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Exam 10: Making Capital Investment Decisions

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Question 31

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Which one of the following will increase a bid price?

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

F) C) and E)
G) A) and E)

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Question 32

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You just purchased some equipment that is classified as 5-year property for MACRS.The equipment cost $147,000.What will the book value of this equipment be at the end of 4 years should you decide to resell the equipment at that point in time?

A) $8,467.20
B) $25,401.60
C) $42,336.00
D) $121,598.40
E) $138,532.80

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

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Question 33

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Marie's Fashions is considering a project that will require $28,000 in net working capital and $87,000 in fixed assets.The project is expected to produce annual sales of $75,000 with associated cash costs of $57,000.The project has a 5-year life.The company uses straight-line depreciation to a zero book value over the life of the project.The tax rate is 30 percent.What is the operating cash flow for this project?

The operating cash flow of a cost cutting project:

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

Net working capital:

The Card Shoppe needs to maintain 20 percent of its sales in net working capital.Currently,the shoppe is considering a 6-year project that will increase sales from its current level of $379,000 to $421,000 the first year and to $465,000 a year for the following 5 years of the project.What amount should be included in the project analysis for net working capital in year 6 of the project?

Which one of the following would make a project unacceptable?

The equivalent annual cost considers which of the following? I.required rate of return II.operating costs III.need for replacement IV.economic life

Kelly's Corner Bakery purchased a lot in Oil City 6 years ago at a cost of $302,000.Today,that lot has a market value of $340,000.At the time of the purchase,the company spent $15,000 to level the lot and another $20,000 to install storm drains.The company now wants to build a new facility on that site.The building cost is estimated at $1.51 million.What amount should be used as the initial cash flow for this project?

Cool Comfort currently sells 300 Class A spas,450 Class C spas,and 200 deluxe model spas each year.The firm is considering adding a mid-class spa and expects that if it does it can sell 375 of them.However,if the new spa is added,Class A sales are expected to decline to 225 units while the Class C sales are expected to decline to 200.The sales of the deluxe model will not be affected.Class A spas sell for an average of $12,000 each.Class C spas are priced at $6,000 and the deluxe model sells for $17,000 each.The new mid-range spa will sell for $8,000.What is the value of the erosion?

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

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

Heer Enterprises needs someone to supply it with 225,000 cartons of machine screws per year to support its manufacturing needs over the next 7 years,and you've decided to bid on the contract.It will cost you $1,230,000 to install the equipment necessary to start production; you'll depreciate this cost straight-line to zero over the project's life.You estimate that in 7 years,this equipment can be salvaged for $75,000.Your fixed production costs will be $360,000 per year,and your variable production costs should be $13.20 per carton.You also need an initial investment in net working capital of $112,500,all of which will be recovered when the project ends.Your tax rate is 32 percent and you require a 13 percent return on your investment.What bid price per carton should you submit?

A proposed expansion project is expected to increase sales of JL Ticker's Store by $41,000 and increase cash expenses by $21,000.The project will cost $28,000 and be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project.The store has a marginal tax rate of 30 percent.What is the operating cash flow of the project using the tax shield approach?

Eads Industrial Systems Company (EISC) is trying to decide between two different conveyor belt systems.System A costs $427,000,has a 6-year life,and requires $115,000 in pretax annual operating costs.System B costs $502,000,has an 8-year life,and requires $79,000 in pretax annual operating costs.Both systems are to be depreciated straight-line to zero over their lives and will have a zero salvage value.Whichever system is chosen,it will not be replaced when it wears out.The tax rate is 33 percent and the discount rate is 24 percent.Which system should the firm choose and why?

When using the equivalent annual cost as a basis for deciding which equipment should be purchased,the equipment under consideration must fit which two of the following criteria? I.differing productive lives II.differing manufacturers III.required replacement at end of economic life IV.differing initial cost

Precision Tool is analyzing two machines to determine which one it should purchase.The company requires a 15 percent rate of return and uses straight-line depreciation to a zero book value over the life of its equipment.Machine A has a cost of $892,000,annual operating costs of $28,200,and a 4-year life.Machine B costs $1,118,000,has annual operating costs of $19,500,and has a 5-year life.Whichever machine is purchased will be replaced at the end of its useful life.Precision Tool should purchase Machine _____ because it lowers the firm's annual cost by approximately _______ as compared to the other machine.

Can the initial cash flow at time zero for a project ever be a positive value? If yes,give an example.If no,explain why not.

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