Deck 6: Making Capital Investment Decisions

Question 1

A cost that has already been paid,or a liability to pay that has already been incurred,is classified as a(n):

A)salvage value expense.
B)net working capital expense.
C)sunk cost.
D)opportunity cost.
E)erosion cost.

Answer 1

sunk cost.

Question 2

A decrease in a firm's current cash flows resulting from the implementation of a new project is referred to as:

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

Answer 2

erosion costs.

Question 3

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)fixed
C)incremental
D)sunk
E)relevant

Answer 3

sunk

Question 4

The net working capital of a firm will decrease if there is:

A)a decrease in accounts payable.
B)an increase in inventory.
C)a decrease in accounts receivable.
D)an increase in the checking account balance.
E)a decrease in fixed assets.

Question 5

Which one of the following should be excluded from the analysis of a project?

A)Erosion costs
B)Incremental fixed costs
C)Incremental variable costs
D)Sunk costs
E)Opportunity costs

Question 6

Champion Toys just purchased some MACRS 5-year property at a cost of $230,000.The MACRS rates are 20 percent,32 percent,19.2 percent,11.52 percent,11.52 percent,and 5.76 percent for Years 1 to 6,respectively.Assuming the firm foregoes all bonus depreciation,the book value of the asset as of the end of Year 2 can be calculated as:

A)$230,000(1 − .20 − .32).
B)$230,000([1 − (.20)(.32)].
C)$230,000(1 − .20)(1 − .32).
D)$230,000/(1 − .20 − .32).
E)$230,000(.20)(.32).

Question 7

The salvage value of an asset creates an aftertax cash flow in an amount equal to the sales price:

A)of the asset.
B)minus the remaining book value.
C)minus [Tax rate × (Sales price − Book value)].
D)minus [Tax rate × (Book value − Sales price)].
E)plus the remaining book value.

Question 8

Erosion can be explained as the:

A)additional income generated from the sales of a newly added product.
B)loss of current sales due to a new project being implemented.
C)loss of revenue due to employee theft.
D)loss of revenue due to customer theft.
E)decrease in expected annual revenues as a new product ages.

Question 9

Pete's Garage just purchased some equipment at a cost of $650,000.What is the proper methodology for computing the depreciation expense for Year 3 if the equipment is classified as 5-year property for MACRS? The MACRS rates are 20 percent,32 percent,19.2 percent,11.52 percent,11.52 percent,and 5.76 percent for Years 1 to 6,respectively.Ignore bonus depreciation.

A)$650,000(1 − .20)(1 − .32)(1 − .192)
B)$650,000(1 − .20)(1 − .32)
C)$650,000(1 − .20)(1 − .32)(.192)
D)$650,000(1 − .192)
E)$650,000(.192)

Question 10

All of the following are anticipated effects of a proposed project.Which of these should be considered when computing the cash flow for the final year of the project?

A)Operating cash flow and salvage values only
B)Salvage values and net working capital recovery only
C)Operating cash flow,net working capital recovery,salvage values
D)Net working capital recovery and operating cash flow only
E)Operating cash flow only

Question 11

Changes in the net working capital:

A)can affect the cash flows of a project every year of the project's life.
B)only affect the initial cash flows of a project.
C)are included in project analysis only if they represent cash outflows.
D)are generally excluded from project analysis due to their irrelevance to the total project.
E)can only affect the initial and the final cash flows of a project.

Question 12

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

A)salvage value expense.
B)net working capital expense.
C)sunk cost.
D)opportunity cost.
E)erosion cost.

Question 13

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

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

Question 14

The changes in a firm's future cash flows that are a direct consequence of accepting a project are called ________ cash flows.

A)incremental
B)stand-alone
C)opportunity
D)net present value
E)erosion

Question 15

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 inflow at the beginning of a project.
C)expenditures commonly occur at the end of a project.
D)is frequently affected by the additional sales generated by a new project.
E)is the only expenditure where at least a partial recovery can be made at the end of a project.

Question 16

The cash flows of a project should:

A)be computed on a pretax basis.
B)include all sunk costs and opportunity costs.
C)include all incremental and opportunity costs.
D)be applied to the year when the related expense or income is recognized by GAAP.
E)include all financing costs related to new debt acquired to finance the project.

Question 17

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 be paid to a third party and cannot be refunded for any reason whatsoever.
E)will occur if a project is accepted and once incurred,cannot be recouped.

Question 18

One purpose of identifying all the incremental cash flows related to a proposed project is to:

A)isolate the total sunk costs so they can be evaluated to determine if the project will add value to the firm.
B)eliminate any cost which has previously been incurred so that it can be omitted from the analysis of the project.
C)make each project appear as profitable as possible for the firm.
D)include both the proposed and the current operations of a firm in the analysis of the project.
E)identify any and all changes in the cash flows of the firm for the past year so they can be included in the analysis.

Question 19

A company that opts to forego bonus depreciation and instead uses the MACRS system of depreciation:

A)will have equal depreciation costs for each year of an asset's life.
B)will expense the largest percentage of the cost during an asset's first year of life.
C)can depreciate the cost of land,if it so desires.
D)will write off the entire cost of an asset over the asset's class life.
E)cannot expense any of the cost of a new asset during the first year of the asset's life.

Question 20

Which one of these is an example of erosion that should be included in project analysis?

A)The anticipated loss of current sales when a new product is launched.
B)The expected decline in sales as the market for a product becomes saturated.
C)The reduction in sales that occurs when a competitor introduces a new product.
D)The sudden loss of sales due to a major employer in your community implementing massive layoffs.
E)The reduction in sales price that will most likely be required to sell inventory that has aged.

Question 21

The equivalent annual cost method is most useful in determining:

A)the annual operating cost of an idle machine that is currently owned by a firm.
B)the tax shield benefits of depreciation given the purchase of new assets for a project.
C)operating cash flows for cost-cutting projects of equal duration.
D)which one of two machines to acquire given equal machine lives but unequal machine costs.
E)which one of two machines to purchase when the machines are mutually exclusive,have differing lives,and will be replaced.

Question 22

The bottom-up approach to computing the operating cash flow applies only when:

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

Question 23

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 24

For a profitable firm,an increase in which one of the following will increase the operating cash flow?

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

Question 25

The annual annuity stream of payments with the same present value as a project's costs is called the project's ________ cost.

A)incremental
B)sunk
C)opportunity
D)erosion
E)equivalent annual

Question 26

The term "tax shield" refers to a reduction in taxes created by:

A)a reduction in sales.
B)an increase in interest expense.
C)noncash expenses.
D)a project's incremental expenses.
E)opportunity costs.

Question 27

A project which is designed to improve the manufacturing efficiency of a firm but will generate no additional sales revenue is referred to as a(n)________ project.

A)sunk cost
B)opportunity
C)cost-cutting
D)revenue-cutting
E)revenue-generating

Question 28

Jamestown Ltd.currently produces boat sails and is considering expanding its operations to include awnings.The expansion would require the use of land the firm purchased three years ago at a cost of $142,000 that is currently valued at $137,500.The expansion could use some equipment that is currently sitting idle if $6,700 of modifications were made to it.The equipment originally cost $139,500 six years ago,has a current book value of $24,700,and a current market value of $39,000.Other capital purchases costing $780,000 will also be required.What is the amount of the initial cash outflow for this expansion project?

A)$953,400
B)$962,300
C)$948,900
D)$927,800
E)$963,200

Question 29

The pro forma income statement for a cost reduction project:

A)will reflect a reduction in the sales of the firm.
B)will generally reflect no incremental sales.
C)has to be prepared reflecting the total sales and expenses of the entire firm.
D)cannot be prepared due to the lack of any project related sales.
E)will always reflect a negative project operating cash flow.

Question 30

The increase you realize in buying power as a result of owning an investment is referred to as the ________ rate of return.

A)inflated
B)realized
C)nominal
D)real
E)risk-free

Question 31

For a tax-paying firm,the net present value of a project will increase when:

A)the initial net working capital requirement increases.
B)depreciation is decreased during the early years of a project's life.
C)the life of the fixed assets used by that project is increased.
D)the operating cash flows increase.
E)the tax rate increases.

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)their equivalent annual costs.
D)the depreciation tax shield approach.
E)the replacement cost approach.

Question 33

Marshall's purchased a corner lot five years ago at a cost of $498,000 and then spent $63,500 on grading and drainage so the lot could be used for storing outdoor inventory.The lot was recently appraised at $610,000.The company now wants to build a new retail store on the site.The building cost is estimated at $1.1 million.What amount should be used as the initial cash outflow for this building project?

A)$1,661,500
B)$1,100,000
C)$1,208,635
D)$1,710,000
E)$1,498,000

Question 34

Assume a firm has no interest expense or extraordinary items.Given this,the operating cash flow can be computed as:

A)EBIT − Taxes.
B)EBIT(1 − Tax rate)+ Depreciation(Tax rate).
C)(Sales − Costs)(1 − Tax rate).
D)EBIT − Depreciation + Taxes.
E)Net income + Depreciation.

Question 35

Which depreciation method currently permitted under U.S.tax law provides the fastest means of depreciating an asset?

A)MACRS depreciation
B)Bonus depreciation only
C)Straight-line depreciation
D)Sum-of-years digits depreciation
E)Partial bonus depreciation combined with MACRS

Question 36

Samson's purchased a lot four years ago at a cost of $398,000.At that time,the firm spent $289,000 to build a small retail outlet on the site.The most recent appraisal on the property placed a value of $629,000 on the property and building.Samson's now wants to tear down the original structure and build a new strip mall on the site at an estimated cost of $2.3 million.What amount should be used as the initial cash outflow for the new project?

A)$2,987,000
B)$2,242,000
C)$2,058,000
D)$2,300,000
E)$2,929,000

Question 37

Interest rates or rates of return on investments that have been adjusted for the effects of inflation are called ________ rates.

A)real
B)nominal
C)effective
D)stripped
E)coupon

Question 38

The top-down approach to computing the operating cash flow:

A)ignores all noncash items.
B)applies only if a project produces sales.
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 39

The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called the:

A)aftertax depreciation savings.
B)depreciable basis.
C)depreciation tax shield.
D)operating cash flow.
E)aftertax salvage value.

Question 40

A project's operating cash flow will increase when the:

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

Question 41

Walks Softly currently sells 14,800 pairs of shoes annually at an average price of $59 a pair.It is considering adding a lower-priced line of shoes that will be priced at $39 a pair.The company estimates it can sell 6,000 pairs of the lower-priced shoes annually but will sell 3,500 less pairs of the higher-priced shoes each year by doing so.What annual sales revenue should be used when evaluating the addition of the lower-priced shoes?

A)$27,500
B)$24,000
C)$31,300
D)$789,100
E)$900,700

Question 42

Reynolds Metals is considering a project with a life of 4 years that will produce annual operating cash flows of $57,000.During the life of the project,inventory will be lowered by $28,000,accounts receivable will increase by $15,000,and accounts payable will increase by $6,000.The project requires the purchase of equipment at an initial cost of $104,000 that will be depreciated straightline to a zero book value over the life of the project.Ignore bonus depreciation.The equipment will be salvaged at the end of the project creating an aftertax cash inflow of $22,000.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 16 percent?

A)$83,483.48
B)$78,117.05
C)$76,153.17
D)$80,037.86
E)$79,876.02

Question 43

Lee's Furniture just purchased $24,000 of fixed assets that are classified as 5-year MACRS property.The MACRS rates are 20 percent,32 percent,19.2 percent,11.52 percent,11.52 percent,and 5.76 percent for Years 1 to 6,respectively.What is the amount of the depreciation expense for the third year if the firm applies the new bonus method of depreciation?

A)$2,304
B)$2,507
C)$4,608
D)$0
E)$4,800

Question 44

Lew just purchased $67,600 of equipment that is classified as 5-year MACRS property.The MACRS rates are 20 percent,32 percent,19.2 percent,11.52 percent,11.52 percent,and 5.76 percent for Years 1 to 6,respectively.What will be the book value of this equipment at the end of four years if he ignores bonus depreciation?

A)$11,681.28
B)$18,280.20
C)$17,040.00
D)$19,468.80
E)$22,672.00

Question 45

A project is expected to create operating cash flows of $26,500 a year for four years.The fixed assets required for the project cost $62,000 and will be worthless at the end of the project.An additional $3,000 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 12 percent?

A)$19,208.11
B)$14,028.18
C)$15,306.09
D)$17,396.31
E)$21,954.17

Question 46

Brennan's Boats is considering a project which will require additional inventory of $128,000,will decrease accounts payable by $7,000,and will increase accounts receivable by $56,000.What is the initial net working capital requirement for this project?

A)$177,000
B)$184,000
C)$191,000
D)$79,000
E)$198,000

Question 47

Three years ago,you purchased some 5-year MACRS equipment at a cost of $135,000.The MACRS rates are 20 percent,32 percent,19.2 percent,11.52 percent,11.52 percent,and 5.76 percent for Years 1 to 6,respectively.You sold the equipment today for $82,500.Which of these statements is correct if your tax rate is 23 percent and you ignore bonus depreciation?

A)The tax due on the sale is $10,032.60.
B)The book value today is $40,478.
C)The book value today is $37,320.
D)The taxable amount on the sale is $47,380.
E)The tax refund from the sale is $13,219.40.

Question 48

The Boat Works currently produces boat sails and is considering expanding its operations to include awnings.The expansion would require the use of land the firm purchased three years ago at a cost of $197,000 that is currently valued at $209,500.The expansion could use some equipment that is currently sitting idle if $7,500 of modifications were made to it.The equipment originally cost $387,500 five years ago,has a current book value of $132,700,and a current market value of $139,000.Other capital purchases costing $520,000 will also be required.What is the value of the opportunity costs that should be included in the initial cash outflow for the expansion project?

A)$425,000
B)$485,000
C)$329,700
D)$348,500
E)$537,200

Question 49

Foamsoft currently sells 16,850 pairs of shoes annually at an average price of $79 a pair.It is considering adding a new line of shoes that would sell for $49 a pair.The company estimates it can sell 5,000 pairs of the lower-priced shoes annually but will sell 1,250 less pairs of the higher-priced shoes each year by doing so.What is the estimated value of the annual erosion cost that should be charged to the lower-priced shoe project?

A)$138,750
B)$146,250
C)$98,750
D)$52,000
E)$123,240

Question 50

Assume a project will increase inventory by $61,000,accounts payable by $28,000,and accounts receivable by $36,000.What is the initial net working capital requirement for this project?

A)$53,000
B)$69,000
C)$59,000
D)$97,000
E)$125,000

Question 51

If Lew's Steel Forms purchases $618,000 of new equipment,they can lower annual operating costs by $265,000.The equipment will be depreciated straight-line to a zero book value over its 3-year life.Ignore bonus depreciation.At the end of the three years,the equipment will be sold for an estimated $60,000.The equipment will require the company to hold an extra $23,000 of inventory over the 3-year period.What is the NPV if the discount rate is 14 percent and the tax rate is 21 percent?

A)−$2,646.00
B)−$7,014.54
C)−$12,593.78
D)$3,106.54
E)$6,884.40

Question 52

Lottie's Boutique needs to maintain 15 percent of its sales in net working capital.The firm is considering a 3-year project which will increase sales from their current level of $110,000 to $125,000 the first year and to $135,000 a year for the following two years.When analyzing the project,what amount should be included for net working capital for the last year if the net working capital returns to its original level at that time?

A)$20,250
B)$7,000
C)$13,200
D)$3,750
E)$17,400

Question 53

Jeff's Stereos is expanding its product offerings which includes increasing the floor inventory by $150,000,increasing accounts receivable by $35,000,and increasing its debt to suppliers by $75,000.The company will also spend $200,000 for a building contractor to expand the size of the showroom.What is the amount of the project's initial cash flow?

A)−$240,000
B)−$310,000
C)−$160,000
D)−$295,000
E)−$175,000

Question 54

Custom Cars purchased $39,000 of fixed assets two years ago that are classified as 5-year MACRS property.The MACRS rates are 20 percent,32 percent,19.2 percent,11.52 percent,11.52 percent,and 5.76 percent for Years 1 to 6,respectively.The tax rate is 21 percent.If the assets are sold today for $19,000,what will be the aftertax cash flow from the sale? Ignore bonus depreciation.

A)$16,358.88
B)$17,909.09
C)$18,720.00
D)$18,941.20
E)$19,000.00

Question 55

Northern Enterprises just purchased $1,900 of fixed assets that are classified as 3-year MACRS property.The MACRS rates are 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent for Years 1 to 4,respectively.What is the amount of the depreciation expense for Year 2? Ignore bonus depreciation.

A)$562.93
B)$633.27
C)$719.67
D)$844.36
E)$1,477.63

Question 56

The Galley purchased some 3-year MACRS property two years ago at a cost of $19,800.The MACRS rates are 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent.The firm no longer uses this property so is selling it today at a price of $13,500.What is the amount of the aftertax profit on the sale? Assume the firm applies bonus depreciation and has a tax rate of 21 percent.

A)$9,140.48
B)$10,665.00
C)$8,295.00
D)$7,187.78
E)$10,702.40

Question 57

Winslow Motors purchased $225,000 of MACRS 5-year property.The MACRS rates are 20 percent,32 percent,19.2 percent,11.52 percent,11.52 percent,and 5.76 percent for Years 1 to 6,respectively.The tax rate is 21 percent.If the firm sells the asset after four years for $10,000,what will be the aftertax cash flow from the sale if the firm applies bonus depreciation?

A)$6,488.85
B)$8,880.20
C)$7,900.00
D)$7,770.40
E)$11,006.40

Question 58

Wheels and More needs to maintain 8 percent of its sales in net working capital.The firm is considering a 5-year project which will increase sales from their current level of $110,000 to $146,000,$152,000,$158,000,$164,000,and $155,000 for Years 1 to 5 of the project,respectively.What amount should be included in the project analysis cash flows for net working capital for Year 3 of the project?

A)−$12,640
B)−$480
C)$0
D)$480
E)$12,640

Question 59

Jamie's Motor Home Sales currently sells 110 Class A motor homes,220 Class C motor homes,and 280 pop-up trailers each year.They are considering adding a mid-range camper with expected annual sales of 300 units.However,if the new camper is added,Class A sales will decline to 85 units and the Class C camper sales will decline to 200 units.The sales of pop-ups will not be affected.Class A motor homes sell for an average of $140,000 each.Class C homes are priced at $59,500,and the pop-ups sell for $5,000 each.The new mid-range camper will sell for $42,900.What is the annual erosion cost of adding the mid-range camper?

A)$5,425,000
B)$4,690,000
C)$5,375,000
D)$6,315,000
E)$7,875,000

Question 60

Sue purchased a house for $89,000,spent $56,000 upgrading it,and currently had it appraised at $212,900.The house is being rented to a family for $1,200 a month,the maintenance expenses average $200 a month,and the property taxes are $4,800 a year.If she sells the house she will incur $20,000 in expenses.She is considering converting the house into professional office space.What opportunity cost,if any,should she assign to this property if she has been renting it for the past two years?

A)$178,500
B)$120,000
C)$185,000
D)$192,900
E)$232,900

Question 61

A project will increase annual sales by $60,000 and annual cash expenses by $51,000.The project will cost $40,000 and will be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project.Ignore bonus depreciation.The company has a marginal tax rate of 23 percent.What is the annual operating cash flow using the tax shield approach?

A)$5,850
B)$8,650
C)$9,230
D)$9,770
E)$10,350

Question 62

Camille's Café is considering a project that will not produce any sales but will decrease annual cash expenses by $12,000.If the project is implemented,annual taxes will increase from $23,000 to $25,205,and depreciation will increase from $4,000 to $5,500 per year.What is the amount of the annual operating cash flow using the top-down approach?

A)$5,025
B)$9,795
C)$5,500
D)$12,000
E)$14,205

Question 63

A project will produce an operating cash flow of $7,300 a year for three years.The initial investment for fixed assets will be $11,600,which will be depreciated straight-line to zero over the asset's 4-year life.Ignore bonus depreciation.The project will require an initial $500 in net working capital plus an additional $500 every year with all net working capital levels restored to their original levels when the project ends.The fixed assets can be sold for an estimated $2,500 at the end of the project,the combined tax rate is 23 percent,and the required rate of return is 12 percent.What is the net present value of the project?

A)$7,500.95
B)$9,896.87
C)$7,072.72
D)$6,353.41
E)$8,398.29

Question 64

Ronnie's Coffee House is considering a project with a life of one year that will produce sales of $6,000 and increase cash expenses by $2,500.If the project is implemented,taxes will increase by $700.The additional depreciation expense will be $200 and interest expense will increase by $100.An initial cash outlay of $200 is required for net working capital.What is the amount of the operating cash flow using the top-down approach?

A)$2,200
B)$1,500
C)$2,800
D)$3,500
E)$4,200

Question 65

The Down Towner is considering a project with a life of 4 years that will require $164,800 for fixed assets and $42,400 for net working capital.The fixed assets will be depreciated using the Year 2018 bonus depreciation method.At the end of the project,the fixed assets can be sold for $37,500 cash and the net working capital will return to its original level.The project is expected to generate annual sales of $195,000 and costs of $117,500.The tax rate is 24 percent and the required rate of return is 13 percent.What is the project's net present value?

A)$48,909.09
B)$46,482.43
C)$42,316.67
D)$56,500.00
E)$59,488.87

Question 66

Leisure Vacations is considering a project with a life of 5 years that will require the purchase of $1.4 million in new 5-year MACRS equipment.The MACRS rates are 20 percent,32 percent,19.2 percent,11.52 percent,11.52 percent,and 5.76 percent for Years 1 to 6,respectively.Ignore bonus depreciation.The firm desires a minimum 14 percent rate of return and the tax rate is 22 percent.The equipment can be sold at the end of the project for an estimated $225,000.What is the amount of the aftertax salvage value?

A)$187,600.00
B)$162,418.54
C)$195,322.15
D)$184,238.97
E)$193,240.80

Question 67

Samoa's Tools has annual sales of $760,000 and a profit margin of 8 percent.The annual depreciation expense is $50,000.What is the amount of the annual operating cash flow if the company has no long-term debt?

A)$50,000
B)$60,800
C)$110,800
D)$810,000
E)$930,000

Question 68

Schroeder Electronics is considering a project which will require the purchase of $5.68 million in new equipment that will be depreciated straight-line to a zero book value over the 5-year life of the project.Ignore bonus depreciation.The firm requires a rate of return of 12 percent and the tax rate is 21 percent.What is the value of the depreciation tax shield in Year 5 of the project?

A)$225,608
B)$228,406
C)$334,800
D)$238,560
E)$0

Question 69

For the current year,Peter's Boats has sales of $760,000 and a profit margin of 5 percent.The annual depreciation expense is $80,000.What is the amount of the annual operating cash flow if the company has no long-term debt?

A)$34,000
B)$86,400
C)$118,000
D)$120,400
E)$123,900

Question 70

Ernie's Electrical is evaluating a project which will increase annual sales by $50,000 and costs by $30,000.The project has an initial asset cost of $150,000 that will be depreciated straight-line to a zero book value over the 10-year life of the project.Ignore bonus depreciation.The applicable tax rate is 25 percent.What is the annual operating cash flow for this project?

A)$19,250
B)$15,500
C)$21,350
D)$17,900
E)$18,750

Question 71

A new project with a life of four years will increase sales by $140,000 and cash expenses by $95,000 annually.The project will cost $100,000 and will be depreciated using the Year 2018 bonus depreciation method.The company has a marginal tax rate of 21 percent.What is the value of the depreciation tax shield in Year 2?

A)$0
B)$5,250
C)$2,625
D)$3,375
E)$6,500

Question 72

Assume a proposed project under consideration by the James River Co.requires $28,900 in fixed assets.The firm plans to ignore bonus depreciation and instead apply straight-line depreciation to zero over the asset's 6-year life.An aftertax salvage value of $5,400 is expected.The project will produce an annual operating cash flow of $7,300 and will require net working capital of $500 initially plus an additional $500 in Year 3.Net working capital will be restored to its original level when the project ends at the end of Year 6.The tax rate is 21 percent and the required rate of return is 14 percent.What is the net present value of this project?

A)$1,565.54
B)$1,196.87
C)$1,072.72
D)$1,337.75
E)$1,398.29

Question 73

For this year,Jessica's has sales of $439,000,depreciation of $32,000,and net working capital of $56,000.The firm has a tax rate of 23 percent and a profit margin of 6 percent.The firm has no interest expense.What is the amount of the operating cash flow?

A)$49,384
B)$52,616
C)$54,980
D)$58,340
E)$114,340

Question 74

The Mill Wheel is considering a project with a life of 3 years that will require $289,400 for fixed assets,$36,700 for inventory and $27,800 for accounts receivable.Short-term debt is expected to increase by $16,500.The fixed assets will be depreciated straight-line to a zero book value over 5 years.Ignore bonus depreciation.At the end of the project,the fixed assets can be sold for 20 percent of their original cost and the net working capital will return to its original level.The project is expected to generate annual sales of $275,000 and costs of $198,000.The tax rate is 21 percent and the required rate of return is 16 percent.What is the amount of the cash flow in the project's final year?

A)$208,433.33
B)$197,908.18
C)$191,019.60
D)$160,087.09
E)$181,250.24

Question 75

Tech Enterprises is considering a new project that will require $325,000 for fixed assets,$160,000 for inventory,and $35,000 for accounts receivable.Short-term debt is expected to increase by $100,000.The project has a life of 5 years.The fixed assets will be depreciated straight-line to a zero book value over the life of the project.Ignore bonus depreciation.At the end of the project,the fixed assets can be sold for 25 percent of their original cost and the net working capital will return to its original level.The project is expected to generate annual sales of $554,000 with costs of $430,000.The tax rate is 21 percent and the required rate of return is 15 percent.What is the net present value of this project?

A)$32,026.45
B)$33,278.35
C)$34,138.25
D)$32,318.29
E)$36,202.48

Question 76

Ben's Border Café is considering a project that will produce sales of $16,000,increase cash expenses by $10,000,increase taxes by $950,and increase depreciation by $1,500 for each year of the project's 9-year life.What is the amount of the annual operating cash flow using the top-down approach?

A)$3,550
B)$5,050
C)$6,100
D)$7,550
E)$4,550

Question 77

Kurt's Cabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital.The project is expected to produce annual sales of $110,000 with associated costs of $70,000.The project has a life of 4 years.The company ignores bonus depreciation and instead uses straight-line depreciation to a zero book value over the life of the project.The tax rate is 21 percent.What is the annual operating cash flow for this project?

A)$31,600
B)$43,200
C)$27,000
D)$35,800
E)$40,000

Question 78

Leisure Vacations is considering a project which will require the purchase of $1.4 million in new 5-Year MACRS equipment.The MACRS rates are 20 percent,32 percent,19.2 percent,11.52 percent,11.52 percent,and 5.76 percent for Years 1 to 6,respectively.Ignore bonus depreciation.The firm desires a minimal 14 percent rate of return and has a combined tax rate of 25 percent.What is the value of the depreciation tax shield in Year 2 of the project?

A)$107,500
B)$90,400
C)$89,600
D)$123,416
E)$112,000

Question 79

For next year,By-Way has projected sales of $435,000,costs of $254,000,depreciation of $35,000,interest expense of $22,000,and taxes of $28,500.What is the amount of the projected operating cash flow?

A)$130,500
B)$157,900
C)$152,500
D)$161,500
E)$181,000

Question 80

For this year,Wilbert's Cakes has costs of $187,400,depreciation of $32,700,interest expense of $14,800,dividends paid of $5,600,taxes of $17,600,and an operating cash flow of $101,900.What is the sales amount?

A)$264,200
B)$269,800
C)$306,900
D)$322,100
E)$324,200