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Exam 9: Making Capital Investment Decisions

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Question 1

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Which one of the following is a correct value to use if you are conducting a best-case scenario analysis?

A) Sales price that is most likely to occur
B) Lowest expected level of sales quantity
C) Lowest expected salvage value
D) Highest expected need for net working capital
E) Lowest expected value for fixed costs

F) B) and C)
G) C) and D)

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Question 2

Multiple Choice

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Lake City Plastics currently produces plastic plates and silverware.The company is considering expanding its product offerings to include plastic serving trays.Which of the following are cash flows relevant to the new product? I.Molds needed to form the serving trays II.Projected increase in plate and silverware sales if the trays are produced III.A portion of the production manager's current annual salary of $75,000 IV.Raw materials used in the production of the serving trays

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

F) A) and C)
G) All of the above

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Question 3

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A project has an initial requirement of $261,000 for fixed assets and $27,000 for net working capital.The fixed assets will be depreciated to a zero book value over the four-year life of the project and have an estimated salvage value of $78,000.All of the net working capital will be recouped at the end of the project.The annual operating cash flow is $96,200 and the discount rate is 13 percent.What is the project's net present value if the tax rate is 35 percent?

The Golf Range is considering adding an additional driving range to its facility.The range would cost $76,000,would be depreciated on a straight-line basis over its seven-year life,and would have a zero salvage value.The anticipated income from the project is $34,000 a year with $14,400 of that amount being variable cost.The fixed cost would be $16,200.The firm believes that it will earn an additional $13,000 a year from its current operations should the driving range be added.The project will require $2,000 of net working capital,which is recoverable at the end of the project.What is the internal rate of return on this project at a tax rate of 34 percent?

Explain the concept of incremental cash flow analysis and its purpose.

A project has annual depreciation of $16,200,costs of $87,100,and sales of $123,000.The applicable tax rate is 40 percent.What is the operating cash flow according to the tax shield approach?

You are analyzing a project and have developed the following estimates: unit sales = 3,100,price per unit = $215,variable cost per unit = $115,fixed costs = $164,000.The depreciation is $59,000 a year and the tax rate is 35 percent.What effect would the sale of one more unit have on the operating cash flow?

The Tattle Teller has a printing press sitting idly in its back room.The press has no market value to another printer because the machine utilizes old technology.The firm could get $250 for the press as scrap metal.The press is six years old and originally cost $148,000.The current book value is $2,570.The president of the firm is considering a new project and feels he can use this press for that project.What value,if any,should be assigned to the press as an initial cost of the new project?

A proposed project will increase a firm's accounts payables.This increase is generally:

You are analyzing a project and have developed the following estimates.The depreciation is $19,800 a year and the tax rate is 34 percent.What is the best-case operating cash flow?

Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows?

An asset used in a three-year project falls in the five-year MACRS class for tax purposes.The asset has an acquisition cost of $5.4 million and will be sold for $1.2 million at the end of the project.If the tax rate is 35 percent,what is the aftertax salvage value of the asset? Table 9.7 Modified ACRS depreciation allowances

Kyle Electric has three positive net present value opportunities.Unfortunately,the firm has not been able to find financing for any of these projects.Which one of the following terms best describes the firm's situation?

You are analyzing a project and have developed the following estimates: unit sales = 2,600,price per unit = $56,variable cost per unit = $39,fixed costs = $24,700.The depreciation is $15,800 a year and the tax rate is 35 percent.What effect would a decrease of $1 in the variable cost per unit have on the operating cash flow?

Rocky Top,Inc.purchased some welding equipment six years ago at a cost of $579,000.Today,the company is selling this equipment for $110,000.The tax rate is 35 percent.What is the aftertax cash flow from this sale? The MACRS allowance percentages are as follows,commencing with year 1: 14) 29,24.49,17.49,12.49,8.93,8.92,8.93,and 4.46 percent.

The operating cash flows of a project:

Explain the difference between a sunk cost and an opportunity cost and give an example of each.

A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as which type of cost?

Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million.Last year,the government changed the emission requirements and this furnace cannot meet those standards.Thus,Weston can no longer use the furnace,nor has it been able to locate anyone willing to purchase the furnace.Given the current situation,the furnace is best described as which type of cost?

Lakeside Winery is considering expanding its winemaking operations.The expansion will require new equipment costing $649,000 that would be depreciated on a straight-line basis to a zero balance over the four-year life of the project.The estimated salvage value is $187,000.The project requires $38,000 initially for net working capital,all of which will be recouped at the end of the project.The projected operating cash flow is $198,500 a year.What is the net present value of this project if the relevant discount rate is 14 percent and the tax rate is 35 percent?