Deck 10: Capital Budgeting and Cash Flow Analysis

Question 1

Which of the following is generally considered a problem associated with cash flow estimation?

A) Uncertainty about the value of future cash flows
B) Bias in the estimation of cash flows
C) Different levels of uncertainty among different types of projects
D) All of these are correct

Answer 1

D

Question 2

The decision by the Municipal Transportation Authority to either refurbish existing buses, to buy new large buses, or to supplement the existing fleet with mini-buses is an example of ____.

A) independent projects
B) mutually exclusive projects
C) contingent projects
D) separable projects

Answer 2

B

Question 3

Which of the following is a basic principle when estimating a project's cash flows?

A) Cash flows should be measured on a pretax basis
B) Cash flows should ignore depreciation because it is a noncash charge
C) Only direct effects of a project should be included in cash flow calculations
D) Cash flows should be measured on an incremental basis

Answer 3

D

Question 4

The dollar amount of interest charges is ____.

A) always considered in the net cash flow calculation
B) normally not considered in the net cash flow calculation
C) always considered as a part of the net investment
D) never a consideration

Question 5

Which of the following is NOT a major step in the capital budgeting process?

A) generating investment project proposals
B) estimating cash flows
C) analyzing the effect of a project on the firm's financial ratios
D) performing a project post-audit and review

Question 6

Which of the following items is NOT considered as a part of the net investment calculation?

A) the first year's net cash flow
B) increase in net working capital
C) salvage of an old piece of equipment that is being replaced
D) installation and shipping charges

Question 7

____ is the term used when the initial cost of all acceptable capital budgeting projects is greater than the total funds the firm has available.

A) Profit maximization
B) Funds constraint
C) Mutually exclusive
D) Contingent

Question 8

The determination of net cash flows (NCF) should NEVER include

A) changes in depreciation
B) changes in operating costs
C) interest charges
D) indirect effects

Question 9

Most firms choose accelerated depreciation methods because ____.

A) reported net income is higher
B) tax payments are made sooner, resulting in a lower deferred tax liability
C) operating expenses are correspondingly reduced
D) income taxes are deferred

Question 10

Which of the following would not be classified as a capital expenditure for decision-making purposes?

A) purchase of a building
B) investment in a management training program
C) purchase of 90-day Treasury bills
D) development of a major advertising campaign

Question 11

Raider Productions has to decide whether to build its warehouse in Dallas or Houston. This decision falls into the class of ____.

A) independent projects
B) mutually exclusive projects
C) contingent projects
D) marginal projects

Question 12

There is neither a gain nor a loss on the sale of a depreciable asset for an amount exactly equal to its ____.

A) acquisition cost
B) tax book value
C) opportunity cost
D) historical cost

Question 13

The ____ curve is a schedule of projects arranged in ____ order according to their expected rates of return.

A) investment opportunity; ascending
B) marginal cost of capital; ascending
C) investment opportunity; descending
D) marginal cost of capital; descending

Question 14

Sale of an asset for less than book value creates an operating loss that effectively reduces the company's taxes by an amount equal to ____ times ____.

A) one-half the loss; the company's marginal tax rate
B) the loss; one minus the company's marginal tax rate
C) one-half the loss; one minus the company's marginal tax rate
D) the loss; the company's marginal tax rate

Question 15

The value of resources used in an investment project should be measured in terms of their ____ cost.

A) acquisition
B) historical
C) opportunity
D) depreciated

Question 16

A firm's cost of capital is ____.

A) an important financial ratio
B) equal to 10 percent
C) rarely used in practice
D) an important input in the capital budgeting process

Question 17

Which of the following is NOT a major difficulty in implementing the basic capital budgeting model?

A) determining the schedule of available projects before a decision on any one project can be made
B) accounting for the risk of individual projects
C) projecting the cost of funds over the investment decision horizon
D) choosing an appropriate criterion for selecting among various investment alternatives

Question 18

Cash flows for all investment projects should be projected over the ____ of the project.

A) MACRS recovery period
B) depreciable life
C) economic life
D) smaller of depreciable or economic lives

Question 19

When a firm sells an asset for ____, it realizes a capital gain and must pay income taxes on it.

A) book value
B) less than book value
C) more than book value but less than original cost
D) more than its original cost

Question 20

The effect of a one-dollar increase in depreciation expenses is to ____ the typical firm's net cash flows by ____ one dollar.

A) increase; less than
B) increase; exactly
C) decrease; more than
D) increase; more than

Question 21

The net cash flows for any year during the life of a capital expenditure project are equal to the change in ____ plus the change in ____.

A) earnings before interest and taxes; depreciation
B) earnings before taxes; depreciation
C) earnings after taxes; depreciation
D) revenues; costs

Question 22

When calculating the net cash flow in a project's expected final year, the ____.

A) recovery of any working capital invested is disregarded
B) after-tax salvage value of any project equipment is considered
C) remaining principal on any borrowed funds is considered
D) sales proceeds from any land associated with the project is disregarded

Question 23

In estimating the net investment, an outlay that has already been made is known as a(n) ____.

A) sunk cost
B) cash outflow
C) opportunity cost
D) expansion cost

Question 24

If a firm sells an asset for less than its book value, ____.

A) there are no tax consequences
B) the loss is treated as lost depreciation
C) the loss reduces depreciation expenses
D) the loss may be used to offset operating income

Question 25

The set of investment projects arranged in descending order according to their expected rates of return is known as the ____.

A) marginal cost of capital schedule
B) schedule of mutually exclusive projects
C) schedule of contingent projects
D) simplified capital budgeting model

Question 26

Depreciation ____.

A) does not affect cash flows
B) does not affect profits
C) is not a cash outflow
D) is a cash inflow

Question 27

Capital expenditure projects may be classified in all the following types EXCEPT ____.

A) growth opportunities
B) obligations to meet legal requirements
C) cost reduction opportunities
D) capital rationing

Question 28

The net investment calculation for an asset replacement decision normally includes any ____.

A) after-tax salvage value of the old asset
B) increase in net working capital
C) installed asset costs
D) All of these are correct

Question 29

Depreciation ____ reported profits and it ____ taxes paid by a firm.

A) increases; reduces
B) reduces; reduces
C) reduces; increases
D) increases; increases

Question 30

In terms of the capital budgeting process, net cash flows are the ____.

A) net cash outlays required to place a project in service
B) funds invested in additional assets
C) incremental changes in a firm's cash flow
D) outlays that have already been made

Question 31

When managers knowingly bias estimates of cash flows from investment projects in order to serve their personal objectives, they are ____.

A) performing management by exception
B) increasing their total compensation
C) departing from the shareholder wealth maximization goal
D) increasing their confidence level

Question 32

A recent survey of Fortune 500 firms regarding their cash flow estimation procedures indicated that ____.

A) few firms prepared formal cash flow estimates
B) the majority produced detailed cash flow projections
C) a majority estimated cash flows for a range of estimates
D) about 50 percent made comparisons between actual and projected cash flows

Question 33

A(n) ____ is a cash outlay that is expected to generate a flow of future cash benefits lasting longer than 1 year.

A) depreciation charge
B) operating expenditure
C) capital expenditure
D) capital gain

Question 34

The net investment calculation for an ____ project normally includes ____.

A) asset expansion; pretax proceeds from the sale of the old asset
B) asset replacement; pretax proceeds from the sale of the old asset
C) asset expansion; after-tax proceeds from the sale of the old asset
D) asset replacement; after-tax proceeds from the sale of the old asset

Question 35

A(n) ____ project is one whose acceptance is dependent on the adoption of one or more other projects.

A) contingent
B) mutually exclusive
C) independent
D) perfectly correlated

Question 36

____ have cash flow patterns with more than one sign change.

A) Conventional projects
B) Nonnormal projects
C) Normal projects
D) Contingent projects

Question 37

Depreciation is based on the asset cost plus all of the following EXCEPT ____.

A) shipping costs
B) increase in inventory
C) installation
D) cost of attached equipment acquired at the same time

Question 38

The total accumulated net working capital of a project is normally recovered in the project's ____ year.

A) last
B) first
C) second
D) second to last

Question 39

The capital budgeting process is very important to the firm because it ____.

A) highlights the impacts of a project on net income
B) essentially plots the company's future direction
C) is used in working capital analysis
D) indicates the net cash flows available for employee education

Question 40

The ____ the amount of depreciation charged in a period, the ____ will be the firm's taxable income.

A) greater; lower
B) lower; lower
C) lower; greater
D) greater; higher

Question 41

In-Step Video is considering expanding its video rental library to 8,000 DVDs. The purchase price of the additional DVDs will be $80,000, and the shipping cost is another $4,000. To house the media, the owner will have to spend another $10,000 for display shelves, increase net working capital by $5,000, and interest expenses will add another $8,000 to the operating cost. What is the net investment to In-Step Video for this project?

A) $95,000
B) $99,000
C) $84,000
D) $107,000

Question 42

A drill press costs $30,000 and is expected to have a 10-year life. The drill press will be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. This machine is expected to reduce the firm's cash operating costs by $4,500 per year. Assuming the firm is in the 40 percent marginal tax bracket, determine the annual net cash flows generated by the drill press.

A) $4,500
B) $900
C) $5,700
D) $3,900

Question 43

Maritech purchased a pellet mill 4 years ago for $60,000. The mill is being depreciated over 7 years using MACRS. Maritech is planning to replace the mill with a higher volume unit that will cost $110,000 installed. If the old mill can be sold for $25,000, what is the tax liability? Assume a marginal tax rate of 40%. Use the rounded MACRS schedule listed below.
(7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

A) $3,754
B) $7,498
C) $2,560
D) $16,502

Question 44

LISP Inc. is planning to purchase a new mixer/dubber for $50,000. The new equipment will replace an older mixer that has been fully depreciated but has a salvage value of $5,000. Compute the net investment required for this project. Assume a marginal tax rate of 40 percent.

A) $47,000
B) $45,000
C) $48,000
D) $55,000

Question 45

Allen Company is considering an investment project that is expected to generate $100,000 in annual earnings before taxes. Annual depreciation will be $50,000. Allen's marginal tax rate is 40%. Determine the project's annual net cash flows.

A) $150,000
B) $110,000
C) $90,000
D) $60,000

Question 46

The management of Jasper Equipment Company is planning to purchase a new milling machine that will cost $160,000 installed. The old milling machine has been fully depreciated but can be sold for $15,000. The new machine will be depreciated on a straight-line basis over its 10-year economic life to an estimated salvage value of $10,000. If this milling machine will save Jasper $20,000 a year in production expenses, what are the annual net cash flows associated with the purchase of this machine? Assume a marginal tax rate of 40 percent.

A) $15,000
B) $18,000
C) $27,000
D) $21,000

Question 47

Ten years ago J-Bar Company purchased a lathe for $250,000. It was being depreciated on a straight-line basis to an estimated $25,000 salvage value over a 15-year period. The firm is considering selling the old lathe and purchasing a new one. The new lathe would cost $500,000. The firm's marginal tax rate 40 percent. Determine the net investment required to purchase the new lathe, if the old lathe is sold for $100,000.

A) $380,000
B) $397,500
C) $400,000
D) $418,000

Question 48

LISP Inc. is planning to purchase a new mixer for $50,000 that will qualify as MACRS 3-year property (first-year depreciation rate = 33.33%). The new mixer should increase revenues by $20,000 per year, with no increase in operating cost. If LISP's marginal tax rate is 40 percent, what is the net cash flow in the first year?

A) $22,665
B) $19,000
C) $18,666
D) $21,500

Question 49

Capital Foods purchased an oven 5 years ago for $45,000. The oven is being depreciated over its estimated 10-year life using the straight-line method to a salvage value of $5,000. Capital is planning to replace the oven with a more automated one that will cost $150,000 installed. If the old oven can be sold for $30,000, what is the tax liability? Assume a marginal tax rate of 40 percent.

A) $900
B) $2,000
C) $127,000
D) $25,000

Question 50

Rupp Pumps is purchasing an extruder for $80,000. The extruder will require an expenditure of $12,000 for installation and $4,000 for training new operators. The new equipment will require an increase of $5,000 in inventory, $4,000 in accounts receivable, and $3,000 in accounts payable. What is the net investment for this project?

A) $108,000
B) $102,000
C) $98,000
D) $99,000

Question 51

What is the net investment for an extruder that costs $42,000, if shipping costs are $1,500 and installation is $4,800? Assume this efficient machine is replacing an older extruder with a book and market value of zero. The replacement investment will reduce operating costs by $6,600 a year.

A) $48,300
B) $54,900
C) $43,500
D) $51,000

Question 52

Shunt Technology will spend $800,000 on a piece of equipment that will manufacture fine wire for the electronics industries. The shipping and installation charges will be $240,000 and net working capital will increase $48,000.The equipment will replace an existing machine that has a salvage value of $75,000 and a book value of $125,000. If Shunt has a current marginal tax rate of 34 percent, what is the net investment?

A) $1,030,000
B) $1,163,000
C) $1,033,000
D) $996,000

Question 53

Moon Pie Company is considering automated baking equipment that costs $500,000 installed and would replace the present handmade production method. The present equipment has a zero book and salvage value. The new equipment will not increase revenues but will reduce operating costs from a current level of $600,000 to $300,000 per year. The depreciation of the new equipment will be $73,000 per year. What are the annual incremental net cash flows? Assume a marginal tax rate of 40 percent.

A) $296,800
B) $136,200
C) $192,200
D) $209,200

Question 54

Outback is purchasing a new machine that will cost $98,000. The machine will qualify as MACRS 5-year property but has an economic life of 8 years. The new machine is expected to increase revenues by $35,000 per year, and operating costs are expected to increase by $15,000 per year. If the firm's marginal tax rate is 34 percent and the first year's depreciation rate is 20 percent, what is the net cash flow in the first year.

A) $264
B) $7,984
C) $19,864
D) $26,034

Question 55

Little Giant is building a manufacturing plant that will require a cash outlay of $300,000 for the initial purchase of a building, $450,000 for remodeling the first year, and $710,000 for new equipment in the second year. If the firm's cost of capital is 12 percent, what is the present value of the net investment at time 0?

A) $1,460,000
B) $1,132,070
C) $1,267,720
D) $300,000

Question 56

Baker Company is considering an investment in a new metal lathe. If the new lathe is purchased, revenues will increase by $5,000 per year and cash operating costs will decline by $10,000 per year. The lathe will cost $60,000 and will be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. Baker's marginal tax rate is 40%. Determine the annual net cash flows generated by the lathe.

A) $11,400
B) $9,000
C) $600
D) $5,400

Question 57

An investment project is expected to generate earnings before taxes (EBT) of $60,000 per year. Annual depreciation from the project is $30,000, and the firm's tax rate is 40 percent. Determine the project's annual net cash flows.

A) $48,000
B) $66,000
C) $36,000
D) $52,000

Question 58

Jim Bo's currently has annual cash revenues of $240,000 and annual operating expenses of $185,000, including $35,000 in depreciation. The firm's marginal tax rate is 40 percent. A new cutting machine can be purchased for $120,000, which will increase revenues by $50,000 per year while operating expenses would increase to $205,000, including $42,000 in depreciation. Compute Jim Bo's annual incremental after-tax net cash flows.

A) $25,000
B) $20,800
C) $93,000
D) $19,000

Question 59

What is the net investment required for a pitting machine that will cost $35,000 including installation? The machine replaces a machine that cost $5,000 when purchased five years ago. The old machine has been fully depreciated but has a market value of $6,000. Assume the marginal tax rate is 40 percent.

A) $29,000
B) $31,400
C) $32,600
D) $34,505

Question 60

Basin Manufacturing (40% marginal tax rate) is considering a plant expansion project. The equipment will cost $100,000 and will require an additional $10,000 for delivery and installation. The expansion also will require Basin to increase immediately its net working capital by $25,000. The expansion is expected to generate revenues of $150,000 per year. Calculate the project's net investment.

A) $81,000
B) $125,000
C) $131,000
D) $135,000

Question 61

A contractor has a team of plumbers and assigns those plumbers to a new construction site. The fact that the plumbers are unavailable for any other job makes the construction site project a(n) ____ project.

A) independent
B) qualified
C) mutually exclusive
D) contingent

Question 62

Ripstart is replacing an old, fully depreciated stamping line with a more efficient machine that will cost $245,000. The line will be depreciated as a 7-year MACRS asset. With the increased production, Ripstart expects revenues to increase by $55,000, and operating expenses to increase by $20,000. The MACRS depreciation rate during the fifth year is 8.93%, and the accumulated MACRS depreciation after five years totals 77.69 percent of the cost of the asset. Assume the firm's marginal tax rate is 40 percent and that the company does get to take the full benefit of year 5 depreciation. If Ripstart expects to sell the new machine at the end of year 5 for $40,000, what will be the net cash flow in the fifth year?

A) $29,751
B) $53,736
C) $75,615
D) $69,751

Question 63

Parker Chemicals purchased a hexene extractor 10 years ago for $120,000. It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of zero. It can be sold today for $10,000. Parker is considering purchasing a new more efficient extractor that would cost $270,000 installed and would be depreciated as a 10-year MACRS asset. (The depreciation rate for year one is 10 percent for this asset.) The company's marginal tax rate is 40%. If the new extractor is purchased, annual revenues will increase by $10,000 and annual operating expenses will decrease by $10,000. What is the net cash flow in year 1?

A) $7,600
B) $19,600
C) $24,200
D) $600

Question 64

Anderson Clayton will purchase a new pellet mill that will replace an older, less efficient mill. The new mill costs $360,000 and shipping costs are $10,000. Improving the steam lines to the new mill will cost an additional $22,000. The old mill has a book value of $25,000 and can be sold for $12,000. The installation of the new mill will cause inventories to increase by $8,000, accounts receivable will go up $20,000, and accounts payable will increase $10,000. If Anderson Clayton has a marginal tax rate of 40%, what is the NINV for the new mill?

A) $392,800
B) $412,800
C) $374,800
D) $398,000

Question 65

Com-Cat is considering expanding their current production facility. This year Com-Cat had an operating income (EBIT) of $760,000, interest expenses of $120,000, depreciation expenses of $45,000, and capital expenditures of $160,000. Next year, after the expansion is completed, operating income is expected to be $880,000, interest expenses will remain at $120,000, but depreciation will increase to $61,000. To support the expansion, cash is expected to increase by $5,000, accounts receivable by $12,000, inventories by $8,000, and accounts payable by $7,000. What is the change in Com-Cat's net operating cash flows attributable to this project if the tax rate is 40%?

A) $80,400
B) $88,000
C) $106,000
D) $70,000

Question 66

Seduck has just replaced a set of hydraulic screens that had been in operation for 6 years with a newer screening system that cost $180,000 installed. The old system cost $140,000 and had been depreciated as a 10-year MACRS asset. Its salvage value is $10,000. What is the NINV for the new equipment? Assume a 40% tax rate. Use the rounded MACRS schedule listed below:
(10-Year Depreciation Schedule: 10%, 18%, 14%, 12%, 9%, 7%, 7%, 7%, 7%, 6%, 3%)

A) $170,000
B) $157,200
C) $202,514
D) $151,228

Question 67

Consider a capital expenditure project with an expected 10-year economic life and forecasted revenues equal to $40,000 per year; cash expenses are estimated to be $29,000 per year. The cost of the project equipment is $23,000, and the equipment's estimated salvage value at the end of the project is $9,000. The equipment's $23,000 cost will be depreciated using MACRS depreciation (7-year asset). The project requires a $7,000 working capital investment in year 0 and another $5,000 in year 5. The company's marginal tax rate is 40%. Calculate the expected net cash flow in year 10 of the project.

A) $32,000
B) $27,000
C) $24,000
D) $18,000

Question 68

Of the following, an example of a component of a firm's cost of capital is ____.

A) repurchase of company stock
B) investment of corporate funds into a money market account
C) the purchase of another company's bonds
D) the return on common stock required by investors

Question 69

Pixaire purchased a new mixer to replace an older system. The older system, which cost $100,000, is 5 years old now and was being depreciated over a MACRS life at 7 years. The new mixer, which will cost $270,000, will also be depreciated as a 7-year asset for MACRS purposes. The new mixer is expected to increase revenues by $64,000 with no additional operating expenses. Determine the net operating cash flows in year 2 for the new mixer. Assume a 40% tax rate. Use the rounded MACRS schedule listed below:
(7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

A) $66,974
B) $66,124
C) $61,277
D) $64,229

Question 70

Felix Industries purchased a grinder 5 years ago for $15,000. It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of zero. It could be sold now for $6,000. The firm is considering selling it and purchasing a new one. The new grinder would cost $25,000 installed and would be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. The company's marginal tax rate is 40%. Determine the net investment if the old grinder is sold and the new one purchased.

A) $19,000
B) $16,600
C) $17,400
D) cannot be computed

Question 71

Rough & Tumble Clothiers is considering the purchase of a new loom to replace a less efficient one. The new machine will cost $240,000 including installation. The machine being replaced was purchased 5 years ago for $150,000 and is being depreciated as a 7-year MACRS property. It can be sold for $40,000. Compute the NINV for this project if KC has a marginal tax rate of 40%. Use the rounded MACRS schedule listed below:
(7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

A) $200,000
B) $197,386
C) $202,614
D) $216,000

Question 72

Adler is replacing its old packing line with a more efficient line. The old line was being depreciated on a straight-line basis at a rate of $20,000 per year. The old machine has a current book value of $100,000. The new line, which costs $910,000, will be depreciated on a 10-year MACRS schedule. The more efficient operation is expected to increase revenues by $50,000 per year and reduce annual operating costs by $80,000. Compute the net cash flows for Adler in year 2. Assume Adler has a marginal tax rate of 40%. Use the rounded MACRS schedule listed below:
(10-Year Depreciation Schedule: 10%, 18%, 14%, 12%, 9%, 7%, 7%, 7%, 7%, 6%, 3%)

A) $143,520
B) $135,520
C) $39,520
D) $47,520

Question 73

The Johnson Drum Company is planning to build a new factory. The purchase of the land, building the plant, and installation of equipment will take place over a 2-year period. The following are planned cash outflows: $$\begin{array} { l l } \text { Year } & \text { Cash Outflow } \\0 & \$ 3,500,000 \\1 & \$ 4,750,000 \\2 & \$ 6,100,000\end{array}$$ Johnson Drum's cost of capital is 14%, and its marginal tax rate is 35%. What is the NINV measured in present value terms today?

A) $14,350,000
B) $12,356,650
C) $9,327,500
D) $8,035,788

Question 74

The Weis Corp. purchased a new conveyor system to replace an older less automated system. The old system, which was 10 years old, was being depreciated on a straight-line basis over its 20-year life at $25,000 per year. The new system will be depreciated as a 7-year asset for MACRS purposes. The more efficient machine, which costs $520,000 installed, will reduce operating costs by $74,000 per year. Compute the net cash flows in year 3 for the new system. Assume a 40% tax rate. Use the rounded MACRS schedule listed below:
(7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

A) $71,840
B) $80,779
C) $68,600
D) $149,917

Question 75

The ____ of an asset are the cash flows that the asset could generate if it were not used in the project under consideration.

A) sunk costs
B) opportunity costs
C) marginal costs
D) net investments

Question 76

Martin Tartans Inc. is considering the purchase of a new argyle sock knitting machine to replace a less automated one. The new machine will cost $220,000 plus $30,000 for shipping and installation. The machine being replaced was purchased five years ago for $140,000 and depreciated as a 7-year MACRS property. It can be sold for $24,000. Martin has a marginal tax rate of 35%. Compute the NINV for the project. Use the rounded MACRS schedule listed below:
(7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

A) $250,000
B) $226,000
C) $221,298
D) $223,620

Question 77

The difference between a capital expenditure and an operating expenditure is that a capital expenditure ____.

A) is expected to generate returns greater than 10%
B) involves replacement of a money market account with three-month treasury bills.
C) is expected to generate future cash benefits lasting longer than one year.
D) involves a combined effort of the accounting department and the marketing department.

Question 78

Airstat is replacing an old stamping line that cost $80,000 five years ago, with a new, more efficient machine that will cost $225,000. Shipping and installation will cost an additional $20,000. The old machine has a book value of $15,000 but will be sold as scrap for $5,000. The new machine will be depreciated with a 7-year life under MACRS guidelines. With the increased production, inventories will increase $4,000, accounts receivable will increase $16,000, and accounts payable will increase $14,000. If Airstat has a marginal tax rate of 40 percent, what is the net investment?

A) $274,000
B) $242,000
C) $260,000
D) $274,000

Question 79

A Lotta Bread Corp. is replacing an entire baking line that was purchased for $420,000 and currently has a book value of $60,000. The new more efficient line will cost $940,000 installed and can be depreciated as a 7-year MACRS asset. With the increased efficiency, Lotta expects annual revenues to increase by $425,000 and operating expenses to increase by $170,000. The older machine, which was being depreciated at the straight-line rate of $20,000/year, will be sold for $30,000. What are the net cash flows for year 2? Assume the firm's marginal tax rate is 40% and that the year 2 depreciation rate is 24.49%.

A) $26,996
B) $332,206
C) $237,082
D) $383,206

Question 80

Parker Chemicals purchased a hexene extractor 10 years ago for $120,000. It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of zero. It can be sold today for $10,000. Parker is considering purchasing a new more efficient extractor that would cost $270,000 installed and would be depreciated as a 10-year MACRS asset. The company's marginal tax rate is 40%. Determine the NINV if the old extractor is sold and the new one is purchased.

A) $252,000
B) $228,000
C) $260,000
D) $248,000