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Exam 9: Making Capital Investment Decisions

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Question 41

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The Outpost currently sells short leather jackets for $349 each.The firm is considering selling long coats also.The coats would sell for $689 each and the company expects to sell 900 a year.If the firm decides to carry the long coat,management feels that the sales of the short jacket will decline from 1,420 to 1,265 units.Variable costs on the jacket are $210 and $445 on the long coat.The fixed costs for this project are $42,000,depreciation is $11,000 a year,and the tax rate is 33 percent.What is the projected operating cash flow for this project?

A) $108,187
B) $111,264
C) $112,212
D) $119,672
E) $120,418

F) A) and B)
G) A) and E)

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Question 42

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Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as which one of the following?

A) Eroded cash flows
B) Deviated projections
C) Incremental cash flows
D) Directly impacted flows
E) Assumed flows

F) B) and C)
G) A) and B)

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Question 43

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Mind Blowers,Inc.has a new project in mind that will increase accounts receivable by $28,000,decrease accounts payable by $6,000,increase fixed assets by $36,000,and decrease inventory by $11,000.What is the amount the firm should use as the initial cash flow attributable to net working capital when it analyzes this project?

Miller Lite,Inc.is considering a new four-year expansion project that requires an initial fixed asset investment of $3.6 million.The fixed asset will be depreciated straight-line to zero over its four-year life,after which time it will be worthless.The project is estimated to generate $3.9 million in annual sales,with costs of $2.6 million.If the tax rate is 35 percent,what is the OCF for this project?

Jim's Hardware is adding a new product line to its sales lineup.Initially,the firm will stock $41,000 of the new inventory,which will be purchased on 30 days' credit from a supplier.The firm will also invest $6,000 in accounts receivable and $4,000 in equipment.What amount should be included in the initial project costs for net working capital?

Hi-As-A-Kite is considering making and selling custom kites in two sizes.The small kites would be priced at $10 and the large kites would be $24.The variable cost per unit is $5 and $11,respectively.Jill,the owner,feels that she can sell 2,600 of the small kites and 1,700 of the large kites each year.The fixed costs would be only $2,100 a year and the tax rate is 34 percent.What is the annual operating cash flow if the annual depreciation expense is $900?

Identify three managerial options that relate to project analysis and explain how those options affect the net present value of a project.

Green Woods sells specialty equipment for mountain climbers.Its sales for last year included $238,000 of tents and $411,000 of climbing gear.For next year,management has decided to sell specialty sleeping bags also.As a result of this change,sales projections for next year are $264,000 of tents,$426,000 of climbing gear,and $51,000 of sleeping bags.How much of next year's sales are derived from the side effects of adding the new product to its sales offerings?

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

Marcos Enterprises has three separate divisions.The firm allocates each division $1.5 million per year for capital purchases.Which one of the following terms applies to this allocation process?

Your local athletic center is planning a $1.23 million expansion to its current facility.This cost will be depreciated on a straight-line basis over a 20-year period.The expanded area is expected to generate $524,000 in additional annual sales.Variable costs are 48 percent of sales,the annual fixed costs are $79,400,and the tax rate is 35 percent.What is the operating cash flow for the first year of this project?

An all-equity firm has net income of $28,300,depreciation of $7,500,and taxes of $2,050.What is the firm's operating cash flow?

Classic Cars is considering a project that requires $148,000 of fixed assets that are classified as five-year property for MACRS.What is the book value of these assets at the end of year 3? The MACRS allowance percentages are as follows,commencing with year 1: 20) 00,32.00,19.20,11.52,11.52,and 5.76 percent.

British Motor Works is reviewing its current accounts to determine how a proposed project might affect the account balances.The firm estimates the project will initially require $67,000 in additional current assets and $32,000 in additional current liabilities.The firm also estimates the project will require an additional $7,000 a year in current assets for each one of the four years of the project.How much net working capital will the firm recoup at the end of the project assuming that all net working capital can be recaptured?

Consider a three-year project with the following information: initial fixed asset investment = $770,000; straight-line depreciation to zero over the three-year life; zero salvage value; price = $34.99; variable costs = $23.16; fixed costs = $245,000; quantity sold = 94,500 units; tax rate = 40 percent.How sensitive is OCF to an increase of one unit in the quantity sold?

The tax shield approach to computing the operating cash flow,given a tax-paying firm:

Which of the following should be included when compiling pro forma statements for a proposed investment? I.Forecasted sales II.Start-up costs III.Aftertax salvage value of any assets sold IV.Anticipated changes in net working capital

Firm A uses straight-line depreciation.Firm B uses MACRS depreciation.Both firms bought $60,000 worth of equipment last year.Both firms are in the 35 percent tax bracket.The operating cash flows for each firm are identical except for the depreciation effects.Given this,you know the:

The net working capital invested in a project is generally:

Which one of the following refers to a method of increasing the rate at which an asset is depreciated?