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Exam 10: Making Capital Investment Decisions

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Question 21

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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?

A) $13,122.20
B) $18,576.00
C) $20,843.68
D) $23,072.80
E) $25,211.09

F) A) and E)
G) A) and D)

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Question 22

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The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following?

A) salvage value
B) wasted value
C) sunk cost
D) opportunity cost
E) erosion

F) B) and E)
G) B) and D)

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Question 23

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You own a house that you rent for $1,100 a month.The maintenance expenses on the house average $200 a month.The house cost $219,000 when you purchased it 4 years ago.A recent appraisal on the house valued it at $239,000.If you sell the house you will incur $14,000 in real estate fees.The annual property taxes are $4,000.You are deciding whether to sell the house or convert it for your own use as a professional office.What value should you place on this house when analyzing the option of using it as a professional office?

Hollister & Hollister is considering a new project.The project will require $522,000 for new fixed assets,$218,000 for additional inventory,and $39,000 for additional accounts receivable.Short-term debt is expected to increase by $165,000.The project has a 6-year life.The fixed assets will be depreciated straight-line to a zero book value over the life of the project.At the end of the project,the fixed assets can be sold for 20 percent of their original cost.The net working capital returns to its original level at the end of the project.The project is expected to generate annual sales of $875,000 and costs of $640,000.The tax rate is 34 percent and the required rate of return is 14 percent.What is the cash flow recovery from net working capital at the end of this project?

The equivalent annual cost method is useful in determining:

The depreciation tax shield is best defined as the:

Dog Up! Franks is looking at a new sausage system with an installed cost of $397,800.This cost will be depreciated straight-line to zero over the project's 7-year life,at the end of which the sausage system can be scrapped for $61,200.The sausage system will save the firm $122,400 per year in pretax operating costs,and the system requires an initial investment in net working capital of $28,560.All of the net working capital will be recovered at the end of the project.The tax rate is 33 percent and the discount rate is 9 percent.What is the net present value of this project?

Dexter Smith & Co.is replacing a machine simply because it has worn out.The new machine will not affect either sales or operating costs and will not have any salvage value at the end of its 5-year life.The firm has a 34 percent tax rate,uses straight-line depreciation over an asset's life,and has a positive net income.Given this,which one of the following statements is correct?

Increasing which one of the following will increase the operating cash flow assuming that the bottom-up approach is used to compute the operating cash flow?

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?

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

Keyser Mining is considering a project that will require the purchase of $980,000 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 25 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 35 percent.What is the recovery amount attributable to net working capital at the end of the project?

Phone Home,Inc.is considering a new 6-year expansion project that requires an initial fixed asset investment of $5.876 million.The fixed asset will be depreciated straight-line to zero over its 6-year tax life,after which time it will be worthless.The project is estimated to generate $5,328,000 in annual sales,with costs of $2,131,200.The tax rate is 32 percent.What is the annual operating cash flow for this project?

Which one of the following statements is correct?

The Buck Store is considering a project that will require additional inventory of $216,000 and will increase accounts payable by $181,000.Accounts receivable are currently $525,000 and are expected to increase by 9 percent if this project is accepted.What is the project's initial cash flow for net working capital?

Which one of the following is the depreciation method which allows accelerated write-offs of property under various lifetime classifications?

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?

Phone Home,Inc.is considering a new 5-year expansion project that requires an initial fixed asset investment of $2.484 million.The fixed asset will be depreciated straight-line to zero over its 5-year tax life,after which time it will be worthless.The project is estimated to generate $2,208,000 in annual sales,with costs of $883,200.The tax rate is 32 percent and the required return on the project is 11 percent.What is the net present value for this 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?

Winnebagel Corp.currently sells 28,200 motor homes per year at $42,300 each,and 11,280 luxury motor coaches per year at $79,900 each.The company wants to introduce a new portable camper to fill out its product line.It hopes to sell 19,740 of these campers per year at $11,280 each.An independent consultant has determined that if Winnebagel introduces the new campers,it should boost the sales of its existing motor homes by 4,700 units per year,and reduce the sales of its motor coaches by 1,222 units per year.What is the amount that should be used as the annual sales figure when evaluating this project?