Exam 8: Making Capital Investment Decisions

The Java House is considering a project that will produce sales of $59,280 and increase cash expenses by $26,040.If the project is implemented,taxes will increase by $4,600.The additional depreciation expense will be $10,100.An initial cash outlay of $7,300 is required for net working capital.What is the amount of the operating cash flow using the top-down approach?

Erosion can be best explained as the

Which one of these statements is correct?

A project will increase annual sales by $183,000 and cash expenses by $99,000 for 4 years.The project has an initial cost of $115,000 for equipment that will be depreciated using MACRS depreciation.The applicable MACRS table values are 0.1429,0.2449,0.1749,and 0.1249 for Years 1 to 4,respectively.The company has a marginal tax rate of 35 percent.What is the depreciation tax shield for Year 3?

Precision Mfg.is trying to decide which one of two machines to purchase.Machine A costs $854,000,has a life of 8 years,and requires $147,000 in pretax annual operating costs.Machine B costs $798,000,has a life of 11 years,and requires $104,000 in pretax annual operating costs.Either machine will be depreciated using the straight-line method to zero over its life.Neither machine will have any salvage value.Whichever machine is selected,it will never be replaced.The discount rate is 13 percent and the tax rate is 35 percent.Which machine should be purchased and why?

Capital budgeting analysis is based on

Which of the following are correct methods of computing the operating cash flow of a project assuming that the interest expense is equal to zero? I.EBIT + Depreciation − Taxes II)EBIT − Depreciation + Taxes III)Net Income − Depreciation IV)[(Sales − Costs)× (1 − Tax rate)] + [Depreciation × Tax rate]

Kay's Quilts is considering a project that will reduce inventory by $38,000,increase accounts payable by $55,000,and increase accounts receivables by 9 percent.Accounts receivable is currently $78,000.What is the cash flow at Time 0 for net working capital?

The bottom-up approach to computing the operating cash flow of a project applies only when

You spent $500 last week fixing the transmission in your car.Now,the brakes are acting up,and you are trying to decide whether to fix them or trade the car in for a newer model.In analyzing the brake situation,the $500 you spent fixing the transmission is a(n)________ cost.

The cash flows of a project include the

BLD,Inc.just purchased some fixed assets at a total cost of $94,318 that are classified as 3-year property for MACRS.The MACRS table values are 0.3333,0.4445,0.1481,and 0.0741 for Years 1 to 4,respectively.What is the amount of the depreciation expense for Year 3?

Assume you computed the NPV of a project using nominal values.Your partner computed the NPV of the identical project using real values,given a positive rate of inflation.When you compare your results,you should discover that

In project analysis,which one of these is a common assumption regarding net working capital?

Kustom Cars purchased a fixed asset 2 years ago for $47,000 and sold it today for $23,000.The assets are classified as 5-year property for MACRS.The MACRS table values are 0.2000,0.3200,0.1920,0.1152,0.1152,and 0.0576 for Years 1 to 6,respectively.What is the net cash flow from the sale if the tax rate is 34 percent?

Outdoor Gear is purchasing equipment costing $485,900 that will lower manufacturing costs by $132,000 a year.The equipment will be depreciated over 8 years using straight-line depreciation to a zero book value.After 8 years,the equipment will be worthless.The discount rate is 16 percent and the tax rate is 34 percent.What is the annual net income from this purchase?

Changes in net working capital

JADO Mfg.is trying to decide which one of two machines to purchase.Machine A costs $398,000,has a 5-year life and requires $113,000 in pretax annual operating costs.Machine B costs $510,000,has a 4-year life and requires $67,000 in pretax annual operating costs.Either machine will be depreciated using the straight-line method to zero over its life.Neither machine will have any salvage value.Whichever machine is selected,it will never be replaced.The discount rate is 12 percent and the tax rate is 34 percent.Which machine should be purchased and why?

When determining a minimum bid price,you should assume the

Elton International is considering the installation of a new computer system that will cut annual operating costs by $16,500 but not affect sales.The system will cost $68,000 and will be depreciated to zero over its 7-year life using the straight-line method.What is the amount of the earnings before interest and taxes (EBIT)?