Deck 8: Making Capital Investment Decisions

Question 1

Which one of these statements is correct?

A)All allocated costs should be included in the initial cost of a project.
B)Sunk costs should be included in the initial cost of a project.
C)Synergy occurs when a new product reduces the sales of a current product.
D)Costs incurred prior to deciding whether or not to produce a new product are sunk costs.
E)Incremental costs should not be included in a project's initial cost estimate.

Answer 1

Costs incurred prior to deciding whether or not to produce a new product are sunk costs.

Question 2

Sunk costs include any cost that

A)will change if a project is undertaken.
B)will be incurred if a project is accepted.
C)has previously been incurred and cannot be changed.
D)will occur if a project is accepted and once incurred,cannot be recouped.
E)is paid to a third party and cannot be refunded for any reason whatsoever.

Answer 2

has previously been incurred and cannot be changed.

Question 3

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

A)Insurance on a building the company currently owns that will house the operations for Project A
B)Property taxes on a currently owned warehouse that has been sitting idle but is going to be utilized by Project A
C)Cost of the test marketing to ascertain whether or not Project A is feasible
D)Rental cost of some new machinery that will be acquired for Project A
E)Contractual annual salary of the company president

Answer 3

Rental cost of some new machinery that will be acquired for Project A

Question 4

Bloomfield's has some idle equipment that is debt-free and also fully depreciated.If the company decides to use this equipment for a new project,what cost,if any,should be included for this equipment in the project's start-up costs?

A)Zero cost
B)Original purchase price of the equipment
C)Original purchase price minus any tax savings realized to date on the depreciation
D)Current market value of the equipment
E)Annual storage cost for the equipment

Question 5

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?

A)Depreciation increases the net book value of the firm's assets.
B)Depreciation is a noncash expense that increases the firm's cash flows.
C)Depreciation lowers the firm's net income but does not affect its cash flows.
D)Depreciation has no effect on either the firm's net income or its cash flows.
E)Depreciation decreases both the firm's net income and its cash flows.

Question 6

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

A)sunk cost.
B)opportunity cost.
C)salvage value expense.
D)equivalent annual cost.
E)erosion cost.

Question 7

The incremental cash flows of a project are best defined as

A)the cash received from the additional sales generated by the project.
B)any change in a firm's cash flows resulting from the addition of the project including opportunity costs.
C)the cash received or lost from changes in the sales of a firm's current products as a result of adding the project.
D)the increase or decrease in a firm's cash flows resulting from adding the project,excluding all sunk and opportunity costs.
E)the total cash flows of a firm once the new project is completely integrated into the firm's operations.

Question 8

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

A)Incremental and sunk costs only
B)Opportunity costs,erosion,and sunk costs
C)Opportunity costs and synergy only
D)Synergy,erosion,opportunity costs,and incremental costs
E)Incremental costs minus any sunk costs plus synergy

Question 9

The cash flows of a project include the

A)net operating cash flow generated by the project,less both sunk and erosion costs.
B)incremental operating cash flow,as well as any changes in capital spending and net working capital.
C)net income generated by the project plus the annual depreciation expense.
D)sunk costs,opportunity costs,and erosion costs of the project.
E)incremental operating cash flow plus any after-tax salvage value minus opportunity costs.

Question 10

Capital budgeting analysis is based on

A)the discounted cash flows incremental to a project.
B)the additional income generated from the sales of a newly added project.
C)the expected profits generated by a project's sales and costs.
D)all incremental and allocated costs assigned to a project.
E)all past and future expenditures related to a proposed project.

Question 11

In project analysis,which one of these is a common assumption regarding net working capital?

A)Only changes in current assets are included in net working capital for project analysis purposes.
B)The aftertax salvage value of an asset that is sold is included as a net working capital item.
C)Net working capital will be returned to its preproject level at the end of a project.
D)Increases in net working capital will be treated as a cash inflow.
E)Any change in net working capital will only occur when a project commences.

Question 12

Global Enterprises has spent $134,000 on research developing a new type of shoe.For this shoe to now be manufactured,the firm will need to expand into an empty building that it currently owns.The firm was offered $229,000 last week for that building.An additional $342,000 will be required for new equipment and building improvements.Labor and material costs are estimated at $4.98 per pair of shoes.Interest expense on the loan needed to finance the production of this new shoe will be $17,800 a year.Which one of these correctly identifies the sunk costs?

A)$229,000 value of the building
B)$134,000 for research
C)$229,000 value of the building plus $342,000 for new equipment and improvements
D)$17,800 for interest plus $134,000 for research
E)$229,000 for the building plus $134,000 for research

Question 13

You spent $500 last week fixing the transmission in your car.Now,the brakes are acting up,and you are trying to decide whether to fix them or trade the car in for a newer model.In analyzing the brake situation,the $500 you spent fixing the transmission is a(n)________ cost.

A)opportunity
B)sunk
C)incremental
D)fixed
E)relevant

Question 14

Project analysis is focused on ________ costs.

A)total
B)sunk
C)variable
D)incremental
E)fixed

Question 15

Changes in net working capital

A)are included in project analysis only if they represent cash outflows.
B)only affect the initial cash flows of a project.
C)can affect the cash flows of a project every year of the project's life.
D)are generally excluded from project analysis due to their irrelevance to the total project.
E)affect the initial and the final cash flows of a project but not the cash flows of the middle years.

Question 16

The cash flows of a new project that come at the expense of a firm's existing projects are called

A)opportunity costs.
B)net working capital expenses.
C)erosion costs.
D)salvage value expenses.
E)sunk costs.

Question 17

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

A)The MACRS percentages in the IRS tables are applied annually to the then current book value of an asset.
B)The MACRS system of depreciation was eliminated by the IRS in 2012.
C)An asset will be depreciated faster using MACRS rather than the straight-line method.
D)An asset classified as 3-year MACRS property will be fully depreciated at the end of Year 3.
E)All newly acquired property is considered to be placed in service at the start of the year for MACRS purposes.

Question 18

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

A)increase by exactly $15,000.
B)decrease by the difference between the $18,209 and the $15,000.
C)increase by more than $15.000.
D)increase by less than $15,000.
E)decrease by some amount.

Question 19

Which one of the following will decrease a firm's net working capital?

A)A decrease in fixed assets
B)An increase in inventory
C)An increase in the firm's checking account balance
D)A decrease in accounts payable
E)A decrease in accounts receivable

Question 20

Erosion can be best explained as the

A)loss of current sales due to a new project being implemented.
B)additional income generated from the sales of a newly added product.
C)loss of revenue due to customer theft.
D)loss of revenue due to employee theft.
E)loss of sales due to a product become obsolete.

Question 21

When determining a minimum bid price,you should assume the

A)net present value is zero.
B)net profit is zero.
C)discount rate equals the risk-free rate.
D)depreciation is based on the straight-line method.
E)fixed assets are unaffected.

Question 22

A company that uses the MACRS system of depreciation

A)cannot expense any of the cost of a new asset during the first year of the asset's life.
B)will expense the entire cost of an asset over the asset's class life.
C)will fully depreciate most assets over a 3-year period.
D)will forgo any benefits normally derived from the depreciation tax shield.
E)will have equal depreciation costs each year of an asset's life.

Question 23

Which one of these represents the difference between a nominal rate and a real rate as they relate to project analysis?

A)Interest rate on any project debt
B)Risk-free rate of interest
C)Market rate of return
D)Rate of inflation
E)Required rate of return

Question 24

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

A)4-year annuity payment that has the same net present value as the project's costs given a stated discount rate.
B)4-year total of all costs divided by four.
C)annual sales needed to offset these additional costs.
D)lump sum payment at Time 0 that is equal to these additional costs at a given discount rate.
E)4-year average after-tax cash flow resulting from the annual costs.

Question 25

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

A)reaches the end of its depreciable life.
B)is fully paid for.
C)reaches a point where the book value is less than half of the original cost.
D)can be replaced with a machine that has a lower equivalent annual cost.
E)can be sold at a price that exceeds the current book value.

Question 26

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

A)cash outflow at Time 0.
B)change in net working capital.
C)reduction in the cash flow for Time 0.
D)cash flow in the last year of the project.
E)cash flow in the year of sale.

Question 27

Which one of these is a requirement when computing the net present value of a capital project?

A)The discount rate used must be a nominal rate.
B)The discount rate must be stated in real terms.
C)Nominal cash flows must be discounted using a real rate.
D)Real cash flows must be converted to nominal cash flows.
E)Real cash flows must be discounted using a real rate.

Question 28

The top-down approach to computing the operating cash flow

A)applies only if a project produces sales.
B)ignores all noncash items.
C)can only be used if the entire cash flows of a firm are included.
D)is equal to (Sales − Costs − Taxes + Depreciation).
E)includes the interest expense related to a project.

Question 29

All else equal,a project's operating cash flow will increase when the

A)net working capital requirement increases.
B)sales projections are lowered.
C)interest expense is lowered.
D)depreciation expense increases.
E)earnings before interest and taxes decreases.

Question 30

The equivalent annual cost is a method used to primarily compare mutually exclusive machines

A)with different initial costs but similar lives.
B)depreciated using various methods.
C)that will be replaced with those that will not.
D)that perform different functions.
E)that will be replaced and have unequal lives.

Question 31

Which of the following are correct methods of computing the operating cash flow of a project assuming that the interest expense is equal to zero? I.EBIT + Depreciation − Taxes
II)EBIT − Depreciation + Taxes
III)Net Income − Depreciation
IV)[(Sales − Costs)× (1 − Tax rate)] + [Depreciation × Tax rate]

A)I and III only
B)II and IV only
C)II and III only
D)I and IV only
E)I,III,and IV only

Question 32

Toni's Tools is comparing machines to determine which one to purchase.The machines sell for differing prices,have differing operating costs,differing machine lives,and will be replaced when worn out.These machines should be compared using

A)net present value only.
B)both net present value and the internal rate of return.
C)the replacement parts approach.
D)the depreciation tax shield approach.
E)the equivalent annual cost method.

Question 33

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

A)annual depreciation tax shield.
B)amount of tax due on the sale of that asset.
C)amount of tax saved annually due to the depreciation expense.
D)amount of cash that can be received from the sale of that asset.
E)change in depreciation needed to reflect the market value of the asset.

Question 34

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

A)Employee salaries
B)Office rent
C)Building maintenance
D)Equipment rental
E)Equipment depreciation

Question 35

The sale of an asset creates an aftertax cash flow in an amount equal to the

A)Sale price - Book value.
B)Sale price - Tax rate × (Book value - Sale price).
C)Sale price - Tax rate × (Sale price - Book value).
D)Sale price + Tax rate × (Sale price - Book value).
E)Sale price × (1 - Tax rate).

Question 36

Net working capital

A)can be ignored in project analysis because any expenditure is normally recouped by the end of the project.
B)requirements generally,but not always,create a cash outflow at the beginning of a project.
C)expenditures commonly occur at the end of a project.
D)is ignored in project analysis because any change in net working capital is a sunk cost.
E)is the only initial expenditure where at least a partial recovery can be made at the end of a project.

Question 37

Assume you computed the NPV of a project using nominal values.Your partner computed the NPV of the identical project using real values,given a positive rate of inflation.When you compare your results,you should discover that

A)the discount rate used by your partner is higher than the rate you used.
B)both computations used the identical discount rate.
C)your NPV value is greater than your partner's NPV value.
D)your partner's initial cash flow at Time 0 is less than the value you used for Time 0.
E)your NPV values are identical.

Question 38

The bottom-up approach to computing the operating cash flow of a project applies only when

A)both the depreciation expense and the interest expense are equal to zero.
B)the project is a cost-cutting project.
C)the interest expense is equal to zero.
D)no fixed assets are required for the project.
E)taxes are ignored and the interest expense is equal to zero.

Question 39

Computers used for business purposes are assigned to which MACRS property class?

A)3-year
B)7-year
C)10-year
D)5-year
E)15-year

Question 40

The pretax salvage value of an asset is equal to the

A)book value if straight-line depreciation is used.
B)book value if MACRS depreciation is used.
C)market value minus the book value.
D)book value minus the market value.
E)market value.

Question 41

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?

A)$40,449.47
B)$54,019.09
C)$123,926.08
D)$102,004.20
E)$74,355.65

Question 42

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?

A)$168,800
B)$174,000
C)$148,900
D)$167,400
E)$157,040

Question 43

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?

A)$11,746.73
B)$12,011.98
C)$10,927.87
D)−$11,746.73
E)−$12,011.98

Question 44

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?

A)$54,000
B)$35,000
C)$146,000
D)$108,000
E)$63,000

Question 45

Elton International is considering the installation of a new computer system that will cut annual operating costs by $16,500 but not affect sales.The system will cost $68,000 and will be depreciated to zero over its 7-year life using the straight-line method.What is the amount of the earnings before interest and taxes (EBIT)?

A)−$26,214.29
B)$17,014.29
C)$6,785.71
D)$9,308.71
E)−$9,714.29

Question 46

Data,Inc.purchased some fixed assets 4 years ago at a cost of $21,650 and is selling them today at a price of $4,500.The assets are 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 current book value of these assets?

A)$1,247.04
B)$3,741.12
C)$6,309.19
D)$4,016.67
E)$8,420.02

Question 47

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?

A)$1,231,200
B)$1,139,900
C)$333,200
D)$452,200
E)$1,259,100

Question 48

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?

A)$446,040
B)$1,022,000
C)$726,040
D)$1,302,000
E)$170,040

Question 49

Walks Softly sells customized shoes.Currently,it sells 14,800 pairs of shoes annually at an average price of $79 a pair.The company is considering adding a lower-priced line of shoes that will sell for $59 a pair.The company estimates it can sell 4,800 pairs of the lower-priced shoes but will sell 1,900 less pairs of the higher-priced shoes by doing so.What is the amount of the sales that should be used when evaluating the addition of the lower-priced shoes?

A)$133,100
B)$1,245,000
C)$416,300
D)$1,302,300
E)$283,200

Question 50

Julian's has spent $47,200 to design a new airline carryon bag.It spent another $56,500 testing various materials for their durability.An additional $75,000 was spent on test marketing to determine both the market demand and color preference.Since the test marketing proved successful,the firm is now compiling data to evaluate the addition of this bag to its production runs.The estimated production start up costs are $932,300 with annual costs thereafter of $57,000.The discount rate is 11 percent and the estimated life of the project is 5 years.What value should be used for the Time 0 cash flow?

A)−$932,300
B)−$1,217,300
C)−$654,973
D)−$1,036,000
E)−$1,111,000

Question 51

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?

A)$38,323,800
B)$30,801,200
C)$49,350,000
D)$1,478,800
E)$2,118,600

Question 52

A project will produce an operating cash flow of $38,400 a year for 4 years.The initial cash outlay for equipment will be $57,300 and the net after-tax salvage value of $8,415 will be received at the end of the project.The project initially requires $1,200 of net working capital that will be fully recovered at project's end.What is the net present value of the project if the required rate of return is 16 percent?

A)$54,260.42
B)$49,896.87
C)$48,368.19
D)$53,300.41
E)$47,398.29

Question 53

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?

A)$0
B)$192,000
C)$164,000
D)$259,429
E)$423,429

Question 54

You purchased an asset 3 years ago at a cost of $135,000 and sold it today for $82,500.The equipment is 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.Which one of the following statements is correct if the tax rate is 34 percent?

A)The current book value is $41,800.
B)The taxable amount on the sale is $38,880.
C)The tax due on the sale is $14,830.80.
D)The book value today is $37,478.
E)The after-tax salvage value is $38,880.

Question 55

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?

A)$2,415,000
B)$1,600,000
C)$2,385,000
D)$2,240,000
E)$2,270,000

Question 56

Farris Industrial purchased a machine 5 years ago at a cost of $229,380.The machine is being depreciated using the straight-line method over 8 years.The tax rate is 35 percent and the discount rate is 16 percent.If the machine is sold today for $74,500,what will be the after-tax salvage value?

A)$74,500.00
B)$67,625.09
C)$78,531.13
D)$37,389.69
E)$115,454.05

Question 57

Kustom Cars purchased a fixed asset 2 years ago for $47,000 and sold it today for $23,000.The assets are 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 net cash flow from the sale if the tax rate is 34 percent?

A)$24,604.19
B)$23,873.12
C)$18,720.00
D)$22,850.40
E)$19,0208.19

Question 58

BLD,Inc.just purchased some fixed assets at a total cost of $94,318 that are classified as 3-year property for MACRS.The MACRS table values are 0.3333,0.4445,0.1481,and 0.0741 for Years 1 to 4,respectively.What is the amount of the depreciation expense for Year 3?

A)$13,968.50
B)$14,602.94
C)$5,173.26
D)$8,044.36
E)$6,988.96

Question 59

Lefty's just purchased some equipment that is classified as 7-year property for MACRS.The equipment cost $123,940.The MACRS table values are 0.1429,0.2449,0.1749,0.1249,and 0.0893,for Years 1 to 5,respectively.What will the book value of this equipment be at the end of 4 years?

A)$38,718.86
B)$36,036.68
C)$47,040.00
D)$44,566.04
E)$48,443.24

Question 60

A project will produce operating cash flows of $39,000 a year for 4 years.During the life of the project,inventory will be lowered by $9,000,accounts receivable will increase by $14,000,and accounts payable will increase by $11,000.The project requires $118,000 of new equipment that will be depreciated straight-line to a zero book value over 4 years.At the end of the project,net working capital will return to its normal level and the equipment will be sold for $21,000,aftertaxes.What is the net present value given a required return of 13 percent?

A)$14,322.49
B)$13,483.48
C)$18,117.05
D)$13,204.16
E)$12,804.42

Question 61

Uptown Motors is analyzing a project with annual sales of $420,000,straight-line depreciation of $28,700 a year,and a net working capital requirement of $34,000.The firm has a tax rate of 34 percent and a profit margin of 6.1 percent.The firm has no long-term debt.What is the amount of the operating cash flow?

A)$24,384.42
B)$50,616.67
C)$54,320.00
D)$58,340.70
E)$26,667.20

Question 62

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?

A)$64,209.11
B)$121,012.12
C)$74,083.33
D)$81,028.40
E)$137,583.33

Question 63

Outdoor Gear is purchasing equipment costing $485,900 that will lower manufacturing costs by $132,000 a year.The equipment will be depreciated over 8 years using straight-line depreciation to a zero book value.After 8 years,the equipment will be worthless.The discount rate is 16 percent and the tax rate is 34 percent.What is the annual net income from this purchase?

A)$51,428.57
B)$47,033.25
C)$87,120.00
D)−$38,527.11
E)−$127,206.75

Question 64

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?

A)$237,750.85
B)$268,411.15
C)$261,632.62
D)$240,600.00
E)$289,038.11

Question 65

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?

A)$281,782.87
B)$406,208.19
C)$315,189.32
D)$319,208.19
E)$423,008.24

Question 66

Margarite's Enterprises is considering a new 5-year project that will require $612,000 for new fixed assets,$160,000 for inventory,and $35,000 for accounts receivable.Short-term debt is expected to increase by $110,000.The fixed assets will be depreciated straight-line to zero over the life of the project.The project is expected to generate annual sales of $694,000 with costs of $428,000.The tax rate is 35 percent,and the required rate of return is 15 percent.What is the amount of the earnings before interest and taxes (EBIT)for the first year of this project?

A)$138,500
B)$143,600
C)$167,000
D)$93,340
E)$90,025

Question 67

Kurt's Kabinets is looking at a 4-year project that will require $76,000 in fixed assets and another $20,000 in net working capital.Annual sales are projected at $142,800 with costs of $79,600.The company uses straight-line depreciation to a zero book value over the life of the project.The tax rate is 35 percent.What is the annual operating cash flow for this project?

A)$42,240
B)$60,440
C)$40,440
D)$47,730
E)$67,730

Question 68

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?

A)$100,020
B)$85,900
C)$99,000
D)$9,980
E)$8,120

Question 69

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)$410,208
B)$393,760
C)$408,211
D)$427,009
E)$367,984

Question 70

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?

A)$65,714.29
B)$62,764.36
C)$78,775.88
D)$51,006.23
E)$50,200.00

Question 71

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?

A)Machine A because it will save the company about $32,642 a year
B)Machine A because it will save the company about $19,261 a year
C)Machine B because it will save the company about $32,642 a year
D)Machine B because it will save the company about $10,000 a year
E)Machine B because it will save the company about $19,261 a year

Question 72

Ernie's Electrical is evaluating a project that will increase sales by $48,000 and costs by $16,000.The project will initially cost $89,000 for fixed assets that will be depreciated straight-line to a zero book value over the 6-year life of the project.The applicable tax rate is 34 percent.What is the project's annual operating cash flow?

A)$23,300.13
B)$21,450.87
C)$26,163.33
D)$22,406.67
E)$18,180.09

Question 73

A project will increase sales by $92,800 and cash expenses by $53,200.The project will cost $89,000 and be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project.The tax rate is 35 percent.What is the operating cash flow of the project using the tax shield approach?

A)$42,350.50
B)$28,650.00
C)$33,527.50
D)$35,170.50
E)$37,672.50

Question 74

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?

A)Machine A because its NPV is about $61,927 higher than Machine B's NPV
B)Machine A because its EAC is about $38,319 higher than Machine B's EAC
C)Machine A because its EAC is about $89.989 lower than Machine B's EAC
D)Machine B because its NPV is about $56,642 higher than Machine A's NPV
E)Machine B because its NPV is about $45,880 higher than Machine A's NPV

Question 75

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?

A)$152,960
B)$106,502
C)$114,458
D)$93,960
E)$55,458

Question 76

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)$3,925.59
B)$7,039.73
C)$4,556.08
D)$8,288.16
E)$9,955.77

Question 77

Precision Mfg.is trying to decide which one of two machines to purchase.Machine A costs $854,000,has a life of 8 years,and requires $147,000 in pretax annual operating costs.Machine B costs $798,000,has a life of 11 years,and requires $104,000 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 13 percent and the tax rate is 35 percent.Which machine should be purchased and why?

A)Machine A because its NPV is about $114,558 higher than Machine B's NPV
B)Machine A because its NPV is about $64,217 higher than Machine B's NPV
C)Machine A because its EAC is about $83,404 lower than Machine B's EAC
D)Machine B because its NPV is about $95,188 higher than Machine A's NPV
E)Machine B because its EAC is about $83,404 lower than Machine A's EAC

Question 78

Ripley Co.is considering a project that will produce sales of $36,700 and increase cash expenses by $14,600.If the project is implemented,the firm's taxes will increase from $17,420 to $21,680 and depreciation will increase from $4,000 to $5,500.What is the amount of the operating cash flow using the top-down approach?

A)$14,960
B)$17,840
C)$12,400
D)$10,900
E)$16,340

Question 79

A project requires $1.08 million of new equipment that will be depreciated straight-line to zero over the project's 4-year life.The equipment is expected to be sold at the end of the project for 33 percent of its original cost.Net working capital equal to 12 percent of sales is required and will be recouped at the end of the project.Annual sales are projected at $487,500 with annual costs of $302,400.What is the recovery amount attributable to net working capital at the end of the project?

A)$25,555
B)$22,212
C)$40,100
D)$58,500
E)$42,550

Question 80

The Java House is considering a project that will produce sales of $59,280 and increase cash expenses by $26,040.If the project is implemented,taxes will increase by $4,600.The additional depreciation expense will be $10,100.An initial cash outlay of $7,300 is required for net working capital.What is the amount of the operating cash flow using the top-down approach?

A)$18,540
B)$33,240
C)$18,200
D)$28,640
E)$32,800