Exam 9: Capital Budgeting and Cash Flow Analysis

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

Of the following, an example of a component of a firm's cost of capital is:

The determination of net cash flows (NCF) should never include

The effect of a one dollar increase in depreciation expenses is to ____ the typical firm's net cash flows by ____ one dollar.

Depreciation

Depreciation is based on the asset cost plus all of the following except

A Lotta Bread Corp. is replacing an entire baking line that was purchased for $420,000 and currently has a book value of $60,000. The new, more efficient line, will cost $940,000 installed and can be depreciated as a 7-year MACRS asset. With the increased efficiency, Lotta expects annual revenues to increase by $425,000, and operating expenses to increase by $170,000. The older machine, which was being depreciated at the straight-line rate of $20,000/year, will be sold for $30,000. What are the net cash flows for year 2? Assume the firm's marginal tax rate is 40% and that the year 2 depreciation rate is 24.49%.

All of the following are reasons that capital investment analysis must be performed correctly EXCEPT:

LISP Inc. is planning to purchase a new mixer for $50,000 that will qualify as MACRS 3-year property (first year depreciation rate = 33.33%). The new mixer should increase revenues by $20,000 per year with no increase in operating cost. If LISP's marginal tax rate is 40 percent, what is the net cash flow in the first year?

There is a capital gain on the sale of an asset for ____.

The ____ the amount of depreciation charged in a period, the ____ will be the firm's taxable income.

Allen Company is considering an investment project that is expected to generate $100,000 in annual earnings before taxes. Annual depreciation will be $50,000. Allen's marginal tax rate is 40%. Determine the project's annual net cash flows.

When a firm sells an asset for ____, it realizes a capital gain and must pay income taxes on it.

Anderson Clayton will purchase a new pellet mill that replace an older, less efficient, mill. The new mill costs $360,000 and shipping costs are $10,000. Improving the steam lines to the new mill will cost an additional $22,000. The old mill has a book value of $25,000 and can be sold for $12,000. The installation of the new mill will cause inventories to increase by $8,000, accounts receivable will go up $20,000, and accounts payable will increase $10,000. If Anderson Clayton has a marginal tax rate of 40%, what is the NINV for the new mill?

List the steps that a firm uses in the capital budgeting process:

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.

The net investment calculation for an asset replacement decision normally includes any ____.

Capital expenditure projects may be classified in all the following types except:

In Step Video is considering expanding its video rental library to 8,000 tapes. The purchase price of the additional videos will be $80,000 and the shipping cost is another $4,000. To house the tapes, the owner will have to spend another $10,000 for display shelves, increase net working capital by $5,000, and interest expenses will add another $8,000 to the operating cost. What is the net investment to In Step Video for this project?

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.