Exam 9: Making Capital Investment Decisions

Valley Forge and Metal purchased a truck five years ago for local deliveries.Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of five years.

A project has projected values of: unit sales = 1,650, price per unit = $19, variable cost per unit = $7, fixed costs per year = $4,700.The depreciation is $1,100 a year and the tax rate is 34 percent.What effect would a decrease of $1 in the variable cost per unit have on the operating cash flow?

Nu Tek is comprised of four separate operating divisions.For this year, the firm has decided to allocate capital funds using a soft rationing approach.Which one of the following applies to this situation?

The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns.This lot was purchased four years ago at a cost of $299,000, which the firm paid in cash.To date, the firm has spent another $38,000 on land improvements, all of which was also paid in cash.Today, the lot has a market value of $329,000.What value should be included in the analysis of the expansion project for the cost of the land?

The analysis of a new project should exclude:

Outdoors Essentials sells specialty equipment for mountain climbers.Its sales for last year included $255,000 of tents and $ 550,000 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 $300,000 of tents, $600,000 of climbing gear, and $110,000 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?

Assume an all-equity firm has positive net earnings.The operating cash flow of this firm:

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

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

The Outpost, a sole proprietorship currently sells short leather jackets for $369 each.The firm is considering selling long coats also.The long coats would sell for $719 each and the company expects to sell 820 a year.If the company decides to carry the long coat, management feels that the annual sales of the short jacket will decline from 1,120 to 1,040 units.Variable costs on the jacket are $228 and $435 on the long coat.The fixed costs for this project are $23,100, depreciation is $10,400 a year, and the tax rate is 34 percent.What is the projected operating cash flow for this project?

A pro forma financial statement is a financial statement that:

Woodland Lake Manufacturing has a new project that requires $652,000 of equipment.What is the depreciation in Year 5 of this project if the equipment is classified as seven-year property for MACRS purposes? 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.

An all-equity firm has net income of $112,780, depreciation of $8,750, and taxes of $29,980.What is the firm's operating cash flow?

Floral Shoppes has a new project in mind that will increase accounts receivable by $19,000, decrease accounts payable by $4,000, increase fixed assets by $27,000, and decrease inventory by $2,000.What is the amount the firm should use as the initial cash flow attributable to net working capital when it analyzes this project?

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 a(n):

Forecasting risk is best defined as:

The Corner Shop is considering a new four-year expansion project that requires an initial fixed asset investment of $210,000.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 $48,000 in annual sales, with costs of $31,000.If the tax rate is 34 percent, what is the OCF for this project?

Scenario analysis asks questions such as:

Classic Cars is considering a project that requires $311,250 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.

Three years ago, Stock Tek purchased some five-year MACRS property for $82,600.Today, it is selling this property for $31,500.How much tax will the company owe on this sale if the tax rate is 34 percent? 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.