Deck 10: Making Capital Investment Decisions

Question 1

All of the following are related to a proposed project. Which one of these should be included in the cash flow at Time 0?

A) Loan obtained to finance the project
B) Initial investment in inventory to support the project
C) Annual depreciation tax shield
D) Aftertax salvage value
E) Net working capital recovery

Answer 1

Initial investment in inventory to support the project

Question 2

Which one of the following best describes the concept of erosion?

A) Expenses that have already been incurred and cannot be recovered
B) Change in net working capital related to implementing a new project
C) The cash flows of a new project that come at the expense of a firm's existing cash flows
D) The alternative that is forfeited when a fixed asset is utilized by a project
E) The differences in a firm's cash flows with and without a particular project

Answer 2

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

Question 3

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

A) Sunk
B) Total
C) Variable
D) Incremental
E) Fixed

Answer 3

Incremental

Question 4

Net working capital:

A) can be ignored in project analysis because any expenditure is normally recouped at the end of the project.
B) requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project.
C) is rarely affected when a new product is introduced.
D) can create either an initial cash inflow or outflow.
E) is the only expenditure where at least a partial recovery can be made at the end of a project.

Question 5

Kelley's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project?

A) Storing supplies in the same space currently used for materials storage
B) Utilizing the basket manager to oversee wreath production
C) Hiring additional employees to handle the increased workload should the firm accept the wreath project
D) Researching the market to determine if wreath sales might be profitable before deciding to proceed
E) Planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt

Question 6

Frank's is a furniture store that is considering adding appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances?

A) Moving furniture to provide floor space for the appliances
B) Paying the rent for the store
C) Selling furniture to appliance customers
D) Having the current store manager oversee appliance sales
E) Using the store's billing system for appliance sales

Question 7

Pro forma statements for a proposed project should generally do all of the following except:

A) be compiled on a stand-alone basis.
B) include all project-related fixed asset acquisitions and disposals.
C) include all the incremental cash flows related to the project.
D) include taxes.
E) include interest expense.

Question 8

Dependable Motors just purchased some MACRS five-year property at a cost of $216,000. The MACRS rates are .2, .32, and .192 for Years 1 to 3, respectively. Assume the firm opted to forego any bonus depreciation. Which one of the following will correctly give you the book value of this equipment at the end of Year 2?

A) $216,000/(1 + .2 + .32)
B) $216,000(1 − .2 − .32)
C) $216,000(.20 + .32)
D) [$216,000(1 − .20)](1 − .32)
E) $216,000[(1 + .20)(1 + .32)]

Question 9

The option that is forgone 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 

Question 10

Which one of the following is an example of a sunk cost?

A) $1,500 of lost sales because an item was out of stock
B) $1,200 paid to repair a machine last year
C) $20,000 project that must be forfeited if another project is accepted
D) $4,500 reduction in current shoe sales if a store commences selling sandals
E) $1,800 increase in comic book sales if a store ceases selling puzzles

Question 11

Which one of the following is a project cash inflow? Ignore any tax effects.

A) Decrease in accounts payable
B) Increase in accounts receivable
C) Decrease in inventory
D) Depreciation expense
E) Equipment acquisition

Question 12

Pro forma financial statements can best be described as financial statements:

A) expressed in a foreign currency.
B) where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales.
C) showing projected values for future time periods.
D) expressed in real dollars, given a stated base year.
E) where all accounts are expressed as a percentage of last year's values.

Question 13

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?

A) Providing both ketchup and mustard for customers' use
B) Repairing the roof of the hot dog stand because of water damage
C) Selling fewer hot dogs because hamburgers were added to the menu
D) Offering french fries but not onion rings
E) Losing sales due to bad weather

Question 14

A project's cash flow is equal to the project's operating cash flow:

A) plus the project's depreciation expense minus both the project's taxes and capital spending.
B) minus both the project's change in net working capital and capital spending.
C) minus the project's change in net working capital plus all of the depreciation expenses.
D) plus the project's depreciation expenses minus the project's taxes.
E) minus the project's taxes.

Question 15

Which one of the following costs was incurred in the past and cannot be recouped?

A) Incremental 
B) Side
C) Sunk 
D) Opportunity 
E) Erosion 

Question 16

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?

A) Underlying value principle
B) Stand-alone principle
C) Equivalent cost principle
D) Salvage principle
E) Fundamental principle

Question 17

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's:

A) incremental cash flows.
B) internal cash flows.
C) external cash flows.
D) erosion effects.
E) financing cash flows.

Question 18

Which one of the following should not be included in the analysis of a new product?

A) Increase in accounts payable for inventory purchases of the new product
B) Reduction in sales for a current product once the new product is introduced
C) Market value of a machine owned by the firm which will be used to produce the new product
D) Money already spent for research and development of the new product
E) Increase in accounts receivable needed to finance sales of the new product

Question 19

Changes in the net working capital requirements:

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) only affect the initial and final cash flows of a project.
D) are generally excluded from project analysis due to their irrelevance to the total project.
E) are excluded from project analysis as long as they are recovered when the project ends.

Question 20

GL Plastics spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?

A) Opportunity
B) Fixed
C) Incremental 
D) Erosion 
E) Sunk 

Question 21

Which one of the following will increase a bid price?

A) A decrease in the fixed costs
B) A reduction in the net working capital requirement
C) A reduction in the firm's tax rate
D) An increase in the salvage value
E) An increase in the required rate of return

Question 22

Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero?

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

Question 23

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 five-year life. The firm has a tax rate of 22 percent, uses straight-line depreciation over an asset's life, ignores bonus depreciation options, and has a positive net income. Given this, which one of the following statements is correct?

A) As a project, the new machine has a net present value equal to minus one times the machine's purchase price.
B) The new machine will have a zero rate of return.
C) The new machine will generate positive operating cash flows.
D) The new machine will create a cash outflow when the firm disposes of the machine at the end of its life.
E) The new machine creates erosion effects.

Question 24

The depreciation tax shield is best defined as the:

A) amount of tax that is saved when an asset is purchased.
B) tax that is avoided when an asset is sold as salvage.
C) amount of tax that is due when an asset is sold.
D) amount of tax that is saved because of the depreciation expense.
E) amount by which the aftertax depreciation expense lowers net income.

Question 25

Three years ago, Knox Glass purchased a machine for a three-year project. The machine is being depreciated straight-line to zero over a five-year period. Assume the firm decided to forego any bonus depreciation. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (TC represents the relevant tax rate)

A) Sale price + (Sale price − Book value)(TC)
B) Sale price + (Sale price − Book value)(1 − TC)
C) Sale price + (Book value − Sale price)(TC)
D) Sale price + (Book value − Sale price)(1 − TC)
E) Sale price(1 − TC)

Question 26

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 a project.
E) both taxes and the interest expense are equal to zero.

Question 27

Increasing which one of the following will increase the operating cash flow of a profitable, tax paying company assuming that the bottom-up approach is used to compute the operating cash flow?

A) Erosion effects
B) Taxes
C) Fixed expenses
D) Salaries
E) Depreciation expense

Question 28

The operating cash flow of a cost-cutting project:

A) is equal to the depreciation tax shield.
B) is equal to zero because there is no incremental sales.
C) can only be analyzed by projecting the sales and costs for a firm's entire operations.
D) includes any changes that occur in the current accounts.
E) can be positive even though there are no sales.

Question 29

The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following?

A) Depreciation tax shield
B) Tax due on the current salvage value of that asset
C) Current year's operating cash flow
D) Change in net working capital
E) MACRS depreciation for the current year

Question 30

You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines that have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine that has the:

A) longest life.
B) highest annual operating cost.
C) lowest annual operating cost.
D) highest equivalent annual cost.
E) lowest equivalent annual cost.

Question 31

Which one of the following statements is correct concerning bid prices?

A) The bid price is the maximum price that a firm should bid.
B) A firm can submit a bid that is higher than the computed bid price and still break even.
C) A bid price ignores taxes.
D) A bid price should be computed based solely on the operating cash flows of the project.
E) A bid price should be computed based on a zero percent required rate of return.

Question 32

The operating cash flow for a project should exclude which one of the following?

A) Taxes
B) Variable costs
C) Fixed costs
D) Interest expense
E) Depreciation tax shield

Question 33

A company that utilizes the MACRS system of depreciation but does not use bonus depreciation:

A) will have equal depreciation costs each year of an asset's life.
B) will have a greater depreciation tax shield in Year 2 than in Year 1.
C) can depreciate the cost of land.
D) will expense less than the entire cost of an asset.
E) will fully depreciate a MACRS five-year asset within 5 years.

Question 34

Which one of the following statements is correct?

A) Project analysis should only include the cash flows that affect the income statement.
B) A project can create a positive operating cash flow without affecting sales.
C) The depreciation tax shield creates a cash outflow for a project.
D) Interest expense should always be included when analyzing cost-cutting projects.
E) A bid price maximizes profits on a project for the bidding firm.

Question 35

P.A. Petroleum just purchased some equipment at a cost of $67,000. The equipment is classified as MACRS five-year property. The MACRS rates are .2, .32, and .192 for Years 1 to 3, respectively. What is the proper methodology for computing the depreciation expense for Year 2 assuming the firm opts to forego any bonus depreciation?

A) $67,000(1 − .20)(.32)
B) $67,000/(1 − .20 − .32)
C) $67,000(1.32)
D) $67,000(1 − .32)
E) $67,000(.32)

Question 36

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

A) ignores noncash expenses.
B) applies only if a project affects sales.
C) applies only to cost cutting projects.
D) is equal to sales − costs − taxes + depreciation.
E) is used solely to compute a bid price.

Question 37

The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following?

A) Yearly incremental costs
B) Sunk costs
C) Opportunity costs
D) Annuitized erosion cost
E) Equivalent annual cost

Question 38

Atlas Manufacturing purchased a new computer system in 2018 at a cost of $622,400. This system falls in the 5-year MACRS class that has depreciation allowance percentages of 20, 32, 19.2, 11.52, 11.52, and 5.76. What is the maximum amount of depreciation the firm can claim on this system in the first year if it selects the bonus depreciation method?

A) $311,200
B) $124,480
C) $199,168
D) $622,400
E) $155,600

Question 39

The bid price is the:

A) price you must charge to break even at a zero discount rate.
B) the aftertax contribution margin.
C) the highest price you should charge if you want to win the bid.
D) the only price you can bid if the project is to be profitable.
E) the minimum price that will provide your target rate of return.

Question 40

Ignoring bonus depreciation, the net book value of equipment will:

A) remain constant over the life of the equipment.
B) vary in response to changes in the market value of that equipment.
C) decrease at a constant rate when MACRS depreciation is used.
D) increase over the taxable life of an asset.
E) decrease slower under straight-line depreciation than under MACRS.

Question 41

Currently, GH Co. sells 42,600 handbags annually at an average price of $149 each. It is considering adding a lower-priced line of handbags that sell for $79 each. The firm estimates it can sell 21,000 of the lower-priced handbags but expects to sell 7,200 less of the higher-priced handbags by doing so. What is the amount of the annual sales that should be used when evaluating the addition of the lower-priced handbags?

A) $586,200
B) $659,000
C) $6,933,600
D) $5,839,000
E) $780,200

Question 42

High Breeze is considering expanding on some land that it currently owns. The initial cost of the land was $364,500 and it is currently valued at $357,900. The company has some unused equipment that it currently owns valued at $29,000 that could be used for this project if $8,200 is spent for equipment modifications. Other equipment costing $157,900 will also be required. What is the amount of the initial cash flow for this expansion project?

A) −$530,600
B) −$158,720
C) −$553,000
D) −$585,600
E) −$559,600

Question 43

Mason Farms purchased a building for $689,000 and made repairs costing $136,000. The annual taxes on the property are $8,200. The building has a current market value of $730,000 and a current book value of $394,000. The building is mortgage-free. If the company decides to use this building for a new project, what value, if any, should be included in the initial cash flow of the project for this building?

A) $0
B) $394,000
C) $730,000
D) $159,000
E) $721,800

Question 44

Winn Corp. currently sells 9,820 motor homes per year at $45,500 each, and 3,680 luxury motor coaches per year at $89,700 each. The company wants to introduce a new portable camper to fill out its product line. It hopes to sell 4,000 of these campers per year at $14,750 each. An independent consultant has determined that if the new campers are introduced, sales of its existing motor homes will most likely increase by 250 units per year while the sales of its motor coaches will probably decline by 368 units per year. What is the amount that should be used as the annual sales figure when evaluating the portable camper project?

A) $59,000,000
B) $103,384,600
C) $64,141,800
D) $37,365,400
E) $103,325,600

Question 45

Nelson Mfg. owns a manufacturing facility that is currently sitting idle and is debt-free. The facility is located on a piece of land that originally cost $159,000. The facility itself cost $1,390,000 to build. As of now, the book value of the land and the facility are $159,000 and $458,000, respectively. The firm received a bid of $1,700,000 for the land and facility last week. The firm's management rejected this bid even though they were told that it is a reasonable offer in today's market. If the firm was to consider using this land and facility in a new project, what cost, if any, should it include in the project analysis?

A)  $0
B) $617,000
C) $1,083,000
D) $1,700,000
E) $1,619,000

Question 46

The bid price always assumes which one of the following?

A) A project has a one-year life.
B) The aftertax net income of the project is zero.
C) The net present value of the project is zero.
D) Any assets purchased will have a positive salvage value at the end of the project.
E) Assets will be depreciated based on MACRS.

Question 47

Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs and machine lives, and will be replaced when worn out. Which one of the following computational methods should Dan use as the basis for his decision?

A) Internal rate of return
B) Net present value
C) Equivalent annual cost
D) Depreciation tax shield
E) Bottom-up operating cash flow

Question 48

Cool Comfort currently sells 340 Class A spas, 465 Class C spas, and 125 deluxe model spas each year. The firm is considering adding a mid-class spa and expects that, if it does, it can sell 360 of them. However, if the new spa is added, Class A sales are expected to decline to 235 units while the Class C sales are expected to decline to 275 units. The sales of the deluxe model will not be affected. Class A spas sell for an average of $10,700 each. Class C spas are priced at $18,700 and the deluxe model sells for $27,000 each. The new mid-range spa will sell for $13,500. What is the value of the erosion effect?

A) −$3,510,500
B) −$4,166,500
C) −$3,827,000
D) −$4,676,500
E) −$3,657,000

Question 49

Decreasing which one of the following will increase the acceptability of a project?

A) Sunk costs
B) Salvage value
C) Depreciation tax shield
D) Equivalent annual cost
E) Accounts payable requirement

Question 50

The Lunch Counter is expanding and expects operating cash flows of $49,500 a year for nine years as a result. This expansion requires $36,500 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $2,200 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 15.6 percent?

A) $194,736.05
B) $201,033.33
C) $192,536.05
D) $188,569.91
E) $193,132.81

Question 51

The maintenance expenses on a rental house you own average $200 a month and property taxes are $4,800 annually. The house cost $238,500 when you purchased it four years ago. The house was recently appraised at $247,600. If you sell the house you will incur $12,900 in costs. What value should you place on this house should you opt to use it as your professional office?

A) $251,400
B) $247,600
C) $234,700
D) $238,500
E) $242,300

Question 52

A new molding machine is expected to produce operating cash flows of $109,000 a year for 4 years. At the beginning of the project, inventory will decrease by $8,700, accounts receivables will increase by $9,500, and accounts payable will decrease by $5,200. All net working capital will be recovered at the end of the project. The initial cost of the molding machine is $319,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. No bonus depreciation will be taken. The equipment will be salvaged at the end of the project creating an aftertax cash inflow of $51,600. What is the net present value of this project given a required return of 14.2 percent?

A) $25,162.45
B) $24,061.87
C) $28,336.01
D) $22,863.16
E) $27,925.54

Question 53

Ausel's is considering a five-year project that will require $738,000 for new fixed assets that will be depreciated straight-line to a zero book value over five years. No bonus depreciation will be taken. At the end of the project, the fixed assets can be sold for 18 percent of their original cost. The project is expected to generate annual sales of $679,000 with costs of $321,000. The tax rate is 22 percent and the required rate of return is 15.2 percent. What is the amount of the aftertax salvage value?

A) $105,165.60
B) $103,615.20
C) $104,409.20
D) $132,840.00
E) $118,406.90

Question 54

The equivalent annual cost method is useful in determining:

A) which one of two machines to purchase if the machines are mutually exclusive, have differing lives, and are a one-time purchase.
B) the operating cash flow for mutually exclusive projects ignoring any fixed asset acquisitions or dispositions.
C) the minimum price that should be bid to earn a specified rate of return.
D) which one of two investments to accept when the investments have differing required rates of return, differing costs, and will not be replaced once they wear out.
E) which one of two machines should be purchased when the machines are mutually exclusive, have differing lives, and will be replaced at the end of their lives.

Question 55

The equivalent annual cost considers all of the following except the:

A) required rate of return.
B) operating costs.
C) need for replacement.
D) economic life.
E) costs of research conducted to identify equipment choices.

Question 56

A project will produce an operating cash flow of $56,200 a year for 5 years. The initial fixed asset investment in the project will be $238,900. The net aftertax salvage value is estimated at $67,000 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 15.2 percent?

A) −$20,627.54
B) −$18,374.86
C) $5,120.52
D) $18,374.86
E) $20,627.54

Question 57

W&M paid $179,000, in cash, for equipment three years ago and spent $18,000 for equipment upgrades last year. The company no longer uses this equipment and has received a cash offer of $68,000 from a buyer. The current book value of the equipment, including all updates, is $54,500. What value, if any, should the company assign to this equipment should it decide to use the equipment for a new project?

A) $0 
B) $54,500
C) $68,000
D) $74,500
E) $129,000

Question 58

Which one of the following would make a mutually exclusive project unacceptable?

A) Cash inflow for net working capital at Time 0
B) Requiring fixed assets that would have no salvage value
C) An equivalent annual cost that exceeds that of an alternative project
D) Lack of revenue generation
E) A depreciation tax shield that exceeds the value of the interest expense

Question 59

Assume you are considering two mutually exclusive machines and need to select one for a cost-cutting project. Which one of these sets of characteristics best indicates the use of the equivalent annual cost method of analysis?

A) Differing costs with no replacement at end of life
B) Differing lives and planned replacement at end of life
C) Differing lives with no replacement at end of life
D) Differing manufacturers and differing operating costs
E) Differing required returns with no replacement at end of life

Question 60

Kelly's Corner Bakery purchased a lot in Oil City six years ago at a cost of $98,700. Today, that lot has a market value of $128,900. At the time of the purchase, the company spent $6,500 to level the lot and another $12,000 to install storm drains. The company now wants to build a new facility on the site at an estimated cost of $494,200. What amount should be used as the initial cash flow for this project?

A) −$611,400
B) −$623,100
C) −$641,600
D) −$592,900
E) −$582,400

Question 61

Eglon Mills has a new Year 2020 project with an initial equipment cost of $368,000 and a project life of 10 years. The firm generally uses straight-line depreciation to a zero book value over the project's life. If the firm opts instead to use the bonus depreciation method, what is the depreciation tax shield amount for Year 2020 at a tax rate of 21 percent?

A) $77,280
B) $38,640
C) $7,280
D) $3,864
E) $15,456

Question 62

Better Beverages purchased $139,700 of fixed assets that are classified as five-year MACRS property. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for Years 1 to 6, respectively. What will the accumulated depreciation be at the end of Year 4 if the tax rate is 21 percent and no bonus depreciation is taken?

A) $76,269.49
B) $16,093.44
C) $24,140.16
D) $48,755.09
E) $115,559.84

Question 63

Pre-Fab purchased some equipment two years ago for $287,600. These assets are classified as five-year property for MACRS. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576, for Years 1 to 6, respectively. The company is currently replacing this equipment so the old equipment is being sold for $150,000. What is the aftertax salvage value from this sale if the tax rate is 21 percent and no bonus depreciation is claimed?

A) $144,433.20
B) $154,183.20
C) $142,311.12
D) $147,490.08
E) $149,000.00

Question 64

Russell's is considering purchasing $697,400 of equipment for a four-year project. The equipment falls in the five-year MACRS class with annual percentages of .2, .32, .192, .1152, .1152, and .0576 for Years 1 to 6, respectively. At the end of the project the equipment can be sold for an estimated $135,000. The required return is 13.2 percent and the tax rate is 23 percent. What is the amount of the aftertax salvage value of the equipment assuming no bonus depreciation is taken?

A) $140,071.25
B) $131,667.47
C) $118,804.30
D) $138,666.67
E) $143,001.29

Question 65

Phone Home, Inc. is considering a new five-year expansion project that requires an initial fixed asset investment of $6.089 million. The fixed asset will be depreciated straight-line to zero over the project's life, after which time it will be worthless. No bonus depreciation will be taken. The project is estimated to generate $4,389,000 in annual sales, with costs of $1,731,200. The tax rate is 24 percent. What is the annual operating cash flow for this project?

A) $1,727,570
B) $1,211,407
C) $2,312,200
D) $936,000
E) $2,848,315

Question 66

The Market Place is considering a new four-year expansion project that requires an initial fixed asset investment of $1.67 million. The fixed asset will be depreciated straight-line to zero over its four-year tax life, after which time it will have a market value of $435,000. No bonus depreciation will be taken. The project requires an initial investment in net working capital of $198,000, all of which will be recovered at the end of the project. The project is estimated to generate $1,850,000 in annual sales, with costs of $1,038,000. The tax rate is 21 percent and the required return for the project is 16.4 percent. What is the net present value?

A) $358,576.22
B) $451,180.73
C) $241,334.55
D) $302,208.15
E) $254,595.45

Question 67

Keyser Mining is considering a project that will require the purchase of $479,000 of equipment. The equipment will be depreciated straight-line to a zero book value over the five-year life of the project after which it will be worthless. The required return is 12 percent and the tax rate is 30 percent. What is the value of the depreciation tax shield in Year 4 of the project assuming no bonus depreciation is taken?

A) $28,740
B) $32,200
C) $78,600
D) $138,400
E) $143,700

Question 68

A proposed three-year project will require $589,000 for fixed assets, $79,000 for inventory, and $43,000 for accounts receivable. Accounts payable are expected to increase by $47,000. The fixed assets will be depreciated straight-line to a zero book value over five years. No bonus depreciation will be taken. At the end of the project, the fixed assets can be sold for $225,000. The net working capital returns to its original level at the end of the project. The operating cash flow per year is $67,900. The tax rate is 21 percent and the discount rate is 12 percent. What is the total cash flow in the final year of the project?

A) $364,190
B) $361,000
C) $370,126
D) $378,970
E) $369,770

Question 69

Home Furnishings is expanding its product offerings to reach a wider range of customers. The expansion project includes increasing floor inventory by $486,000 and increasing its debt to suppliers by 90 percent of that amount. The company will also spend $947,000 to expand the size of its showroom. As part of the expansion plan, the company expects accounts receivable to rise by $205,000. For the project analysis, what amount should be used as the initial cash flow for net working capital?

A) −$156,400
B) −$176,600
C) −$271,000
D) −$253,600
E) −$391,000

Question 70

Dog Up! Franks is looking at a new sausage system with an installed cost of $411,500. This cost will be depreciated straight-line to zero over the project's seven-year life, at the end of which the sausage system is expected to be sold for $35,000 cash. No bonus depreciation will be taken. The sausage system will save the firm $129,400 per year in pretax operating costs, and the system requires an initial investment in net working capital of $22,500. All of the net working capital will be recovered at the end of the project. The tax rate is 23 percent and the discount rate is 13.2 percent. What is the net present value of this project?

A) $105,391.14
B) $107,820.59
C) $51,507.41
D) $40,441.14
E) $84,117.64

Question 71

You just purchased $218,000 of equipment that is classified as five-year MACRS property. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for Years 1 to 6, respectively. What will be the book value of this equipment at the end of three years assuming no bonus depreciation is taken?

A) $58,467
B) $62,784
C) $159,533
D) $67,670
E) $155,216

Question 72

A project will require $543,000 for fixed assets, $118,000 for inventory, and $142,000 for accounts receivable. Short-term debt is expected to increase by $65,000. The project has a six-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. No bonus depreciation will be taken. The project is expected to generate annual sales of $905,000 with costs of $730,000. What is the project's cash flow at Time 0?

A) −$536,000
B) −$738,000
C) −$720,000
D) −$779,000
E) −$944,000

Question 73

You own some equipment that you purchased four years ago at a cost of $287,000. The equipment is five-year property for MACRS. The MACRS rates are .2, .32, .192, .1152, .1152, .0576, for Years 1 to 6, respectively. You are considering selling the equipment today for $105,000. Which one of the following statements is correct if your tax rate is 24 percent and you claim no bonus depreciation?

A) The tax due on the sale is $13,357.76.
B) The book value today is $49,406.40.
C) The accumulated depreciation to date is $270,468.80.
D) The taxable amount on the sale is $54,593.60.
E) The aftertax salvage value is $91,702.46

Question 74

The Card Shoppe needs to maintain 21 percent of its sales in net working capital. Currently, the store is considering a four-year project that will increase sales from its current level of $349,000 to $408,000 the first year and to $414,000 a year for the following three years of the project. What amount should be included in the project analysis for net working capital in Year 4 of the project?

A) −$1,260
B) $86,940
C) $0 
D) $21,720
E) $13,650

Question 75

Consider a project with an initial asset cost of $168,000 with depreciation of that asset set as straight-line to zero over seven years. Ignore bonus depreciation. At the end of the project's four-year life the asset can be sold for $65,000. Use a combined federal and state tax rate of 24 percent. What is the aftertax salvage value?

A) $62,550
B) $65,500
C) $66,050
D) $68,100
E) $66,680

Question 76

Pet Supply purchased $62,800 of fixed assets two years ago. The company no longer needs these assets so it is going to sell them today for $29,500. The assets are classified as five-year property for MACRS. The MACRS rates are .2, .32, .192, .1152, .1152, .0576, for Years 1 to 6, respectively. What is the net cash flow from this sale if the firm's tax rate is 23 percent and no bonus depreciation is taken?

A) $25,516.60
B) $18,576.00
C) $29,281.04
D) $29,648.12
E) $25,211.09

Question 77

Hunter's Hut is considering a project that will require additional inventory of $48,000 and will increase accounts payable by $22,000. Accounts receivable is currently $297,000 and is expected to increase by four percent if this project is accepted. What is the project's initial cash flow for net working capital?

A) −$37,880
B) −$81,880
C) −$42,250
D) −$66,550
E) −$27,550

Question 78

Overland purchased $387,950 of fixed assets that are classified as three-year property for MACRS. The MACRS rates are .3333, .4445, .1481, and .0741 for Years 1 to 4, respectively. What is the amount of the depreciation expense in Year 3 assuming no bonus depreciation is taken?

A) $28,747.10
B) $42,399.29
C) $57,455.40
D) $59,929.11
E) $12,766.59

Question 79

A project will require $512,000 for fixed assets and $47,000 for net working capital. The fixed assets will be depreciated straight-line to a zero book value over the six-year life of the project. No bonus depreciation will be taken. At the end of the project, the fixed assets will be worthless. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $965,000 and costs of $508,000. The tax rate is 21 percent and the required rate of return is 14.7 percent. What is the amount of the annual operating cash flow?

A) $283,633.33
B) $447,826.67
C) $378,950.00
D) $245,300.00
E) $198,300.00

Question 80

Alt's is contemplating the purchase of a new $218,000 computer-based order entry system. The system will be depreciated straight-line to zero over the system's five-year life. No bonus depreciation will be taken. The system will be worth $20,000 at the end of five years. The company will save $73,500 before taxes per year in order processing costs and will reduce working capital by $18,600 on Day 1. The net working capital will return to its original level when the project ends. The tax rate is 21 percent. What is the internal rate of return for this project?

A) 13.37 percent
B) 21.49 percent
C) 18.21 percent
D) 20.12 percent
E) 13.58 percent