Exam 9: Making Capital Investment Decisions

Sensitivity analysis:

Outdoor Sports is considering adding a miniature golf course to its facility.The course would cost $138,000, would be depreciated on a straight-line basis over its five-year life, and would have a zero salvage value.The estimated income from the golfing fees would be $72,000 a year with $24,000 of that amount being variable cost.The fixed cost would be $11,600.In addition, the firm anticipates an additional $14,000 in revenue from its existing facilities if the golf course is added.The project will require $3,000 of net working capital, which is recoverable at the end of the project.What is the net present value of this project at a discount rate of 12 percent and a tax rate of 34 percent?

An all-equity firm has net income of $78,500, depreciation of $6,250, and taxes of $20,867.What is the firm's operating cash flow?

Dismal Outlook is unable to obtain financing for any new projects under any circumstances.This company is faced with:

Shannon's Irish Cookware is implementing a project that will initially increase accounts payable by $5,000, increase inventory by $3,200, and decrease accounts receivable by $1,800.All net working capital will be recouped when the project terminates.What is the cash flow related to the net working capital for the last year of the project?

Consider a three-year project with the following information: initial fixed asset investment = $347,600; straight-line depreciation to zero over the three-year life; zero salvage value; price per unit = $49.99; variable costs per unit = $30.82; fixed costs per year = $187,000; quantity sold per year = 65,500 units; tax rate = 35 percent.How sensitive is OCF to an increase of one unit in the quantity sold?

A five-year project is expected to generate annual revenues of $159,000, variable costs of $72,500, and fixed costs of $15,000.The annual depreciation is $19,500 and the tax rate is 21 percent.What is the annual operating cash flow?

Lake City Plastics currently produces plastic plates and silverware.The company is considering expanding its product offerings to include plastic serving trays.All of the following are relevant costs to this project with the exception of:

Boyertown Industrial Tools is considering a three-year project to improve its production efficiency.Buying a new machine press for $578,000 is estimated to result in $184,000 in annual pretax cost savings.The press falls in the MACRS five-year class, which has percentage rates starting with Year 1, of 20, 32, 19.20,11.52, 11.52, and 5.76.The salvage value at the end of the project of $162,000.The press also requires an initial investment in spare parts inventory of $19,000, along with an additional $1,500 in inventory for each succeeding year of the project.The inventory will all be recovered when the project ends.If the tax rate is 35 percent and the discount rate is 12 percent, should the company buy and install the machine press? Why or why not?

You are analyzing a project and have developed the following estimates.The depreciation is $47,900 a year and the tax rate is 35 percent.What is the worst-case operating cash flow?

Shay Hand Outfitters has a proposed project that will generate sales of 3,100 units annually at a selling price of $37.00 each.The fixed costs are $25,000 and the variable costs per unit are $11.95.The project requires $72,000 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the four-year life of the project.The salvage value of the fixed assets is $9,700 and the tax rate is 21 percent.What is the operating cash flow for Year 4?

You are analyzing a project and have developed the following estimates: unit sales = 2,600, price per unit = $109, variable cost per unit = $67, fixed costs per year = $38,000.The depreciation is $12,000 a year and the tax rate is 34 percent.What effect would the sale of one more unit have on the operating cash flow?

Burke's Corner currently sells blue jeans and T-shirts.Management is considering adding fleece tops to its inventory.The tops would sell for $49 each with expected sales of 3,200 tops annually.By adding the fleece tops, management feels the company will sell an additional 150 pairs of jeans at $79 a pair and 220 fewer T-shirts at $18 each.The variable cost per unit is $36 on the jeans, $7 on the T-shirts, and $21 on the fleece tops.The project's depreciation expense is $23,000 a year and the fixed costs are $21,000 annually.The tax rate is 34 percent.What is the project's operating cash flow?

Thrill Rides is considering adding a new roller coaster to its amusement park.The addition is expected to increase its overall ticket sales.In particular, the company expects to sell more tickets for its current roller coaster and experience extremely high demand for its new coaster.Sales for its boat ride are expected to decline but food and beverage sales are expected to increase significantly.All of the following are side effects associated with the new roller coaster with the exception of the:

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

Which of the following create cash inflows from net working capital?

British Metals is reviewing its current accounts to determine how a proposed project might affect the account balances.The firm estimates the project will initially require $81,000 in additional current assets and $57,000 in additional current liabilities.The firm also estimates the project will require an additional $8,000 a year in current assets in each of the first three 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?

When a firm faces hard rationing,:

Flo is considering three mutually exclusive options for the additional space she plans to add to her specialty women's store.The cost of the expansion will be $148,000.She can use this additional space to add children's clothing, an exclusive gifts department, or a home décor section.She estimates the present value of the cash inflows from these projects are $121,000 for children's clothing, $178,000 for exclusive gifts, and $145,000 for decorator items.Which option(s), if any, should she accept?

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 fits the situation facing the firm?