Exam 9: Making Capital Investment Decisions

A project has an initial requirement of $ 260,000 for fixed assets and $16,500 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 $50,000.All of the net working capital will be recouped at the end of the project.The annual operating cash flow is $82,500 and the discount rate is 12 percent.What is the project's net present value if the tax rate is 21 percent?

Firm A uses straight-line depreciation.Firm B uses MACRS depreciation.Both firms bought $75,000 worth of equipment last year that has a tax life of 5 years.The 5-year MACRS percentage rates, starting with Year 1, are: 20, 32, 19.2, 11.52, 11.52, and 5.76.Both firms have a marginal tax rate of 34 percent and identical operating cash flows except for the depreciation effects.Given this, you know the:

Consider an asset that costs $311,000 and is depreciated straight-line to zero over its six-year tax life.The asset is to be used in a four-year project; at the end of the project, the asset can be sold for $58,000.If the relevant tax rate is 34 percent, what is the aftertax cash flow from the sale of this asset?

Left Eye Promotions is a specialty retailer offering T-shirts, sweatshirts, and caps.Its most recent annual sales consisted of $27,000 of T-shirts, $21,000 of sweatshirts, and $3,500 of caps.The company is adding polo shirts to the lineup and projects that this addition will result in sales next year of $25,000 of T-shirts, $17,000 of sweatshirts, $14,000 of Polo shirts, and $3,000 of caps.What sales amount should be used when evaluating the Polo shirt project?

A project will reduce costs by $62,750 but increase depreciation by $14,812.What is the operating cash flow of this project based on the tax shield approach if the tax rate is 34 percent?

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

The Shoe Box is considering adding a new line of winter footwear to its product lineup.When analyzing the viability of this addition, the company should include all of the following in its analysis with the exception of:

A cost-cutting project will decrease costs by $37,000 a year.The annual depreciation on the project's fixed assets will be $2,750 and the tax rate is 21 percent.What is the amount of the change in the firm's operating cash flow resulting from this project?

A debt-free firm has net income of $210,000, taxes of $55,822.78, and depreciation of $42,000.What is the operating cash flow?

Ed owns a store that caters primarily to men.Each of the answer options represents an item related to a planned store expansion.Each of these items should be included in the expansion analysis with the exception of the cost:

Lee's currently sells 13,800 motor homes per year at $87,900 each, and 1,100 luxury motor coaches per year at $139,900 each.The company wants to introduce a low-range camper to fill out its product line; it hopes to sell 7,200 of these campers per year at $17,500 each.An independent consultant has determined that if the company introduces the new campers, it should boost the sales of its existing motor homes by 1,100 units per year, and reduce the sales of its luxury motor coaches by 610 units per year.What amount should be used as the annual sales figure when evaluating this project?

You are analyzing a project and have developed the following estimates: unit sales = 2,150, price per unit = $84, variable cost per unit = $57, fixed costs per year = $13,900.The depreciation is $8,300 a year and the tax rate is 35 percent.What effect would an increase of $1 in the selling price have on the operating cash flow?

A project has an initial requirement of $311,700 for fixed assets and $47,600 for net working capital.The fixed assets will be depreciated to a zero book value over the four-year life of the project and will be worthless at the end of the project.All of the net working capital will be recouped after four years.The expected annual operating cash flow is $108,315.What is the project's internal rate of return if the tax rate is 34 percent?

Newton Industries is considering a project and has developed the following estimates: unit sales = 4,800, price per unit = $67, variable cost per unit = $42, annual fixed costs = $11,900.The depreciation is $14,700 a year and the tax rate is 34 percent.What effect would an increase of $1 in the selling price have on the operating cash flow?

A project has annual depreciation of $15,028, costs of $82,592, and sales of $138,765.The applicable tax rate is 34 percent.What is the operating cash flow according to the tax shield approach?

The pro forma income statements for a proposed investment should include all of the following except:

Which one of the following will increase the operating cash flow as computed using the tax shield approach?

You are analyzing a project and have developed the following estimates.The depreciation is $5,800 a year and the tax rate is 35 percent.What is the best-case operating cash flow?

A project has sales of $600,000, costs of $366,500, depreciation of $34,500, interest expense of $5,500, and a tax rate of 21 percent.What is the value of the depreciation tax shield?

Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project?