Deck 8: Making Capital Investment Decisions

Question 1

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

Answer 1

sunk

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

Answer 3

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

Question 4

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 5

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 6

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 7

Assume an asset cost $41,500 and has a current book value of $23,200.The asset is sold today for $19,900 cash.The firm's tax rate is 34 percent.As a result of this sale,the firm's net cash flow:

A)will increase by exactly $19,900.
B)will decrease by the difference between the $23,200 and the $19,900.
C)will increase by more than $19,900.
D)will increase by less than $19,900.
E)will decrease by some amount.

Question 8

A pro forma income statement for a cost reduction project:

A)will generally reflect no incremental sales.
B)will reflect a reduction in the sales revenue.
C)will exclude any effects of depreciation.
D)cannot be prepared due to the lack of any project related sales.
E)will always reflect a negative project operating cash flow.

Question 9

Bloomfield's has some equipment sitting idle in a warehouse.The equipment is fully paid for and also fully depreciated.If the firm decides to use this equipment for a new project,what cost,if any,should the firm include in its startup costs for the project?

A)There is no cost to the project for this equipment.
B)The original purchase price of the equipment should be included in the startup costs.
C)The original purchase price minus any tax savings realized to date on the depreciation should be included in the startup costs.
D)The current market value of the equipment should be included in the startup costs.
E)The annual storage cost for the equipment should be included as a cash inflow in the startup costs.

Question 10

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

A)The MACRS percentages in the IRS tables are applied to the current book value of an asset each year.
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 11

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 12

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

A)Depreciation increases the net book value of the firm's assets.
B)Depreciation in a non-cash 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 13

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 14

The cash flows for 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 the capital spending and net working capital requirements.
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 and aftertax salvage value of the project.

Question 15

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 pre-project 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 16

Which of the following should be included in the analysis of a project?
I.Sunk costs
II.Opportunity costs
III.Erosion costs
IV.Incremental costs

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

Question 17

Project analysis is focused on _____ costs.

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

Question 18

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 19

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 20

Which one of these statements is correct?

A)Operating cash flow is equal to net income plus depreciation plus taxes.
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)The cost of test marketing a product prior to deciding whether or not to produce the product is a sunk cost.
E)Real cash flows must be discounted at the nominal rate.

Question 21

A project that will improve the manufacturing efficiency of a firm but will generate no additional sales is referred to as a(n)_____ project.

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

Question 22

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 23

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 annual cost.
E)can be sold at a price that exceeds the current book value.

Question 24

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 25

A cost-cutting project has an initial cost of $1,200 and annual costs of $380 for each year of the project's 4-year life.The equivalent annual cost for this project 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 aftertax cash flow resulting from the annual costs.

Question 26

When compiling the relevant cash flows for a project,the aftertax 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)a change in net working capital.
C)a reduction in the cash flow for Time 0.
D)a cash flow in the last year of the project.
E)a 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

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 29

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 30

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 31

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

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

Question 32

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 33

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 34

The cash flows of a project should:

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

Question 35

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 36

Which of the following are correct methods for 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 37

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

Question 38

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 expenditure where at least a partial recovery can be made at the end of a project.

Question 39

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 40

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 41

Farris Industrial purchased a machine five years ago at a cost of $164,900.The machine is being depreciated using the straight-line method over eight years.The tax rate is 35 percent and the discount rate is 14 percent.If the machine is sold today for $42,500,what will the aftertax salvage value be?

A)$35,731.88
B)$27,625.00
C)$49,268.13
D)$63,696.88
E)$52,011.18

Question 42

Kurt's Kabinets 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 sales of $138,000 with associated costs of $74,000.The project has a 4-year life.The company uses straight-line depreciation to a zero book value over the life of the project.The tax rate is 34 percent.What is the operating cash flow for this project?

A)$42,240
B)$62,240
C)$35,440
D)$49,040
E)$69,040

Question 43

Uptown Motors is analyzing a project with sales of $420,000,depreciation of $30,000,and a net working capital requirement of $56,000.The firm has a tax rate of 35 percent and a profit margin of 5 percent.The firm has no interest expense.What is the amount of the operating cash flow?

A)$49,384
B)$50,616
C)$51,000
D)$58,340
E)$107,000

Question 44

Turkey Hill Motor Homes currently sells 1,200 Class A motor homes,2,600 Class C motor homes,and 4,000 pop-up trailers each year.It is considering adding a mid-range camper and expects that if it does so the firm can sell 1,500 of them.However,if the new camper is added,the firm expects its Class A sales to decline by 10 percent while the Class C camper sales decline to 2,100 units.The sales of pop-ups will not be affected.Class A motor homes sell for an average of $162,000 each.Class C homes are priced at $59,500 and the pop-ups sell for $5,500 each.The new mid-range camper will sell for $32,900.What is the erosion cost?

A)$36,250,000
B)$49,190,000
C)$49,350,000
D)$160,000
E)$118,000

Question 45

The Java House is considering a project that will produce sales of $47,500 and increase cash expenses by $22,500.If the project is implemented,taxes will increase by $7,600.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)$10,100
B)$20,200
C)$18,200
D)$17,400
E)$14,800

Question 46

Peter's Boats has sales of $680,000 and a profit margin of 5.2 percent.The annual depreciation expense is $74,000.The tax rate is 34 percent.What is the amount of the operating cash flow if the company has no long-term debt?

A)$48,498
B)$86,502
C)$109,360
D)$473,960
E)$399,960

Question 47

CATO,Inc.just purchased some fixed assets at a total cost of $62,118 that are classified as 3-year property for MACRS.The MACRS table values are .3333,.4445,.1481,and .0741 for Years 1 to 4,respectively.What is the amount of the depreciation expense for Year 3?

A)$9,199.68
B)$4,602.94
C)$4,261.87
D)$8,044.36
E)$9,477.63

Question 48

Wexter's purchased a warehouse for $499,000 six years ago.Four years ago,repairs costing $132,000 were made to the building.The annual property taxes are $41,000.The warehouse has a current book value of $268,000 and a market value of $529,000.The warehouse is debt-free.If the company decides to assign this warehouse to a new project,what value,if any,should be included in the initial cash flow of the project for this building?

A)$0
B)$246,000
C)$529,000
D)$631,000
E)$268,000

Question 49

Walks Softly sells customized shoes.Currently,it sells 16,000 pairs of shoes annually at an average price of $68 a pair.The company is considering adding a lower-priced line of shoes that will sell for $39 a pair.Walks Softly estimates it can sell 7,000 pairs of the lower-priced shoes but will sell 1,000 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)$205,000
B)$245,000
C)$313,000
D)$273,000
E)$1,293,000

Question 50

Ernie's Electrical is evaluating a project that will increase sales by $39,000 and costs by $6,000.The project will initially cost $102,000 for fixed assets that will be depreciated straight-line to a zero book value over the 10-year life of the project.The applicable tax rate is 35 percent.What is the operating cash flow for this project?

A)$13,300
B)$21,450
C)$25,020
D)$11,550
E)$18,180

Question 51

Ripley Co.is considering a project that will produce sales of $21,000 and increase cash expenses by $8,600.If the project is implemented,the firm's taxes will increase from $23,000 to $27,000 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)$6,900
B)$8,400
C)$12,400
D)$10,900
E)$9,900

Question 52

Dilwater Furniture purchased a corner lot in Pittsburg five years ago at a cost of $890,000.The lot was recently appraised at $1,070,000.At the time of the purchase,the company spent $80,000 to grade the lot and another $120,000 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 $1.8 million.What amount should be used as the initial cash flow for this building project?

A)$3,070,000
B)$1,070,000
C)$1,800,000
D)$2,870,000
E)$2,890,000

Question 53

A project will increase sales by $60,000 and cash expenses by $41,000.The project will cost $40,000 and be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project.The company has a marginal tax rate of 35 percent.What is the operating cash flow of the project using the tax shield approach?

A)$12,350
B)$8,650
C)$15,850
D)$13,150
E)$10,350

Question 54

Riverton Sails currently produces boat sails and is considering expanding its operations to include awnings for homes and travel trailers.The company owns land beside its current manufacturing facility that could be used for the expansion.The company bought this land ten years ago at a cost of $89,000 and spent $26,000 on grading and excavation costs at that time.Today,the land is valued at $221,000.The company currently has some unused equipment that it currently owns with a current market value of $45,000.This equipment could be used for producing awnings if $9,000 is spent for equipment modifications.Other equipment costing $315,000 will be required.What is the amount of the initial cash flow for this expansion project?

A)$484,000
B)$545,000
C)$324,000
D)$439,000
E)$590,000

Question 55

Lefty's just purchased some equipment that is classified as 7-year property for MACRS.The equipment cost $67,600.The MACRS table values are .1429,.2449,.1749,.1249,and .0893,for Years 1 to 5,respectively.What will the book value of this equipment be at the end of four years?

A)$21,118.24
B)$6,036.68
C)$7,040.00
D)$15,081.56
E)$8,443.24

Question 56

A project will increase annual sales by $144,000 and cash expenses by $95,000 for four years.The project has an initial cost of $102,000 for equipment that will be depreciated using MACRS depreciation.The applicable MACRS table values are .1429,.2449,.1749,and .1249 for Years 1 to 4,respectively.The company has a marginal tax rate of 34 percent.What is the depreciation tax shield for Year 3?

A)$3,925.59
B)$6,065.53
C)$11,774.27
D)$8,288.16
E)$4,955.77

Question 57

Sun Lee's Furniture just purchased some fixed assets classified as 5-year property for MACRS.The assets cost $232,618.The MACRS table values are .2000,.3200,.1920,.1152,.1152,and .0576 for Years 1 to 6,respectively.What is the amount of the depreciation expense for the second year?

A)$46,523.60
B)$54,019.09
C)$59,550.21
D)$62,004.20
E)$74,437.76

Question 58

Aaron's Paint paid $320,000,in cash,for a piece of equipment three years ago.Last year,the company spent $34,000 to update the equipment with the latest technology.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 $175,000 from a firm that would like to purchase it.Aaron's is debating whether to sell the equipment or to expand its operations such that the equipment can be used.When evaluating the expansion option,what value,if any,should be assigned to this equipment as an initial cost of the expansion project?

A)$364,000
B)$179,000
C)$175,000
D)$187,000
E)$212,000

Question 59

Data,Inc.purchased some fixed assets four years ago at a cost of $19,800.It no longer needs these assets,so it is going to sell them today at a price of $3,500.The assets are classified as 5-year property for MACRS.The MACRS table values .2000,.3200,.1920,.1152,.1152,and .0576 for Years 1 to 6,respectively.What is the current book value of these assets?

A)$1,140.48
B)$3,421.44
C)$3,500.00
D)$4,016.67
E)$5,702.40

Question 60

Julian's has spent $28,200 to design a new airline carryon bag.It spent another $48,500 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 startup costs are $641,300 and annual costs thereafter of $49,000.The discount rate is 12 percent and the estimated life of the project is 6 years.What value should be used for the Time 0 cash flow?

A)-$641,300
B)-$842,759
C)-$793,000
D)-$716,300
E)-$690,300

Question 61

DeCento's is analyzing two machines to determine which one it should purchase.Whichever machine is purchased will be replaced at the end of its useful life.The company requires a 12 percent rate of return and uses straight-line depreciation to a zero book value over the life of the machine.Machine A has a cost of $276,000,annual operating costs of $18,000,and a 3-year life.Machine B costs $220,000,has annual operating costs of $22,000,and a 2-year life.The firm currently pays no taxes.Which machine should be purchased and why?

A)Machine A;because it will save the company about $18,600 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 $21,202 a year
D)Machine B;because it will save the company about $19,315 a year
E)Machine B;because it will save the company about $18,667 a year

Question 62

A project is expected to create operating cash flows of $24,500 a year for three years.The initial cost of the fixed assets is $55,000.These assets will be worthless at the end of the project.An additional $4,000 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 10 percent?

A)$4,933.13
B)$1,954.17
C)$1,927.87
D)$4,208.11
E)$5,927.87

Question 63

Outdoor Gear is purchasing equipment costing $1.2 million that will lower manufacturing costs by $280,000 a year.The equipment will be depreciated over 7 years using straight-line depreciation to a book value of zero.After 7 years,the equipment will be worthless.The discount rate is 14 percent and the tax rate is 35 percent.What is the annual net income?

A)$111,428.57
B)$70,571.43
C)$59,600.00
D)$38,000.00
E)$43,600.00

Question 64

Margarite's Enterprises is considering a new project that will require $345,000 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 project has a 5-year life.The fixed assets will be depreciated straight-line to zero over the life of the project.At the end of the project,the fixed assets can be sold for 25 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 $550,000 and costs of $430,000.The tax rate is 35 percent and the required rate of return is 15 percent.
What is the initial cost of this project?

A)$330,000
B)$430,000
C)$580,000
D)$360,000
E)$650,000

Question 65

A project will produce operating cash flows of $42,000 a year for four years.During the life of the project,inventory will be lowered by $12,000,accounts receivable will increase by $15,000,and accounts payable will increase by $10,000.The project requires $120,000 of new equipment that will be depreciated straight-line to a zero book value over four years.At the end of the project,net working capital will return to its normal level and the equipment will be sold for $25,000,after taxes.What is the net present value given a required return of 14 percent?

A)$13,483.48
B)$18,117.05
C)$20,033.36
D)$12,037.86
E)$14,322.49

Question 66

JADO Mfg.is trying to decide which one of two machines to purchase.Machine A costs $421,000,has a 5-year life,and requires $108,000 in pretax annual operating costs.Machine B costs $589,000,has a 4-year life,and requires $92,000 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 $49,320 higher than Machine B's NPV
B)Machine A;because its NPV is about $38,319 higher than Machine B's NPV
C)Machine A;because its EAC is about $89.989 lower than Machine B's EAC
D)Machine B;because its EAC is about $68,360 lower than Machine A's EAC
E)Machine B;because its NPV is about $45,880 higher than Machine A's NPV

Question 67

Elton International is considering the installation of a new computer system that will cut annual operating costs by $12,000.The system will cost $48,000 to purchase and install.This system is expected to have a 5-year life and will be depreciated to zero using straight-line depreciation.What is the amount of the earnings before interest and taxes?

A)-$9,600
B)$1,000
C)$2,400
D)$11,000
E)$20,600

Question 68

A project will produce an operating cash flow of $7,300 a year for three years.The initial cash outlay for equipment will be $11,600.The net aftertax salvage value of $3,500 will be received at the end of the project.The project requires $800 of net working capital that will be fully recovered.What is the net present value of the project if the required rate of return is 11 percent?

A)$8,583.24
B)$9,896.87
C)$8,368.19
D)$9,353.41
E)$7,398.29

Question 69

Margarite's Enterprises is considering a new project that will require $345,000 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 project has a 5-year life.The fixed assets will be depreciated straight-line to zero over the life of the project.At the end of the project,the fixed assets can be sold for 25 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 $550,000 and costs of $430,000.The tax rate is 35 percent and the required rate of return is 15 percent.
What is the cash flow recovery from net working capital at the end of this project?

A)$85,000
B)$235,000
C)$430,000
D)$650,000
E)$305,000

Question 70

Precision Mfg.is trying to decide which one of two machines to purchase.Machine A costs $811,000,has a 9-year life,and requires $164,000 in pretax annual operating costs.Machine B costs $939,000,has a 10-year life,and requires $109,000 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 11 percent and the tax rate is 34 percent.Which machine should be purchased and why?

A)Machine A;because its NPV is about $66,035 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 $23,404 lower than Machine B's EAC
D)Machine B;because its NPV is about $66,035 higher than Machine A's NPV
E)Machine B;because its EAC is about $23,404 lower than Machine A's EAC

Question 71

Sway's Market is considering a project that will require the purchase of $1.4 million in new equipment.The equipment 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.New net working capital equal to 10 percent of sales will be required to support the project.All of the new net working capital will be recouped at the end of the project.Annual sales are estimated at $750,000 with costs of $338,000.The required rate of return is 12 percent and the tax rate is 34 percent.
What is the value of the depreciation tax shield in Year 2 of the project?

A)$68,800
B)$74,000
C)$95,200
D)$280,000
E)$184,800

Question 72

Margarite's Enterprises is considering a new project that will require $345,000 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 project has a 5-year life.The fixed assets will be depreciated straight-line to zero over the life of the project.At the end of the project,the fixed assets can be sold for 25 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 $550,000 and costs of $430,000.The tax rate is 35 percent and the required rate of return is 15 percent.
What is the amount of the aftertax cash flow from the sale of the fixed assets at the end of this project?

A)$30,187.50
B)$37,918.88
C)$56,062.50
D)$60,009.01
E)$86,250.00

Question 73

Kay's Quilts is considering a project that will require additional inventory of $138,000,increase accounts payable by $55,000 and increase accounts receivables by 10 percent.Accounts receivable is currently $80,000.What is the net working capital requirement?

A)$201,000
B)$91,000
C)$99,000
D)$136,000
E)$181,000

Question 74

Margarite's Enterprises is considering a new project that will require $345,000 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 project has a 5-year life.The fixed assets will be depreciated straight-line to zero over the life of the project.At the end of the project,the fixed assets can be sold for 25 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 $550,000 and costs of $430,000.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 for the first year of this project?

A)$38,500
B)$51,000
C)$67,000
D)$76,500
E)$159,000

Question 75

Assume a machine costs $136,000 and lasts four years before it is replaced.The operating cost is $6,000 a year.Ignore taxes.What is the equivalent annual cost if the required rate of return is 12 percent?

A)$35,714.29
B)$50,775.88
C)$38,775.88
D)$51,006.23
E)$38,757.88

Question 76

Thornley Co.is considering a 3-year project with an initial cost of $587,000.The project will not directly produce any sales but will reduce operating costs by $265,000 a year.The equipment is classified as MACRS 7-year property.The MACRS table values are .1429,.2449,.1749,.1249,.0893,.0892,.0893,and .0446 for Years 1 to 8,respectively.At the end of the project,the equipment will be sold for an estimated $295,000.The tax rate is 34 percent and the required return is 9 percent.An extra $23,000 of inventory will be required for the life of the project.What is the total cash flow for Year 3?

A)$491,782.87
B)$496,208.19
C)$514,782.87
D)$519,208.19
E)$523,008.24

Question 77

You purchased an asset three 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 .2000,.3200,.1920,.1152,.1152,and .0576 for Years 1 to 6,respectively.Which one of the following statements is correct if tax rate is 34 percent?

A)The current book value is $64,800.
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 $8,478.
E)The aftertax salvage value is $24,049.20.

Question 78

EZ Mart purchased an asset for $208,000 three years ago and sold it today for $86,000.The asset is 7-year MACRS property.The MACRS table values are .1429,.2449,.1749,.1249,.0893,.0892,.0893,and .0446 for Years 1 through 8,respectively.What is the aftertax salvage value from this sale if the tax rate is 35 percent?

A)$84,264.56
B)$84,314.14
C)$87,735.44
D)$87,311.09
E)$87,685.86

Question 79

Kustom Cars purchased a fixed asset two years ago for $39,000 and sold it today for $19,000.The assets are classified as 5-year property for MACRS.The MACRS table values are .2000,.3200,.1920,.1152,.1152,and .0576 for Years 1 to 6,respectively.What is the net cash flow from the salvage value if the tax rate is 35 percent?

A)$18,020
B)$19,098
C)$18,720
D)$18,902
E)$19,000

Question 80

Assume the initial cost of one customized tool and die machine is $684,000 and costs $12,600 a year to operate.Each machine has a life of three years before it is replaced.Ignore taxes.What is the equivalent annual cost of this machine if the required return is 14 percent?

A)$237,750.85
B)$268,411.15
C)$307,220.33
D)$240,600.00
E)$289,038.11