Deck 10: Capital Budgeting - Cash Flows

Question 1

Operating cash flow (OCF)is calculated by adding back depreciation to the net operating profit after taxes.

Answer 1

True

Question 2

Projects should be evaluated on the basis of accounting profits,as these profits actually cover the company's obligations.

Answer 2

True

Question 3

An outlay for installation costs is not considered part of the depreciable basis of the asset to be purchased.

Answer 3

False

Question 4

Using the following data,what is the change in net working capital?

A) -$4,000
B) -$1,000
C) +$9,000
D) +$19.000

Question 5

The book value of an asset is equal to the

A) purchase price minus accumulated depreciation.
B) purchase price minus recaptured depreciation.
C) purchase price minus depreciation expense.
D) fair market value.

Question 6

Bill Sharpe,owner of Sharper Knives Inc.,is closing his business at the end of the current fiscal year.His sole asset,the knife-sharpening machine,is four years old.A depreciation table for the asset is shown below.Bill has agreed to sell the machine at the end of the year for $100,000.What is the impact on taxes from the sale of the machine? (Assume that Sharper Knives claimed a regular depreciation expense in the calculation of income taxes.)The tax rate is 35%.Round your answers to the nearest dollar.
Depreciation Table for Knife Sharpener

A) $7,665 additional taxes owing to IRS
B) $7,665 tax refund from IRS
C) $25,165 additional taxes owing to IRS
D) $25,165 tax refund from IRS
E) $27,335 additional taxes owing to IRS

Question 7

Jones Crusher Company is evaluating the proposed acquisition of a new machine.The machine will cost $190,000,and it will cost another $33,000 to modify it for special use by the firm.The machine falls into the MACRS 3-year class,and it will be sold after 3 years of use for $110,000.The machine will require an increase in net working capital of $9,000 and will have no effect on revenues,but is expected to save the firm $90,000 per year in before-tax operating costs,mainly labour.The company's marginal tax rate is 40%.What is the initial cash flow for the project?

A) -$42,000
B) -$190,000
C) -$199,000
D) -$223,000
E) -$232,000

Question 8

Bill Sharpe,owner of Sharper Knives Inc.,is closing his business at the end of the current fiscal year.His sole asset,the knife-sharpening machine,is three years old.A depreciation table for the asset is shown below.Bill has agreed to sell the machine at the end of the year for $100,000.What is the impact on taxes from the sale of the machine? (Assume that Sharper Knives claimed a regular depreciation expense in the calculation of income taxes.)The tax rate is 35%.Round your answers to the nearest dollar.
Depreciation Table for Knife Sharpener

A) $3,264 tax refund from IRS
B) $3,264 additional taxes owing to IRS
C) $14,236 tax refund from IRS
D) $14,236 additional taxes owing to IRS
E) $38,264 tax refund from IRS

Question 9

Droids-R-Us Inc.(DRU),is considering the installation of a new production line to make service mechanoids.The cost of the new manufacturing equipment is $2.2 million.The machines are classified as 7-year properties.(MACRS rates are provided in the table,below.)The machines will be purchased at the beginning of 2014.(DRU uses a mid-year placed-in-service convention.)DRU's engineers estimate that the new assembly line could be ready for operations in early 2014.Annual EBITDA is forecasted to be $1.3M for 2014 and all subsequent years of the project.DRU's marginal tax rate is 35%.What is the value of the depreciation tax shield in 2015? (Do NOT assume that the equipment is salvaged in 2015.)Round your answers to the nearest dollar.

A) $110,033
B) $188,573
C) $134,673
D) $314,380
E) $538,780

Question 10

A project having the conventional pattern of cash flows exhibits all of the following EXCEPT

A) a terminal cash flow.
B) initial investment.
C) operating cash outflows.
D) operating cash inflows.

Question 11

The book value of an asset is equal to the asset's after-tax proceeds,provided after the asset has been sold.

Question 12

The sale of an ordinary asset for its book value results in

A) no tax benefit.
B) recaptured depreciation.
C) a capital gain.
D) an ordinary tax benefit.

Question 13

The relevant cash flows for a proposed project are the incremental after-tax cash outflows and the resulting cash inflows.

Question 14

Net working capital is the amount by which a firm's current assets exceed its current liabilities.

Question 15

Projects will usually have an initial investment,cash inflows,and a terminal cash flow.

Question 16

The initial purchase price of a new stamp press is $6,000.The firm will spend $5,000 on shipping and installation.Training of new employees will cost $2,000.As a result of the purchase,inventory must increase $1,300.What is the net initial cash flow? Round your answer to the nearest dollar.Sign your cash flows negative for outflows and positive for inflows.

A) $13,000
B) -$13,000
C) $14,300
D) -$14,300
E) $11,000

Question 17

When the sale of an asset is equal to its book value,a firm will have to pay taxes on recaptured depreciation.

Question 18

When calculating the cash flows for a project,you should include interest payments.

Question 19

A corporation has decided to replace an existing machine with a newer model.The old machine had an initial purchase price of $35,000,and has $20,000 in accumulated depreciation.If the 40% tax rate applies to the corporation and the old asset can be sold for $10,000,what will be the tax effect of the replacement?

A) No effect
B) Loss of $2,000
C) Refund of $2,000
D) Loss of $4,000

Question 20

The initial outlays and operating costs of large projects can be forecast with great accuracy,but revenues are more uncertain and large errors are not uncommon.

Question 21

Goodweek Tire,Inc.,has recently developed a new tire,the SuperTread,and must decide whether to make the investment.The research and development costs so far total $10 million.Market research (costing $5 million)shows that there is significant demand for a SuperTread type tire.
The SuperTread will be produced and sold for the next two years.Goodweek Tire must initially invest $120 million in production equipment.This equipment can be sold for $51,428,571 at the end of two years.The equipment is classified as 15-year property for depreciation purposes.
The SuperTread is expected to sell for $45 per tire.The variable cost for each SuperTread is $15.Analysts expect automobile manufacturers to build five million new cars this year and for production to grow 2.5% in the following year.Each new car needs four tires.Goodweek Tire expects the SuperTread to capture 10 percent of the market.Assume that revenues and expenses occur at the end of each of the two years of production.
Working capital is equal to 15% of sales.Investments in working capital are made at the beginning of each year.At the end of the terminal year,the working capital is liquidated.What is the initial cash flow for the project?
MACRS Depreciation Rates

A) -$15,000,000
B) -$120,000,000
C) -$133,500,000
D) -$138,500,000
E) -$148,500,000

Question 22

Dr.Magneto is evaluating whether to open a private MRI clinic in leased office space in a local strip mall.The clinic will run for two years and then close.Before the clinic opens,the offices require $200,000 of renovations.Dr.Magneto will buy $20,000 of computer equipment and one MRI machine.The MRI machine (GE 3.0T Signa Excite HD)costs $2.4M.Assume that the renovations,computer equipment and MRI are paid for at the beginning of the first year (t=0)and that all three are classified as 15-year property.
Assume that the MRI machine will be sold for $500,000 at the end of the second year of business.The computer equipment will be worthless at that time.
The clinic can perform 72 scans per week for 49 operational weeks per year.The clinic will charge $600 per scan.
The clinic will need two technicians,two receptionists and one office manager.Wages,salaries and other payroll costs (i.e.,health insurance premiums)will total $275,000 per year.Maintenance,supplies,marketing and operating costs for the machine are expected to be $200,000 per year.Annual rent is $60,000 payable at the end of each year.Assume that all revenues (and expenses)occur at the end of the year.The tax rate is 40% and Dr.Magneto's cost of capital is 10%.What is the initial cash flow for the project?
MACRS Depreciation Rates

A) -$2,400,000
B) -$2,420,000
C) -$2,620,000
D) -$2,655,000
E) -$2,835,000

Question 23

Dr.Magneto is evaluating whether to open a private MRI clinic in leased office space in a local strip mall.The clinic will run for two years and then close.Before the clinic opens,the offices require $200,000 of renovations.Dr.Magneto will buy $20,000 of computer equipment and one MRI machine.The MRI machine (GE 3.0T Signa Excite HD)costs $2.4M.Assume that the renovations,computer equipment and MRI are paid for at the beginning of the first year (t=0)and that all three are classified as 15-year property.
Assume that the MRI machine will be sold for $500,000 at the end of the second year of business.The computer equipment will be worthless at that time.
The clinic can perform 72 scans per week for 49 operational weeks per year.The clinic will charge $600 per scan.
The clinic will need two technicians,two receptionists and one office manager.Wages,salaries and other payroll costs (i.e.,health insurance premiums)will total $275,000 per year.Maintenance,supplies,marketing and operating costs for the machine are expected to be $200,000 per year.Annual rent is $60,000 payable at the end of each year.Assume that all revenues (and expenses)occur at the end of the year.The tax rate is 40% and Dr.Magneto's cost of capital is 10%.What are the operating cash flows at the end of Year 1?
MACRS Depreciation Rates

A) $997,080
B) $1,001,480
C) $1,037,480
D) $1,048,640
E) $1,053,880

Question 24

Jones Crusher Company is evaluating the proposed acquisition of a new machine.The machine will cost $190,000,and it will cost another $33,000 to modify it for special use by the firm.The machine falls into the MACRS 3-year class,and it will be sold after 3 years of use for $110,000.The machine will require an increase in net working capital of $9,000 and will have no effect on revenues,but is expected to save the firm $90,000 per year in before-tax operating costs,mainly labour.The company's marginal tax rate is 40%.What are the terminal year cash flows?
MACRS Depreciation Rates

A) $93,649
B) $102,649
C) $148,820
D) $179,470
E) $188,740

Question 25

The Munsell Colour Company is considering the purchase of a new batch polymer-bonding machine for producing its number one line of crayons.Although the machine being considered will not produce any increase in sales revenues,it will result in the before-tax reduction of labour costs by $200,000 per year.The machine has a purchase price of $250,000,and it would cost an additional $10,000 to install the machine.In addition,to operate this machine,inventory must be increased by $15,000.The machine is categorized as 10-year property.After 2 years,it can be sold for $150,000.The tax rate is 34% and the cost of capital is 15%.What is the initial cash flow for the project?
MACRS Depreciation Rates

A) -$250,000
B) -$260,000
C) -$265,000
D) -$275,000
E) -$285,000

Question 26

The Munsell Colour Company is considering the purchase of a new batch polymer-bonding machine for producing its number one line of crayons.Although the machine being considered will not produce any increase in sales revenues,it will result in the before-tax reduction of labour costs by $200,000 per year.The machine has a purchase price of $250,000,and it would cost an additional $10,000 to install the machine.In addition,to operate this machine,inventory must be increased by $15,000.The machine is categorized as 10-year property.After 2 years,it can be sold for $150,000.The tax rate is 34% and the cost of capital is 15%.What are the operating cash flows at the end of Year 1?
MACRS Depreciation Rates

A) $132,000
B) $136,420
C) $140,840
D) $165,780
E) $175,240

Question 27

Goodweek Tire,Inc.,has recently developed a new tire,the SuperTread,and must decide whether to make the investment.The research and development costs so far total $10 million.Market research (costing $5 million)shows that there is significant demand for a SuperTread type tire.
The SuperTread will be produced and sold for the next two years.Goodweek Tire must initially invest $120 million in production equipment.This equipment can be sold for $51,428,571 at the end of two years.The equipment is classified as 15-year property for depreciation purposes.
The SuperTread is expected to sell for $45 per tire.The variable cost for each SuperTread is $15.Analysts expect automobile manufacturers to build five million new cars this year and for production to grow 2.5% in the following year.Each new car needs four tires.Goodweek Tire expects the SuperTread to capture 10 percent of the market.Assume that revenues and expenses occur at the end of each of the two years of production.
Working capital is equal to 15% of sales.Investments in working capital are made at the beginning of each year.At the end of the terminal year,the working capital is liquidated.Assume a tax rate of 40%.What are the operating cash flows at the end of Year 1?
MACRS Depreciation Rates

A) 11.6625M
B) 25.4625M
C) 30.2625M
D) 38.0625M
E) 38.4000M

Question 28

Tom Morrison Inc.,a leading manufacturer of golf equipment,is currently evaluating a new golf ball called the 'Feathery'.The secret to the Feathery is that its core is made from goose down.The advantage of down is that the ball flies higher and longer.You have been asked to analyze The Feathery project and present your findings to the company's executive committee.
The production line would be set up in an unused section of Morrison's main plant.The machinery is estimated at $480,000.Further,Morrison's inventories would have to be increased by $50,000 to handle the new line.The machinery is depreciated using MACRS with a 7-year recovery period.The machinery will be used for two years and have an expected salvage value of $200,000 at the end of that time.Morrison's tax rate is 30% and its weighted average cost of capital is 10%.
Operating earnings (EBITDA)are expected to be $330,000 per year for each of the two years.Assume that the purchase of the machine and increase in inventory occur at the beginning of the first year of operations.Assume that operating cash flows occur at the end of each of the two years of operations.What are the operating cash flows at the end of Year 1?
MACRS Depreciation Rates

A) $182,986
B) $211,738
C) $225,437
D) $251,578
E) $261,408

Question 29

Jones Crusher Company is evaluating the proposed acquisition of a new machine.The machine will cost $190,000,and it will cost another $33,000 to modify it for special use by the firm.The machine falls into the MACRS 3-year class,and it will be sold after 3 years of use for $110,000.The machine will require an increase in net working capital of $9,000 and will have no effect on revenues,but is expected to save the firm $90,000 per year in before-tax operating costs,mainly labour.The company's marginal tax rate is 40%.What is the cash flow from the project for year 1?
MACRS Depreciation Rates

A) $90,000
B) $83,730
C) $79,331
D) $71,840
E) $9,404

Question 30

The Boeing Corp.is considering building a new aircraft,the 787--larger than the 747 and larger than the Airbus A380.The company's Renton WA Facility,where 747s are currently manufactured,would have to be expanded.Expansion costs are forecast to be $2.5B,incurred at t = 0.Also at time t = 0,before production begins,inventory will be increased by $1.855B.Assume that this inventory is sold at the end of the project at t = 2.The first sales from operation of the new plant will occur at the end of year 1 (t = 1).Boeing forecasts sales of 220 planes in each of the two years.The plane will be sold for $130M each.The cost of manufacturing a plane is $115M.Annual overhead expenses are $775M.The construction facilities are classified as 15 year property.When the plant is closed it will be sold for $1B.The company is in the 34% marginal tax bracket.Boeing's cost of capital is 12%.What is the initial cash flow for the project?
MACRS Depreciation Rates

A) -$645M
B) -$1,885M
C) -$2,500M
D) -$4,355M
E) -$5,000M

Question 31

Orange Inc.,the Cupertino-based computer manufacturer,has developed a new all-in-one device: phone,music-player,camera,GPS,and computer.The device is called the iPip.The following data have been collected regarding the iPip project.The company has identified a prime piece of real estate and must purchase it immediately for $100,000.In addition,R&D expenditures of $175,000 must be made immediately.During the first year the manufacturing plant will be constructed.The plant will be ready for operation at the end of Year 1.The construction costs are $500,000 and will be paid upon completion.At the end of the Year 1,an inventory of raw materials will be purchased costing $50,000.Production and sales will occur during years 2 and 3.(Assume that all revenues and operating expenses are received (paid)at the end of each year.)Annual revenues are expected to be $850,000.Fixed operating expenses are $100,000 per year and variable operating expenses are 25% of sales.The construction facilities are classified as 10-year property for tax-depreciation purposes.When the plant is closed it will be sold for $200,000.(Note: Assume the investment in plant is depreciated during years 2 and 3.)The land will be sold for $225,000 at the end of year 3.The tax rate on all types of income is 34%.The cost of capital is 12%.What are the operating cash flows at the end of Year 2?
MACRS Depreciation Rates

A) $304,750
B) $318,775
C) $321,750
D) $368,775
E) $371,750

Question 32

The Boeing Corp.is considering building a new aircraft,the 787--larger than the 747 and larger than the Airbus A380.The company's Renton WA Facility,where 747s are currently manufactured,would have to be expanded.Expansion costs are forecast to be $2.5B,incurred at t = 0.Also at time t = 0,before production begins,inventory will be increased by $1.855B.Assume that this inventory is sold at the end of the project at t = 2.The first sales from operation of the new plant will occur at the end of year 1 (t = 1).Boeing forecasts sales of 220 planes in each of the two years.The plane will be sold for $130M each.The cost of manufacturing a plane is $115M.Annual overhead expenses are $775M.The construction facilities are classified as 15 year property.When the plant is closed it will be sold for $1B.The company is in the 34% marginal tax bracket.Boeing's cost of capital is 12%.What are the operating cash flows at the end of Year 1 (t = 1)?
MACRS Depreciation Rates

A) $1,584M
B) $1,709M
C) $1,945M
D) $2,400M
E) $2,525M

Question 33

John Kay Inc.is considering the installation of a new production line to make automated flying shuttles for weaving machines.The capital cost of the equipment is $2.2 million.The machines on the new line are classified as 15-year property.Kay plans to operate the line for two years,at which time the project will end and the assets will be disposed of for $1,000,000.The new line requires an increase in net working capital of $20,000,which would be liquidated at the end of the project.The investment outlays would occur immediately.
Sales are expected to be constant at $2,000,000,and operating expenses at $800,000.Assume that all revenues and operating expenses are received (paid)at the end of each of the two years of operations.Kay's marginal tax rate is 35 percent.Kay's cost of capital is 11%.What is initial cash flow for the flying shuttle project?
MACRS Depreciation Rates

A) $2,220,000
B) $2,200,000
C) $0
D) -$2,200,000
E) -$2,220,000

Question 34

After a trip to Bordeaux France you are considering opening a restaurant based on Restaurant L'Entrecote.You will offer a fixed menu of salad,steak and French fries.Your innovation is that you will use a bordelaise (red wine)sauce instead of a tarragon butter sauce.You plan to run the restaurant for two years and then retire.Start-up costs,to be incurred immediately,are $500,000.Start-up costs include kitchen equipment,kitchen supplies,renovations,furniture,fixtures,and the point-of-sales system.
Assume that all of those assets are classified as 5-year property.The assets can be sold for $150,000 after two years.
You expect 100 diners per night.The restaurant will be open for 300 nights per year.The average diner orders food with a menu price of $35 and beverages with a menu price of $15.Food costs are 34% of the menu price and beverage costs are 50% of the menu price.
The nightly wages are $2,160 (for the chef,5 kitchen staff,a bartender,the Maitre d' and 10 wait staff).Municipal tax,rent,and utilities,are $41,400 per annum.
Assume that all revenues and operating expenses are received (paid)at the end of each year.
The small business tax rate is 20%.The cost of capital is 10%.
When the restaurant opens you will have to invest in an inventory of wine,beer and liquor costing $50,000.What are the operating cash flows at the end of Year 1?
MACRS Depreciation Rates

A) $100,000
B) $128,600
C) $102,880
D) $202,880
E) $1,271,400

Question 35

After a trip to Bordeaux France you are considering opening a restaurant based on Restaurant L'Entrecote.You will offer a fixed menu of salad,steak and French fries.Your innovation is that you will use a bordelaise (red wine)sauce instead of a tarragon butter sauce.You plan to run the restaurant for two years and then retire.Start-up costs,to be incurred immediately,are $500,000.Start-up costs include kitchen equipment,kitchen supplies,renovations,furniture,fixtures,and the point-of-sales system.
Assume that all of those assets are classified as 5-year property.The assets can be sold for $150,000 after two years.
You expect 100 diners per night.The restaurant will be open for 300 nights per year.The average diner orders food with a menu price of $35 and beverages with a menu price of $15.Food costs are 34% of the menu price and beverage costs are 50% of the menu price.
The nightly wages are $2,160 (for the chef,5 kitchen staff,a bartender,the Maitre d' and 10 wait staff).Municipal tax,rent,and utilities,are $41,400 per annum.
Assume that all revenues and operating expenses are received (paid)at the end of each year.
The small business tax rate is 20%.The cost of capital is 10%.
When the restaurant opens you will have to invest in an inventory of wine,beer and liquor costing $50,000.What is initial cash flow for the L'Entrecote project?
MACRS Depreciation Rates

A) -$50,000
B) -$175,000
C) -$275,000
D) -$500,000
E) -$550,000

Question 36

Orange Inc.,the Cupertino-based computer manufacturer,has developed a new all-in-one device: phone,music-player,camera,GPS,and computer.The device is called the iPip.The following data have been collected regarding the iPip project.The company has identified a prime piece of real estate and must purchase it immediately for $100,000.In addition,R&D expenditures of $175,000 must be made immediately.During the first year the manufacturing plant will be constructed.The plant will be ready for operation at the end of Year 1.The construction costs are $500,000 and will be paid upon completion.At the end of the Year 1,an inventory of raw materials will be purchased costing $50,000.Production and sales will occur during years 2 and 3.(Assume that all revenues and operating expenses are received (paid)at the end of each year.)Annual revenues are expected to be $850,000.Fixed operating expenses are $100,000 per year and variable operating expenses are 25% of sales.The construction facilities are classified as 10-year property for tax-depreciation purposes.When the plant is closed it will be sold for $200,000.(Note: Assume the investment in plant is depreciated during years 2 and 3.)The land will be sold for $225,000 at the end of year 3.The tax rate on all types of income is 34%.The cost of capital is 12%.What is the undiscounted sum of the initial cash flows incurred at Year 0 and Year 1 for the iPip project?
MACRS Depreciation Rates

A) -$100,000
B) -$175,000
C) -$275,000
D) -$550,000
E) -$825,000

Question 37

You estimate that if a new 4D computer graphic display product is launched by your firm,revenues will increase by $3,053 in the first year and 10% each year for the next 3 years.Expenses will be 50% of revenues.Depreciation is computed using MACRS for an asset with a 3-year life and a basis of $7,236.The tax rate is 40%.Compute the second years' annual cash flows.
MACRS Depreciation Rates

A) $1,542
B) $1,881
C) $2,294
D) $2,386
E) $2,974

Question 38

The relevant cash flows for capital budgeting analysis are

A) incremental cash flows.
B) ordinary cash flows.
C) necessary cash flows.
D) consistent cash flows.

Question 39

John Kay Inc.is considering the installation of a new production line to make automated flying shuttles for weaving machines.The capital cost of the equipment is $2.2 million.The machines on the new line are classified as 15-year property.Kay plans to operate the line for 2 years,at which time the project will end and the assets will be disposed of for $1,000,000.The new line requires an increase in net working capital of $20,000,which would be liquidated at the end of the project.The investment outlays would occur immediately.
Sales are expected to be constant at $2,000,000,and operating expenses at $800,000.Assume that all revenues and operating expenses are received (paid)at the end of each of the two years of operations.Kay's marginal tax rate is 35 percent.Kay's cost of capital is 11%.What are the operating cash flows at the end of Year 1?
MACRS Depreciation Rates

A) $708,500
B) $764,000
C) $793,000
D) $818,500
E) $818,850

Question 40

Tom Morrison Inc.,a leading manufacturer of golf equipment,is currently evaluating a new golf ball called the 'Feathery'.The secret to the Feathery is that its core is made from goose down.The advantage of down is that the ball flies higher and longer.You have been asked to analyze The Feathery project and present your findings to the company's executive committee.
The production line would be set up in an unused section of Morrison's main plant.The machinery is estimated at $480,000.Further,Morrison's inventories would have to be increased by $50,000 to handle the new line.The machinery is depreciated using MACRS with a 7-year recovery period.The machinery will be used for 2 years and have an expected salvage value of $200,000 at the end of that time.Morrison's tax rate is 30% and its weighted average cost of capital is 10%.
Operating earnings (EBITDA)are expected to be $330,000 per year for each of the two years.Assume that the purchase of the machine and increase in inventory occur at the beginning of the first year of operations.Assume that operating cash flows occur at the end of each of the two years of operations.What is initial cash flow for the Feathery project?
MACRS Depreciation Rates

A) -$530,000
B) -$480,000
C) -$430,000
D) -$50,000
E) $0

Question 41

The Boeing Corp.is considering building a new aircraft,the 787--larger than the 747 and larger than the Airbus A380.The company's Renton WA Facility,where 747s are currently manufactured,would have to be expanded.Expansion costs are forecast to be $2.5B,incurred at t = 0.Also at time t = 0,before production begins,inventory will be increased by $1.855B.Assume that this inventory is sold at the end of the project at t = 2.The first sales from operation of the new plant will occur at the end of year 1 (t = 1).Boeing forecasts sales of 220 planes in each of the two years.The plane will be sold for $130M each.The cost of manufacturing a plane is $115M.Annual overhead expenses are $775M.The construction facilities are classified as 15 year property.When the plant is closed it will be sold for $1B.The company is in the 34% marginal tax bracket.Boeing's cost of capital is 12%.What is the IRR for the proposed acquisition?
MACRS Depreciation Rates

A) 22.4%
B) 24.4%
C) 26.4%
D) 28.4%
E) 30.4%

Question 42

Jones Crusher Company is evaluating the proposed acquisition of a new machine.The machine will cost $190,000,and it will cost another $33,000 to modify it for special use by the firm.The machine falls into the MACRS 3-year class,and it will be sold after 3 years of use for $110,000.The machine will require an increase in net working capital of $9,000 and will have no effect on revenues,but is expected to save the firm $90,000 per year in before-tax operating costs,mainly labour.The company's marginal tax rate is 40%.What is the NPV for the proposed acquisition if the cost of capital is 14%?

A) $13,957
B) $14,619
C) $15,322
D) $18,579
E) $20,456

Question 43

The Munsell Colour Company is considering the purchase of a new batch polymer-bonding machine for producing its number one line of crayons.Although the machine being considered will not produce any increase in sales revenues,it will result in the before-tax reduction of labour costs by $200,000 per year.The machine has a purchase price of $250,000,and it would cost an additional $10,000 to install the machine.In addition,to operate this machine,inventory must be increased by $15,000.Operating expenses are expected to grow at 2.5%.The machine is categorized as 10-year property.After 2 years,it can be sold for $150,000.The tax rate is 34% and the cost of capital is 15%.What is the IRR for the proposed acquisition?
MACRS Depreciation Rates

A) 38%
B) 39%
C) 40%
D) 41%
E) 42%

Question 44

The Boeing Corp.is considering building a new aircraft,the 787-larger than the 747 and larger than the Airbus A380.The company's Renton WA Facility,where 747s are currently manufactured,would have to be expanded.Expansion costs are forecast to be $2.5B,incurred at t = 0.Also at time t = 0,before production begins,inventory will be increased by $1.855B.Assume that this inventory is sold at the end of the project at t = 2.The first sales from operation of the new plant will occur at the end of year 1 (t = 1).Boeing forecasts sales of 220 planes in each of the two years.The plane will be sold for $130M each.The cost of manufacturing a plane is $115M.Annual overhead expenses are $775M.The construction facilities are classified as 15 year property.When the plant is closed it will be sold for $1B.The company is in the 34% marginal tax bracket.Boeing's cost of capital is 12%.What are the terminal year cash flows?
MACRS Depreciation Rates

A) $1,747M
B) $3,134M
C) $3,242M
D) $4,989M
E) $5,089M

Question 45

Dr.Magneto is evaluating whether to open a private MRI clinic in leased office space in a local strip mall.The clinic will run for two years and then close.Before the clinic opens,the offices require $200,000 of renovations.Dr.Magneto will buy $20,000 of computer equipment and one MRI machine.The MRI machine (GE 3.0T Signa Excite HD)costs $2.4M.Assume that the renovations,computer equipment and MRI are paid for at the beginning of the first year (t=0)and that all three are classified as 15-year property.
Assume that the MRI machine will be sold for $500,000 at the end of the second year of business.The computer equipment will be worthless at that time.
The clinic can perform 72 scans per week for 49 operational weeks per year.The clinic will charge $600 per scan.
The clinic will need two technicians,two receptionists and one office manager.Wages,salaries and other payroll costs (i.e.,health insurance premiums)will total $275,000 per year.Maintenance,supplies,marketing and operating costs for the machine are expected to be $200,000 per year.Annual rent is $60,000 payable at the end of each year.Assume that all revenues (and expenses)occur at the end of the year.Revenues and operating expenses are expected to grow at a rate of 2.5%.The tax rate is 40% and Dr.Magneto's cost of capital is 10%.What are the terminal year cash flows?
MACRS Depreciation Rates

A) $1,336,630
B) $2,167,927
C) $2,268,407
D) $2,429,287
E) $2,603,527

Question 46

Dr.Magneto is evaluating whether to open a private MRI clinic in leased office space in a local strip mall.The clinic will run for two years and then close.Before the clinic opens,the offices require $200,000 of renovations.Dr.Magneto will buy $20,000 of computer equipment and one MRI machine.The MRI machine (GE 3.0T Signa Excite HD)costs $2.4M.Assume that the renovations,computer equipment and MRI are paid for at the beginning of the first year (t=0)and that all three are classified as 15-year property.
Assume that the MRI machine will be sold for $500,000 at the end of the second year of business.The computer equipment will be worthless at that time.
The clinic can perform 72 scans per week for 49 operational weeks per year.The clinic will charge $600 per scan.
The clinic will need two technicians,two receptionists and one office manager.Wages,salaries and other payroll costs (i.e.,health insurance premiums)will total $275,000 per year.Maintenance,supplies,marketing and operating costs for the machine are expected to be $200,000 per year.Annual rent is $60,000 payable at the end of each year.Assume that all revenues (and expenses)occur at the end of the year and that they grow at a rate of 2.5%.The tax rate is 40% and Dr.Magneto's cost of capital is 10%.What is the NPV for the proposed acquisition if the cost of capital is 10%?
MACRS Depreciation Rates

A) -$410,087
B) $55,807
C) $165,153
D) $169,483
E) $312,062

Question 47

After a trip to Bordeaux France you are considering opening a restaurant based on Restaurant L'Entrecote.You will offer a fixed menu of salad,steak and French fries.Your innovation is that you will use a bordelaise (red wine)sauce instead of a tarragon butter sauce.You plan to run the restaurant for two years and then retire.Start-up costs,to be incurred immediately,are $500,000.Start-up costs include kitchen equipment,kitchen supplies,renovations,furniture,fixtures,and the point-of-sales system.Assume that all of those assets are classified as 5-year property.The assets can be sold for $150,000 after two years.
You expect 100 diners per night.The restaurant will be open for 300 nights per year.The average diner orders food with a menu price of $35 and beverages with a menu price of $15.Food costs are 34% of the menu price and beverage costs are 50% of the menu price.The nightly wages are $2,160 (for the chef,5 kitchen staff,a bartender,the Maitre d' and 10 wait staff).Municipal tax,rent,and utilities,are $41,400 per annum.Assume that all revenues and operating expenses are received (paid)at the end of each year.The small business tax rate is 20%.The cost of capital is 10%.When the restaurant opens you will have to invest in an inventory of wine,beer and liquor costing $50,000.What are the terminal year cash flows?
MACRS Depreciation Rates

A) $357,752
B) $68,600
C) $50,000
D) $214,880
E) $432,880

Question 48

Goodweek Tire,Inc.,has recently developed a new tire,the SuperTread,and must decide whether to make the investment.The research and development costs so far total $10 million.Market research (costing $5 million)shows that there is significant demand for a SuperTread type tire.
The SuperTread will be produced and sold for the next two years.Goodweek Tire must initially invest $120 million in production equipment.This equipment can be sold for $51,428,571 at the end of two years.The equipment is classified as 15-year property for depreciation purposes.
The SuperTread is expected to sell for $45 per tire.The variable cost for each SuperTread is $15.Analysts expect automobile manufacturers to build five million new cars this year and for production to grow 2.5% in the following year.Each new car needs four tires.Goodweek Tire expects the SuperTread to capture 10 percent of the market.Assume that revenues and expenses occur at the end of each of the two years of production.
Working capital is equal to 15% of sales.Investments in working capital are made at the beginning of each year.Assume a tax rate of 40%.At the end of the terminal year,the working capital is liquidated.What is the NPV for the proposed acquisition if the cost of capital is 7.64%?
MACRS Depreciation Rates

A) $11.6M
B) $11.8M
C) $12.0M
D) $12.2M
E) $12.4M

Question 49

Orange Inc.,the Cupertino-based computer manufacturer,has developed a new all-in-one device: phone,music-player,camera,GPS,and computer.The device is called the iPip.The following data have been collected regarding the iPip project.The company has identified a prime piece of real estate and must purchase it immediately for $100,000.In addition,R&D expenditures of $175,000 must be made immediately.During the first year the manufacturing plant will be constructed.The plant will be ready for operation at the end of Year 1.The construction costs are $500,000 and will be paid upon completion.At the end of the Year 1,an inventory of raw materials will be purchased costing $50,000.Production and sales will occur during years 2 and 3.(Assume that all revenues and operating expenses are received (paid)at the end of each year.)Annual revenues are expected to be $850,000.Fixed operating expenses are $100,000 per year and variable operating expenses are 25% of sales.The construction facilities are classified as 10-year property for tax-depreciation purposes.When the plant is closed it will be sold for $200,000.(Note: Assume the investment in plant is depreciated during years 2 and 3.)The land will be sold for $225,000 at the end of year 3.The tax rate on all types of income is 34%.The cost of capital is 12%.What are the terminal year (Year 3)cash flows?
MACRS Depreciation Rates

A) $846,810
B) $868,850
C) $872,250
D) $896,810
E) $922,400

Question 50

John Kay Inc.is considering the installation of a new production line to make automated flying shuttles for weaving machines.The capital cost of the equipment is $2.2 million.The machines on the new line are classified as 15-year property.Kay plans to operate the line for 2 years,at which time the project will end and the assets will be disposed of for $1,000,000.The new line requires an increase in net working capital of $20,000,which would be liquidated at the end of the project.The investment outlays would occur immediately.
Sales are expected to be constant at $2,000,000,and operating expenses at $800,000.Assume that all revenues and operating expenses are received (paid)at the end of each of the two years of operations.Kay's marginal tax rate is 35 percent.Kay's cost of capital is 11%.What is the NPV for the proposed acquisition if the cost of capital is 11%?
MACRS Depreciation Rates

A) $287,942
B) $291,709
C) $326,983
D) $341,505
E) $430,816

Question 51

The Munsell Colour Company is considering the purchase of a new batch polymer-bonding machine for producing its number one line of crayons.Although the machine being considered will not produce any increase in sales revenues,it will result in the before-tax reduction of labour costs by $200,000 per year.The machine has a purchase price of $250,000,and it would cost an additional $10,000 to install the machine.In addition,to operate this machine,inventory must be increased by $15,000.Operating expenses are expected to grow at 2.5%.The machine is categorized as 10-year property.After 2 years,it can be sold for $150,000.The tax rate is 34% and the cost of capital is 15%.What is the NPV for the proposed acquisition if the cost of capital is 15%?
MACRS Depreciation Rates

A) $74,392
B) $81,567
C) $89,541
D) $96,135
E) $99,792

Question 52

The cash flows in an expansion project are different from those in a replacement project.In an expansion project,the cash flows from the old asset

A) will always be zero.
B) will be evaluated on an after-tax basis.
C) will always be negative.
D) will always equal the terminal cash flow.

Question 53

The Munsell Colour Company is considering the purchase of a new batch polymer-bonding machine for producing its number one line of crayons.Although the machine being considered will not produce any increase in sales revenues,it will result in the before-tax reduction of labour costs by $200,000 per year.The machine has a purchase price of $250,000,and it would cost an additional $10,000 to install the machine.In addition,to operate this machine,inventory must be increased by $15,000.The machine is categorized as 10-year property.After 2 years,it can be sold for $150,000.The tax rate is 34% and the cost of capital is 15%.Operating expenses are expected to increase by 2.5%.What are the terminal year cash flows?
MACRS Depreciation Rates

A) $147,912
B) $155,139
C) $170,139
D) $320,139
E) $328,860

Question 54

Tom Morrison Inc.,a leading manufacturer of golf equipment,is currently evaluating a new golf ball called the 'Feathery'.The secret to the Feathery is that its core is made from goose down.The advantage of down is that the ball flies higher and longer.You have been asked to analyze The Feathery project and present your findings to the company's executive committee.
The production line would be set up in an unused section of Morrison's main plant.The machinery is estimated at $480,000.Further,Morrison's inventories would have to be increased by $50,000 to handle the new line.The machinery is depreciated using MACRS with a 7-year recovery period.The machinery will be used for 2 years and have an expected salvage value of $200,000 at the end of that time.Morrison's tax rate is 30% and its weighted average cost of capital is 10%.
Operating earnings (EBITDA)are expected to be $330,000 per year for each of the two 2 years.Assume that the purchase of the machine and increase in inventory occur at the beginning of the first year of operations.Assume that operating cash flows occur at the end of each of the two years of operations.What is the NPV for the proposed acquisition if the cost of capital is 10%?
MACRS Depreciation Rates

A) $107,320
B) $119,894
C) $125,373
D) $148,643
E) $157,320

Question 55

Goodweek Tire,Inc.,has recently developed a new tire,the SuperTread,and must decide whether to make the investment.The research and development costs so far total $10 million.Market research (costing $5 million)shows that there is significant demand for a SuperTread type tire.
The SuperTread will be produced and sold for the next two years.Goodweek Tire must initially invest $120 million in production equipment.This equipment can be sold for $51,428,571 at the end of two years.The equipment is classified as 15-year property for depreciation purposes.
The SuperTread is expected to sell for $45 per tire.The variable cost for each SuperTread is $15.Analysts expect automobile manufacturers to build five million new cars this year and for production to grow 2.5% in the following year.Each new car needs four tires.Goodweek Tire expects the SuperTread to capture 10 percent of the market.Assume that revenues and expenses occur at the end of each of the two years of production.
Working capital is equal to 15% of sales.Investments in working capital are made at the beginning of each year.Assume a tax rate of 40%.At the end of the terminal year,the working capital is liquidated.What are the terminal year cash flows?
MACRS Depreciation Rates

A) $30,540,000
B) $44,377,500
C) $95,806,071
D) $105,928,048
E) $127,195,000

Question 56

Tom Morrison Inc.,a leading manufacturer of golf equipment,is currently evaluating a new golf ball called the 'Feathery'.The secret to the Feathery is that its core is made from goose down.The advantage of down is that the ball flies higher and longer.You have been asked to analyze The Feathery project and present your findings to the company's executive committee.
The production line would be set up in an unused section of Morrison's main plant.The machinery is estimated at $480,000.Further,Morrison's inventories would have to be increased by $50,000 to handle the new line.The machinery is depreciated using MACRS with a 7-year recovery period.The machinery will be used for two years and have an expected salvage value of $200,000 at the end of that time.Morrison's tax rate is 30% and its weighted average cost of capital is 10%.
Operating earnings (EBITDA)are expected to be $330,000 per year for each of the two years.Assume that the purchase of the machine and increase in inventory occur at the beginning of the first year of operations.Assume that operating cash flows occur at the end of each of the two years of operations.What are the terminal year cash flows?
MACRS Depreciation Rates

A) $455,211
B) $494,422
C) $507,279
D) $516,266
E) $544,422

Question 57

After a trip to Bordeaux France you are considering opening a restaurant based on Restaurant L'Entrecote.You will offer a fixed menu of salad,steak and French fries.Your innovation is that you will use a bordelaise (red wine)sauce instead of a tarragon butter sauce.You plan to run the restaurant for two years and then retire.Start-up costs,to be incurred immediately,are $500,000.Start-up costs include kitchen equipment,kitchen supplies,renovations,furniture,fixtures,and the point-of-sales system.Assume that all of those assets are classified as 5-year property.The assets can be sold for $150,000 after two years.
You expect 100 diners per night.The restaurant will be open for 300 nights per year.The average diner orders food with a menu price of $35 and beverages with a menu price of $15.Food costs are 34% of the menu price and beverage costs are 50% of the menu price.
The nightly wages are $2,160 (for the chef,5 kitchen staff,a bartender,the Maitre d' and 10 wait staff).Municipal tax,rent,and utilities,are $41,400 per annum.
Assume that all revenues and operating expenses are received (paid)at the end of each year.
The small business tax rate is 20%.The cost of capital is 10%.
When the restaurant opens you will have to invest in an inventory of wine,beer and liquor costing $50,000.What is the NPV for the proposed acquisition if the cost of capital is 12%?
MACRS Depreciation Rates

A) $102,880
B) $(9,586)
C) $(7,812)
D) $432,880
E) $128,600

Question 58

Orange Inc.,the Cupertino-based computer manufacturer,has developed a new all-in-one device: phone,music-player,camera,GPS,and computer.The device is called the iPip.The following data have been collected regarding the iPip project.The company has identified a prime piece of real estate and must purchase it immediately for $100,000.In addition,R&D expenditures of $175,000 must be made immediately.During the first year the manufacturing plant will be constructed.The plant will be ready for operation at the end of Year 1.The construction costs are $500,000 and will be paid upon completion.At the end of the Year 1,an inventory of raw materials will be purchased costing $50,000.Production and sales will occur during years 2 and 3.(Assume that all revenues and operating expenses are received (paid)at the end of each year.)Annual revenues are expected to be $850,000.Fixed operating expenses are $100,000 per year and variable operating expenses are 25% of sales.The construction facilities are classified as 10-year property for tax-depreciation purposes.When the plant is closed it will be sold for $200,000.(Note: Assume the investment in plant is depreciated during years 2 and 3.)The land will be sold for $225,000 at the end of year 3.The tax rate on all types of income is 34%.The cost of capital is 12%.What is the NPV for the proposed acquisition if the cost of capital is 12%?
MACRS Depreciation Rates

A) $95,833
B) $134,419
C) $151,136
D) $162,140
E) $223,750

Question 59

The Boeing Corp.is considering building a new aircraft,the 787--larger than the 747 and larger than the Airbus A380.The company's Renton WA Facility,where 747s are currently manufactured,would have to be expanded.Expansion costs are forecast to be $2.5B,incurred at t = 0.Also at time t = 0,before production begins,inventory will be increased by $1.855B.Assume that this inventory is sold at the end of the project at t = 2.The first sales from operation of the new plant will occur at the end of year 1 (t = 1).Boeing forecasts sales of 220 planes in each of the two years.The plane will be sold for $130M each.The cost of manufacturing a plane is $115M.Annual overhead expenses are $775M.The construction facilities are classified as 15 year property.When the plant is closed it will be sold for $1B.The company is in the 34% marginal tax bracket.Boeing's cost of capital is 12%.What is the NPV for the proposed acquisition if the cost of capital is 12%?
MACRS Depreciation Rates

A) $1,025M
B) $1,148M
C) $2,343M
D) $3,242M
E) $3,602M

Question 60

John Kay Inc.is considering the installation of a new production line to make automated flying shuttles for weaving machines.The capital cost of the equipment is $2.2 million.The machines on the new line are classified as 15-year property.Kay plans to operate the line for 2 years,at which time the project will end and the assets will be disposed of for $1,000,000.The new line requires an increase in net working capital of $20,000,which would be liquidated at the end of the project.The investment outlays would occur immediately.
Sales are expected to be constant at $2,000,000,and operating expenses at $800,000.Assume that all revenues and operating expenses are received (paid)at the end of each of the two years of operations.Kay's marginal tax rate is 35 percent.Kay's cost of capital is 11%.What are the terminal year cash flows?
MACRS Depreciation Rates

A) $2,161,500
B) $2,176,000
C) $2,181,500
D) $2,211,500
E) $2,311,500

Question 61

The Ellsworth Company is contemplating the replacement of their old printing machine with a new model costing $60,000.The old machine,which originally cost $40,000,has 6 years of expected life remaining and a current book value of $30,000,versus a current market value of $24,000.Ellsworth's corporate tax rate is 40%.If Ellsworth sells the old machine at market value,what is the initial outlay (after-tax)for the new printing machine?

A) -$36,000
B) -$22,000
C) -$33,600
D) -$30,000

Question 62

You are evaluating two projects.You may accept only one of them.Project one will cost $379,000 initially and will pay $134,000 each year for the next 5 years.Project two will cost $454,000 initially,but will pay $101,000 for the next 10 years.The firm's cost of capital is 15%.Use the replacement chain approach to compute the NPV of each project.Which project has the highest NPV and by how much? Round your answers to the nearest dollar.

A) Project 2 has a higher NPV by $240,619.
B) Project 2 has a higher NPV by $52,189.
C) Project 1 has a higher NPV by $240,619.
D) Project 1 has a higher NPV by $52,189.
E) The two projects have equal NPV.

Question 63

Meals on Wings Inc.,which supplies prepared meals for corporate aircraft,needs to purchase new broilers.The new broilers would replace broilers purchased 10 years ago for $105,000,which are being depreciated on a straight-line basis to a zero salvage value (15-year depreciable life).The old broilers can be sold today for $63,000.The new broilers will cost $202,000,installed (not counting funds already spent),and will be depreciated using straight-line depreciation over their 5-year life.They will be sold at their book value at the end of the 5th year.The firm expects to increase its revenues by $27,000 per year if the new broilers are purchased,but cash expenses will also increase by $3,000 per year.Annual interest expense will be $2,000,and net working capital will increase by $5,000.The new broilers will occupy space currently leased to another firm for $530 per month,and $5,000 has already been spent preparing the building for new broilers.The firm's tax rate is 40%.What is the cash flow from the replacement project for Year 1? Round your answers to the nearest dollar.

A) $27,760
B) $27,442
C) $23,944
D) $22,744
E) $17,640

Question 64

Duddy Kravitz owns the Saint Viateur Bagel store.His world famous bagels are hand rolled,boiled in honey-water and baked in a wood-burning oven.The store sells 5,000 bagels per day and is open 365 days of the year.The bagels are so popular that,on weekends,the customer line-up runs half-way down the block.Uncle Benjy thinks that the wood-fired oven should be replaced by a modern gas oven,which would reduce costs by $0.02 per bagel.A new oven would cost $105,000.Duddy is considering Uncle Benjy's idea,but he only plans to be in business for another two years.The bagels are sold for $0.75 each.The cost of producing each bagel with the wood-burning oven is $0.50 which includes labour and raw materials.The current oven was purchased thirty years ago for $20,000.It could be sold today for $5,000 and will be worth $3,000 in two years.A new oven costs $105,000 today and could be sold for $55,000 in two years.Duddy's cost of capital is 9%.Assume that investment cash flows occur immediately,and that sales and production costs occur at the end of the year.Assume that both ovens are classified as 10-year property and depreciated using the MACRS system.The tax rate is 35%.What is the initial cash flow for the project?
MACRS Depreciation Rates

A) -$110,000
B) -$105,000
C) -$103,050
D) -$101,750
E) -$98,250

Question 65

Meals on Wings Inc.,which supplies prepared meals for corporate aircraft,needs to purchase new broilers.The new broilers would replace broilers purchased 10 years ago for $105,000,which are being depreciated on a straight-line basis to a zero salvage value (15-year depreciable life).The old broilers can be sold today for $63,000.The new broilers will cost $202,000,installed (not counting funds already spent),and will be depreciated using straight-line depreciation over their 5-year life.They will be sold at their book value at the end of the 5th year.The firm expects to increase its revenues by $27,000 per year if the new broilers are purchased,but cash expenses will also increase by $3,000 per year.Annual interest expense will be $2,000,and net working capital will increase by $5,000.The new broilers will occupy space currently leased to another firm for $530 per month,and $5,000 has already been spent preparing the building for new broilers.The firm's tax rate is 40%.What is the NPV for the proposed acquisition if the cost of capital is 10%? Round your answers to the nearest dollar.

A) -$61,329
B) -$53,605
C) -$49,968
D) -$46,863
E) -$44,968

Question 66

The Mountain Jam Company purchased a machine 5 years ago for $70,000.It has an estimated life of 7 years from the time of purchase and is expected to have zero salvage value at the end of 7^th year.The old machine can be sold today for $60,000.A new machine can be purchased for $69,300.It has a 2-year life and is expected to reduce operating expenses by $50,000 per year.Sales aren't expected to change.After 2 years,the new machine can be sold for $20,000.The company uses the straight-line method to calculate depreciation for both machines.The tax rate is 40%.What is the NPV for the proposed acquisition if the cost of capital is 13%?

A) $27,319
B) $49,742
C) $50,588
D) $53,605
E) $61,016

Question 67

You are evaluating two projects.You may accept only one of them.Project one will cost $379,000 initially and will pay $134,000 each year for the next 5 years.Project two will cost $454,000 initially,but will pay $101,000 for the next 10 years.The firm's cost of capital is 15%.Compute the NPV of each project.Which project has the highest NPV and by how much? Round your answers to the nearest dollar.

A) Project 2 has a higher NPV by $17,293.
B) Project 2 has a higher NPV by $37,636.
C) Project 1 has a higher NPV by $17,293.
D) Project 1 has a higher NPV by $37,636.
E) The two projects have equal NPV.

Question 68

Duddy Kravitz owns the Saint Viateur Bagel store.His world famous bagels are hand rolled,boiled in honey-water and baked in a wood-burning oven.The store sells 5,000 bagels per day and is open 365 days of the year.The bagels are so popular that,on weekends,the customer line-up runs half-way down the block.Uncle Benjy thinks that the wood-fired oven should be replaced by a modern gas oven,which would reduce costs by $0.02 per bagel.A new oven would cost $105,000.Duddy is considering Uncle Benjy's idea,but he only plans to be in business for another two years.The bagels are sold for $0.75 each.The cost of producing each bagel with the wood-burning oven is $0.50 which includes labour and raw materials.The current oven was purchased thirty years ago for $20,000.It could be sold today for $5,000 and will be worth $3,000 in two years.A new oven costs $105,000 today and could be sold for $55,000 in two years.Duddy's cost of capital is 9%.Assume that investment cash flows occur immediately,and that sales and production costs occur at the end of the year.Assume that both ovens are classified as 10-year property and depreciated using the MACRS system.The tax rate is 35%.What are the terminal year cash flows?
MACRS Depreciation Rates

A) $30,340
B) $36,500
C) $62,260
D) $90,600
E) $94,500

Question 69

The Mountain Jam Company purchased a machine 5 years ago for $70,000.It has an estimated life of 7 years from the time of purchase and is expected to have zero salvage value at the end of 7^th year.The old machine can be sold today for $60,000.A new machine can be purchased for $69,300.It has a 2-year life and is expected to reduce operating expenses by $50,000 per year.Sales aren't expected to change.After 2 years,the new machine can be sold for $20,000.The company uses the straight-line method to calculate depreciation for both machines.The tax rate is 40%.What are the terminal year cash flows?

A) $12,000
B) $27,860
C) $39,860
D) $51,860
E) $59,860

Question 70

Duddy Kravitz owns the Saint Viateur Bagel store.His world famous bagels are hand rolled,boiled in honey-water and baked in a wood-burning oven.The store sells 5,000 bagels per day and is open 365 days of the year.The bagels are so popular that,on weekends,the customer line-up runs half-way down the block.Uncle Benjy thinks that the wood-fired oven should be replaced by a modern gas oven,which would reduce costs by $0.02 per bagel.A new oven would cost $105,000.Duddy is considering Uncle Benjy's idea,but he only plans to be in business for another two years.The bagels are sold for $0.75 each.The cost of producing each bagel with the wood-burning oven is $0.50 which includes labour and raw materials.The current oven was purchased thirty years ago for $20,000.It could be sold today for $5,000 and will be worth $3,000 in two years.A new oven costs $105,000 today and could be sold for $55,000 in two years.Duddy's cost of capital is 9%.Assume that investment cash flows occur immediately,and that sales and production costs occur at the end of the year.Assume that both ovens are classified as 10-year property and depreciated using the MACRS system.The tax rate is 35%.What is the IRR for the proposed acquisition?
MACRS Depreciation Rates

A) 7.8%
B) 8.8%
C) 9.8%
D) 10.8%
E) 11.8%

Question 71

Equal annual annuities assume projects are renewable indefinitely.

Question 72

A new tire balancing machine is available to replace an existing one.The new one will cost $5,092.The old one originally cost $2,594 and was being depreciated over its 3-year life using MACRS.Two years have passed since the old one was purchased.Shipping of the new machine will cost $320.Assume a 40% tax rate.What is the net initial cash flow? Assume the old machine cannot be sold.(Round answer to nearest dollar.)
MACRS Depreciation Rates

A) $5,258
B) -$5,258
C) -$5,412
D) $5,181
E) -$5,181

Question 73

The Mountain Jam Company purchased a machine 5 years ago for $70,000.It has an estimated life of 7 years from the time of purchase and is expected to have zero salvage value at the end of 7^th year.The old machine can be sold today for $60,000.A new machine can be purchased for $69,300.It has a 2-year life and is expected to reduce operating expenses by $50,000 per year.Sales aren't expected to change.After 2 years,the new machine can be sold for $20,000.The company uses the straight-line method to calculate depreciation for both machines.The tax rate is 40%.What is the initial cash flow for the project?

A) -$69,300
B) -$9,300
C) -$25,300
D) -$33,300
E) $60,000

Question 74

Meals on Wings Inc.,which supplies prepared meals for corporate aircraft,needs to purchase new broilers.The new broilers would replace broilers purchased 10 years ago for $105,000,which are being depreciated on a straight-line basis to a zero salvage value (15-year depreciable life).The old broilers can be sold today for $63,000.The new broilers will cost $202,000,installed (not counting funds already spent),and will be depreciated using straight-line depreciation over their 5-year life.They will be sold at their book value at the end of the 5th year.The firm expects to increase its revenues by $27,000 per year if the new broilers are purchased,but cash expenses will also increase by $3,000 per year.Annual interest expense will be $2,000,and net working capital will increase by $5,000.The new broilers will occupy space currently leased to another firm for $530 per month,and $5,000 has already been spent preparing the building for new broilers.The firm's tax rate is 40%.What are the terminal year cash flows? Round your answers to the nearest dollar.

A) $22,744
B) $23,944
C) $27,442
D) $28,944
E) $32,442

Question 75

Duddy Kravitz owns the Saint Viateur Bagel store.His world famous bagels are hand rolled,boiled in honey-water and baked in a wood-burning oven.The store sells 5,000 bagels per day and is open 365 days of the year.The bagels are so popular that,on weekends,the customer line-up runs half-way down the block.Uncle Benjy thinks that the wood-fired oven should be replaced by a modern gas oven,which would reduce costs by $0.02 per bagel.A new oven would cost $105,000.Duddy is considering Uncle Benjy's idea,but he only plans to be in business for another two years.The bagels are sold for $0.75 each.The cost of producing each bagel with the wood-burning oven is $0.50 which includes labour and raw materials.The current oven was purchased thirty years ago for $20,000.It could be sold today for $5,000 and will be worth $3,000 in two years.A new oven costs $105,000 today and could be sold for $55,000 in two years.Duddy's cost of capital is 9%.Assume that investment cash flows occur immediately,and that sales and production costs occur at the end of the year.Assume that both ovens are classified as 10-year property and depreciated using the MACRS system.The tax rate is 35%.What is the cash flow from the replacement project for year 1?
MACRS Depreciation Rates

A) $10,500
B) $16,900
C) $26,000
D) $27,400
E) $36,500

Question 76

Tom Morrison Inc.,a leading manufacturer of golf equipment,is currently evaluating a new golf ball called the 'Feathery'.The secret to the Feathery is that its core is made from goose down.The advantage of down is that the ball flies higher and longer.You have completed an analysis of the Feathery project and estimated the NPV to be $148,643.
After completing your analysis,your boss tells you that the Feathery project will occupy an unused portion of the Morrison plant and that Morrison could have leased the space to another user for $15,000 per annum for two years.Assume a tax rate of 30% and a cost of capital of 10%.What is the NPV of the project with this fact included? (Round to the nearest dollar)

A) $118,643
B) $127,643
C) $128,229
D) $130,420
E) Doesn't affect NPV of this project

Question 77

The Mountain Jam Company purchased a machine 5 years ago for $70,000.It has an estimated life of 7 years from the time of purchase and is expected to have zero salvage value at the end of 7^th year.The old machine can be sold today for $60,000.A new machine can be purchased for $69,300.It has a 2-year life and is expected to reduce operating expenses by $50,000 per year.Sales aren't expected to change.After 2 years,the new machine can be sold for $20,000.The company uses the straight-line method to calculate depreciation for both machines.The tax rate is 40%.What is the cash flow from the replacement project for Year 1?

A) $27,684
B) $34,316
C) $39,860
D) $50,000
E) $31,544

Question 78

Duddy Kravitz owns the Saint Viateur Bagel store.His world famous bagels are hand rolled,boiled in honey-water and baked in a wood-burning oven.The store sells 5,000 bagels per day and is open 365 days of the year.The bagels are so popular that,on weekends,the customer line-up runs half-way down the block.Uncle Benjy thinks that the wood-fired oven should be replaced by a modern gas oven,which would reduce costs by $0.02 per bagel.A new oven would cost $105,000.Duddy is considering Uncle Benjy's idea,but he only plans to be in business for another two years.The bagels are sold for $0.75 each.The cost of producing each bagel with the wood-burning oven is $0.50 which includes labour and raw materials.The current oven was purchased thirty years ago for $20,000.It could be sold today for $5,000 and will be worth $3,000 in two years.A new oven costs $105,000 today and could be sold for $55,000 in two years.Duddy's cost of capital is 9%.Assume that investment cash flows occur immediately,and that sales and production costs occur at the end of the year.Assume that both ovens are classified as 10-year property and depreciated using the MACRS system.The tax rate is 35%.What is the NPV for the proposed acquisition if the cost of capital is 9%?
MACRS Depreciation Rates

A) -$656
B) -$356
C) $356
D) $656
E) $956

Question 79

Meals on Wings Inc.,which supplies prepared meals for corporate aircraft,needs to purchase new broilers.The new broilers would replace broilers purchased 10 years ago for $105,000,which are being depreciated on a straight-line basis to a zero salvage value (15-year depreciable life).The old broilers can be sold today for $63,000.The new broilers will cost $202,000,installed (not counting funds already spent),and will be depreciated using straight-line depreciation over their 5-year life.They will be sold at their book value at the end of the 5th year.The firm expects to increase its revenues by $27,000 per year if the new broilers are purchased,but cash expenses will also increase by $3,000 per year.Annual interest expense will be $2,000,and net working capital will increase by $5,000.The new broilers will occupy space currently leased to another firm for $530 per month,and $5,000 has already been spent preparing the building for new broilers.The firm's tax rate is 40%.What is the initial cash flow for the project? Round your answers to the nearest dollar.

A) -$160,200
B) -$155,200
C) -$148,200
D) -$145,200
E) -$141,200

Question 80

When evaluating a new project,the firm should consider all of the following factors EXCEPT

A) previous expenditures associated with a market testing.
B) changes in working capital attributable to the project.
C) the current market value of any equipment to be replaced.
D) the resulting difference in depreciation expense if the project involves replacement.