Exam 9: Making Capital Investment Decisions

Herschbach Ad Pros is a specialty retailer offering T-shirts, sweatshirts, and caps.Its most recent annual sales consisted of $15,000 of T-shirts, $11,000 of sweatshirts, and $1,800 of caps.The company is adding polo shirts to the lineup and projects that this addition will result in sales next year of $14,000 of T-shirts, $9,800 of sweatshirts, $15,000 of Polo shirts, and $2,500 of caps.What sales amount should be used when evaluating the Polo shirt project?

Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million.Last year, the government changed the emission requirements and this furnace cannot meet those standards.Thus, the company can no longer use the furnace, nor has it been able to locate anyone willing to purchase the furnace.Given the current situation, the furnace is best described as which type of cost?

A project costs $2.43 million and has no salvage value.Depreciation is straight-line to zero over the five-year life of the project.Sales are projected at 64,000 units per year, price per unit is $73.29, variable cost per unit is $42.93, and fixed costs are $623,000 per year.The tax rate is 35 percent, and the required rate of return is 11percent.What is the sensitivity of NPV to a 100-unit increase in the sales figure?

Turner Industries started a new project three months ago.Sales arising from this project are significantly less than anticipated.Given this, which one of the following is management most apt to implement?

Kate is analyzing a proposed project to determine how changes in the sales quantity would affect the project's net present value.What type of analysis is being conducted?

Great Western Southern purchased $525,000 of equipment four years ago.The equipment is seven-year MACRS property.The firm is selling this equipment today for $150,000.What is the aftertax cash flow from this sale if the tax rate is 27 percent? 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.

Six years ago, China Exporters paid cash for a new packaging machine that cost $347,000.Three years ago, the firm spent $14,300 on repairs and modifications to the machine.The machine is now fully depreciated and has just sat idly in a back corner of the shop for the past seven months.The estimated value of the machine today is $157,500.The firm is considering using this machine in a new project.If it does so, what value should be assigned to this machine and included in the initial costs of the new project?

What is the Year 2 depreciation on equipment costing $148,315 if it is classified as five-year property for MACRS purposes? 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.

Lakeside Winery is considering expanding its winemaking operations.The expansion will require new equipment costing $708,000 that would be depreciated on a straight-line basis to a zero balance over the four-year life of the project.The equipment can be sold for $220,000 after the four years.The project requires $46,000 initially for net working capital, all of which will be recouped at the end of the project.The projected operating cash flow is $211,500 a year.What is the net present value of this project if the relevant discount rate is 13 percent and the tax rate is 34 percent?

The Market Farms purchased a parcel of land six years ago for $200,000.At that time, the firm invested $75,000 grading the site so that it would be usable.Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $40,000 a year.The Green Tomato is now considering building a hotel on the site as the rental lease is expiring.The current value of the land is $225,000.The firm has no loans or mortgages secured by the property.What value should be included in the initial cost of the hotel project for the use of this land?

A debt-free firm has net income of $142,658, taxes of $37,921.75, and depreciation of $27,500.What is the operating cash flow?

The opportunities that a manager has to modify a project once the project has started are called:

The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:

A five-year project is expected to generate annual revenues of $210,000, variable costs of $90,000, and fixed costs of $22,000.The annual depreciation is $24,000 and the tax rate is 21 percent.What is the annual operating cash flow?

A new project is expected to generate an operating cash flow of $85,560 and will initially free up $10,475 in net working capital.Purchases of fixed assets costing $85,000 will be required to start up the project.What is the total cash flow for this project at Time zero?

Sherpa Outfitters sells specialty equipment for mountain climbers.Its sales for last year included $488,500 of tents and $ 800,000 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 $537,350 of tents, $880,000 of climbing gear, and $150,000 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?