Exam 9: Capital Budgeting and Cash Flow Analysis

What is the net investment required for a pitting machine that will cost $35,000 including installation? The machine replaces a machine that cost $5,000 when purchased five years ago.The old machine has been fully depreciated but has a market value of $6,000.Assume the marginal tax rate is 40 percent.

Parker Chemicals purchased a hexene extractor 10 years ago for $120,000.It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of zero.It can be sold today for $10,000.Parker is considering purchasing a new more efficient extractor that would cost $270,000 installed and would be depreciated as a 10-year MACRS asset.The company's marginal tax rate is 40%.Determine the NINV if the old extractor is sold and the new one is purchased.

What is the net investment for an extruder that costs $42,000, if shipping costs are $1,500 and installation is $4,800? Assume this efficient machine is replacing an older extruder with a book and market value of zero.The replacement investment will reduce operating costs by $6,600 a year.

Baker Company is considering an investment in a new metal lathe.If the new lathe is purchased, revenues will increase by $5,000 per year and cash operating costs will decline by $10,000 per year.The lathe will cost $60,000 and will be depreciated on a straight-line basis over 10 years to a zero estimated salvage value.Baker's marginal tax rate is 40%.Determine the annual net cash flows generated by the lathe.

Basin Manufacturing (40% marginal tax rate) is considering a plant expansion project.The equipment will cost $100,000 and will require an additional $10,000 for delivery and installation.The expansion also will require Basin to increase immediately its net working capital by $25,000.The expansion is expected to generate revenues of $150,000 per year.Calculate the project's net investment.

There are several reasons why managers might produce biased cash flow estimates when preparing capital expenditure project proposals. List some of them.

The value of resources used in an investment project should be measured in terms of their

Rupp Pumps is purchasing an extruder for $80,000.The extruder will require an expenditure of $12,000 for installation and $4,000 for training new operators.The new equipment will require an increase of $5,000 in inventory, $4,000 in accounts receivable, and $3,000 in accounts payable.What is the net investment for this project?

Moon Pie Company is considering automated baking equipment that costs $500,000 installed and would replace the present hand-made production method.The present equipment has a zero book and salvage value.The new equipment will not increase revenues but will reduce operating costs from a current level of $600,000 to $300,000 per year.The depreciation of the new equipment will be $73,000 per year.What are the annual incremental net cash flows? Assume a marginal tax rate of 40 percent.

A contractor has a team of plumbers and assigns those plumbers to a new construction site.The fact that the plumbers are unavailable for any other job makes the construction site project a/an:

Which of the following would not be classified as a capital expenditure for decision-making purposes?

List the reasons that the marginal cost of capital schedule increases as more funds are sought in the capital markets.

Felix Industries purchased a grinder 5 years ago for $15,000.It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of zero.It could be sold now for $6,000.The firm is considering selling it and purchasing a new one.The new grinder would cost $25,000 installed and would be depreciated on a straight-line basis over 10 years to a zero estimated salvage value.The company's marginal tax rate is 40%.Determine the net investment if the old grinder is sold and the new one purchased.

The management of Jasper Equipment Company is planning to purchase a new milling machine that will cost $160,000 installed.The old milling machine has been fully depreciated but can be sold for $15,000.The new machine will be depreciated on a straight line basis over its 10 year economic life to an estimated salvage value of $10,000.If this milling machine will save Jasper $20,000 a year in production expenses, what are the annual net cash flows associated with the purchase of this machine? Assume a marginal tax rate of 40 percent.

Why should sunk costs not be considered when evaluating a project?

The is a schedule of projects arranged in order according to their expected rates of return.

A term meaning that the firm has limited funds and must choose only those projects that will be profitable is:

Raider Productions has to decide whether to build its warehouse in Dallas or Houston.This decision falls into the class of:

Sale of an asset for less than book value creates an operating loss which effectively reduces the company's taxes by an amount equal to times .

When calculating the net cash flow in a project's expected final year,