?

A)$208,363
B)$275,000
C)$330,899
D)$341,637

Question 74

You are looking to replace an old machine X with a new machine Y.
The two machines, X and Y, which perform the same functions, have the following costs and lives.
PV Costs Life
Machine X $10,000 5
Machine Y $11,500 7
Which machine would you choose? Assume an opportunity cost of capital of 15%.

A)Keep the old machine X.
B)Buy the new machine Y.
C)Indifferent
D)Neither

Question 75

A firm is considering the purchase of a new computer system at a cost of $180,000 to replace their existing system.The existing system has a current market value of $50,000 today and an expected salvage value of $10,000 at the end of five years.The new system will have a life of five years and is expected to sell for $50,000 at the end of five years.The new system will save the firm $60,000 per year in operating expenses over the life of the system.Both computer systems belong to asset class 45, which has a CCA rate of 45%, and the asset class will remain open and the half-year rule will apply in the first year.The firm's marginal tax rate is 40% and its cost of capital is 10%.What is the NPV of the replacement decision?

A)$67,965
B)$69,998
C)$77,376
D)$83,585

Question 76

Bugs Buster is considering investing in a risky new project that requires $100,000 for the purchase of new equipment and $20,000 for additional net working capital.The equipment has a five-year life and a CCA rate of 30%.The equipment is expected to sell for $8,500 at the end of the project.Assume the asset class remains open after the asset is sold.The firm's cost of capital is 12% and marginal tax rate is 35%.The risk premium for the project is 3%.What is the present value of the terminal after-tax cash flow (ECF_n)?

A)$14,169.54
B)$16,171.67
C)$16,241.76
D)$18,536.69

Question 77

A large printing company is considering purchasing a new printing press to replace the existing one that cost the company $1 million five years ago.The new machine will cost the company $1.8 million, has an economic life of ten years, and an expected salvage value of $150,000.The old machine can be sold for $200,000 today or could be sold for $10,000 in ten years.Both machines have a CCA rate of 30% and the asset class will remain open and the half-year rule applies in the first year.The company projects that operating profit will increase by $400,000 per year.The company's tax rate is 40% and the cost of capital is 12%.What is the NPV of the replacement decision?

A)$223,204
B)$224,124
C)$274,066
D)$277,285

Question 78

Queue de Castor Foods is considering the purchase of a new capital asset for $35,000.The asset has an economic life of three years, a CCA rate of 20%, and expected salvage value of $5,000.The project also requires an investment in net working capital of $4,500.Assume the asset class remains open after the asset is sold.The firm's cost of capital is 14% and marginal tax rate is 40%.What is the present value of the terminal after-tax cash flow (ECF_n)?

A)$2,319.20
B)$6,412.23
C)$9,900.48
D)$10,505.26

Question 79

Maritimes Toy Corporation (MTC)is considering investing in a piece of new equipment worth $50,000.The equipment will increase operating revenue by $10,000 per year for ten years.The equipment is expected to have no salvage value at the end of ten years, and capital cost allowance is claimed at 20% on a declining balance.The corporate tax rate is 38%, and MTC's opportunity cost of capital is 9%.Assume the asset class remains open after the asset is sold and the half-year rule applies in the first year.The project's NPV is approximately

A)$2,352
B)$3,321
C)$26,739
D)$27,709

Question 80

Investment in net working capital is included in the cash flow analysis of a capital expenditure decision in order to:

A)reflect the cash flows from buying and selling on credit
B)reflect the financing decisions
C)reflect opportunity costs
D)all of the above