Question 1

Aaron's Market is implementing a project that will initially increase accounts payable by $3,600, increase inventory by $4,800, and decrease accounts receivable by $800. All net working capital will be recouped when the project terminates. What is the cash flow related to the net working capital for the last year of the project?

Accepted Answer

To calculate the cash flow related to net working capital for the last year of the project, we need to consider the changes in accounts payable, inventory, and accounts receivable. 
Net working capital = Current assets - Current liabilities 
Initial net working capital = (Inventory + Accounts receivable) - Accounts payable 
= (4800 - 800) - 3600 
= 400

Since all net working capital will be recouped at the end of the project, the final net working capital will also be $400. Therefore, the cash flow related to net working capital for the last year will be zero. 
However, if we assume that the project terminates before the end of a year, the cash flow related to net working capital can be negative or positive. But based on the information provided in the question, the best choice is C.

Question 2

Ignoring the option to wait:

Accepted Answer

Ignoring the option to wait may underestimate the net present value of a project. This is because waiting allows for more information gathering and potential changes in the project that could increase its value. Therefore, ignoring the option to wait could result in a less accurate estimate of the project's value.

Question 3

Nu Tek is comprised of four separate operating divisions. For this year, the firm has decided to allocate capital funds using a soft rationing approach. Which one of the following applies to this situation?

Accepted Answer

The answer of Nu Tek is comprised of four separate...

Question 4

Sensitivity analysis:

Accepted Answer

Sensitivity analysis is used to identify the variable within a project that presents the greatest forecasting risk. It helps to understand the impact of changing one input variable while keeping all other factors constant. By doing so, it is possible to determine the most sensitive inputs and how they affect the project's financial performance. Therefore, option B is the correct answer.

Question 5

Browning's Motor Works is reviewing its current accounts to determine how a proposed project might affect the account balances. The firm estimates the project will initially require $57,000 in additional current assets and $32,000 in additional current liabilities. The firm also estimates the project will require an additional $7,000 a year in current assets for each one of the four years of the project. How much net working capital will the firm recoup at the end of the project assuming that all net working capital can be recaptured?

Accepted Answer

The firm will recoup the initial $57,000 in additional current assets and the $32,000 in additional current liabilities at the end of the project. In addition, the firm will recoup $7,000 a year in current assets for each one of the four years of the project, for a total of $28,000. Therefore, the firm will recoup a total of $57,000 + $32,000 + $28,000 = $117,000 in net working capital at the end of the project.

Question 6

A 9-year project is expected to generate annual revenues of $114,500, variable costs of $73,600, and fixed costs of $14,000. The annual depreciation is $3,500 and the tax rate is 34 percent. What is the annual operating cash flow?

Accepted Answer

Operating cash flow is calculated as: (Revenues - Variable Costs - Fixed Costs - Depreciation) * (1 - Tax Rate) + Depreciation. Substituting the given values: ($114,500 - $73,600 - $14,000 - $3,500) * (1 - 0.34) + $3,500 = $18,944.

Question 7

Which of the following have the potential to increase the net present value of a proposed investment? I. ability to immediately shut down a project should the project become unprofitable
II) ability to wait until the economy improves before making the investment
III) option to place the investment on hold until a more favorable discount rate becomes available
IV) option to increase production beyond that initially projected

Accepted Answer

All the options have the potential to increase the net present value of a proposed investment by providing flexibility and strategic advantages in decision-making.

Question 8

Six years ago, Global Exporters paid cash for a new packaging machine that cost $287,000. Three years ago, the firm spent $2,900 on repairs and modifications to the machine. The machine is now fully depreciated and has just sat idly in a back corner of the shop for the past 7 months. The estimated value of the machine today is $124,500. The firm is considering using this machine in a new project. If it does so, what value should be assigned to this machine and included in the initial costs of the new project?

Accepted Answer

The value to be assigned to the machine for the new project is its current estimated value, which is $124,500. This is the opportunity cost of using the machine in the project, as it represents the amount the firm could receive if it sold the machine instead.

Question 9

Scenario analysis:

Accepted Answer

Scenario analysis helps to determine the reasonable range of expectations for a project's anticipated outcome by analyzing various possible scenarios and their respective outcomes. It provides a more comprehensive understanding of the potential risks and rewards associated with a project, which can aid in decision-making and risk management. However, it does not determine the impact of a $1 change in sales on the internal rate of return (A), identify which variable has the greatest impact on net present value (B), evaluate net present value (D), or determine the absolute worst and best outcomes (E).

Question 10

The Tattler has a printing press sitting idly in its back room. The press has no market value to another printer because the machine utilizes old technology. The firm could get $125 for the press as scrap metal. The press is 6 years old and originally cost $148,000. The current book value is $2,370. The president of the firm is considering a new project and feels he can use this press for that project. What value, if any, should be assigned to the press as an initial cost of the new project?

Accepted Answer

The value to be assigned to the press as an initial cost of the new project is its opportunity cost, which is the amount it could be sold for as scrap metal, $125.

Question 11

Rock Haven has a proposed project that will generate sales of 1,680 units annually at a selling price of $22 each. The fixed costs are $12,700 and the variable costs per unit are $5.95. The project requires $28,000 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the 4-year life of the project. The salvage value of the fixed assets is $6,900 and the tax rate is 34 percent. What is the operating cash flow for year four?

Accepted Answer

The operating cash flow for year four is $11,794. This is calculated as follows:Sales revenue: 1,680 units * $22 per unit = $36,960Variable costs: 1,680 units * $5.95 per unit = $10,032Depreciation: $28,000 / 4 years = $7,000Taxable income: $36,960 - $10,032 - $7,000 = $19,928Taxes: $19,928 * 34% = $6,776Operating cash flow: $36,960 - $10,032 - $7,000 - $6,776 + $6,900 = $11,794

Question 12

Ed's Hardware is adding a new product line to its sales lineup. Initially, the firm will stock $31,000 of the new inventory, which will be purchased on 30-days credit from a supplier. The firm will also invest $6,000 in accounts receivable and $4,000 in equipment. What amount should be included in the initial project costs for net working capital?

Accepted Answer

The answer of Ed's Hardware is adding a new product...

Question 13

Waterfront Shirts is a specialty retailer offering T-shirts, sweatshirts, and caps. Its most recent annual sales consisted of $14,000 of T-shirts, $11,000 of sweatshirts, and $1,300 of caps. The company is adding polo shirts to the line-up and projects that this addition will result in sales next year of $12,000 of T-shirts, $8,000 of sweatshirts, $7,800 of polo shirts, and $1,300 of caps. What sales amount should be used when evaluating the Polo shirt project?

Accepted Answer

The sales amount for evaluating the Polo shirt project should be the incremental sales generated by the addition of polo shirts, which is the projected sales of polo shirts ($7,800) minus the decrease in sales of other products ($2,000 decrease in T-shirts and $3,000 decrease in sweatshirts), resulting in $2,800.

Question 14

The Green Shingle purchased a parcel of land 6 years ago for $299,500. At that time, the firm invested $64,000 grading the site so that it would be usable. Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $28,000 a year. The Green Shingle is now considering building a hotel on the site as the rental lease is expiring. The current value of the land is $347,500. The firm has no loans or mortgages secured by the property. What value should be included in the initial cost of the hotel project for the use of this land?

Accepted Answer

The current value of the land, $347,500, should be included in the initial cost of the hotel project as it represents the opportunity cost of using the land for the project instead of selling it.

Question 15

Glass Blowers, Inc. has a new project in mind that will increase accounts receivable by $18,000, decrease accounts payable by $6,000, increase fixed assets by $36,000, and decrease inventory by $11,000. What is the amount the firm should use as the initial cash flow attributable to net working capital when it analyzes this project?

Accepted Answer

The initial cash flow attributable to net working capital is calculated as the change in current assets minus the change in current liabilities. The increase in accounts receivable ($18,000) and the decrease in inventory (-$11,000) result in a net increase in current assets of $7,000. The decrease in accounts payable ($6,000) results in a decrease in current liabilities. Therefore, the net change in net working capital is $7,000 - $6,000 = $1,000. Since this is an increase in net working capital, it is a cash outflow, so the initial cash flow is -$1,000.

Question 16

A debt-free firm has net income of $128,400, taxes of $46,200, and depreciation of $21,300. What is the operating cash flow?

Accepted Answer

Operating cash flow (OCF) for a debt-free firm can be calculated as net income plus depreciation. Here, OCF = $128,400 (net income) + $21,300 (depreciation) = $149,700.

Question 17

The ability to delay an investment:

Accepted Answer

The ability to delay an investment is valuable only when there are conditions under which the investment will have a positive net present value. Delaying an investment allows for more time to evaluate the potential outcomes and make a more informed decision. However, if the investment is never profitable, delaying it will not make it more valuable. Therefore, it is important to consider whether delaying the investment will result in a positive net present value before choosing to do so.

Question 18

Which one of the following statements is correct when a firm faces hard rationing?

Accepted Answer

Hard rationing occurs when a firm does not have enough funds to finance all the positive net present value projects. In such a scenario, the firm is unable to fund any new projects, and therefore, option C is the correct answer. Option A, B, D, and E are incorrect because they assume that the firm has some funds available for financing new projects, which is not the case in hard rationing.

Question 19

Great Woods sells specialty equipment for mountain climbers. Its sales for last year included $238,000 of tents and $411,000 of climbing gear. For next year, management has decided to sell specialty sleeping bags also. As a result of this change, sales projections for next year are $254,000 of tents, $426,000 of climbing gear, and $51,000 of sleeping bags. How much of next year's sales are derived from the side effects of adding the new product to its sales offerings?

Accepted Answer

To find out the amount of sales derived from the side effects of adding the new product, we need to subtract the projected sales of tents and climbing gear without the sleeping bags from their projected sales with the sleeping bags. 
Projected sales of tents without sleeping bags = $238,000 
Projected sales of tents with sleeping bags = $254,000 
Additional sales from adding sleeping bags = $254,000 - $238,000 = $16,000

Projected sales of climbing gear without sleeping bags = $411,000 
Projected sales of climbing gear with sleeping bags = $426,000 
Additional sales from adding sleeping bags = $426,000 - $411,000 = $15,000

Therefore, the total amount of next year's sales derived from the side effects of adding the new product is $16,000 + $15,000 = $31,000.

Question 20

Turner Industries started a new project three months ago. Sales arising from this project are exceeding all expectations. Given this, which one of the following is management most apt to implement?

Accepted Answer

Since sales are exceeding expectations, management is likely to implement the option to expand in order to capitalize on this success and increase profits.

Quiz 9: Making Capital Investment Decisions