Exam 6: Making Capital Investment Decisions

RP&A,Inc. purchased some fixed assets four years ago at a cost of $19,800. It no longer needs these assets so is going to sell them today at a price of $3,500. The assets are classified as 5-year property for MACRS. What is the current book value of these assets?

A pro forma financial statement is one that:

A project will produce an operating cash flow of $7,300 a year for three years. The initial cash investment in the project will be $11,600. The net after-tax salvage value is estimated at $3,500 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 11%?

Which of the following are correct methods for 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) × (Taxes + Depreciation) × (1 - Taxes)

Explain the half year convention used in MACRS depreciation.

Heremy's Flooring is expanding its product offerings to reach a wider range of customers. The expansion project includes increasing the floor inventory by $175,000 and increasing its debt to suppliers by 50% of that amount. The company will also spend $270,000 for a building contractor to expand the size of the showroom. As part of the expansion plan,the company will be offering credit to its customers and thus expects accounts receivable to rise by $25,000. For the project analysis,what amount should be used as the initial cash flow for net working capital?

All of the following are anticipated effects of a proposed project. Which of these should be included in the initial project cash flow related to net working capital? I. An inventory decrease of $5,000 II. An increase in accounts receivable of $1,500 III. An increase in fixed assets of $7,600 IV. A decrease in accounts payable of $2,100

An increase in which one of the following will increase the operating cash flow?

Le Place has sales of $439,000,depreciation of $32,000,and net working capital of $56,000. The firm has a tax rate of 34% and a profit margin of 6%. The firm has no interest expense. What is the amount of the operating cash flow?

Thornley Machines is considering a 3-year project with an initial cost of $618,000. The project will not directly produce any sales but will reduce operating costs by $265,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $60,000. The tax rate is 34%. The project will require $23,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley's requires a 9% rate of return? Why or why not?

Net working capital:

The pro forma income statement for a cost reduction project:

The annual annuity stream of payments with the same present value as a project's costs is called the project's _____ cost.

Interest rates or rates of return on investments that have been adjusted for the effects of inflation are called _____ rates.

Louie's Leisure Products is considering a project which will require the purchase of $1.4 million in new equipment. The equipment will be depreciated straight-line to a zero book value over the 7-year life of the project. Louie's expects to sell the equipment at the end of the project for 20% of its original cost. Annual sales from this project are estimated at $1.2 million. Net working capital equal to 20% of sales will be required to support the project. All of the net working capital will be recouped at the end of the project. The firm desires a minimal 14% rate of return on this project. The tax rate is 34%. What is the value of the depreciation tax shield in year 2 of the project?

Will Do,Inc. just purchased some equipment at a cost of $650,000. What is the proper methodology for computing the depreciation expense for year 3 if the equipment is classified as 5-year property for MACRS?

Margarite's Enterprises is considering a new project. The project will require $325,000 for new fixed assets,$160,000 for additional inventory and $35,000 for additional accounts receivable. Short-term debt is expected to increase by $100,000 and long-term debt is expected to increase by $300,000. The project has a 5-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project,the fixed assets can be sold for 25% of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $554,000 and costs of $430,000. The tax rate is 35% and the required rate of return is 15%. What is the amount of the earnings before interest and taxes for the first year of this project?

The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called the:

The changes in a firm's future cash flows that are a direct consequence of accepting a project are called _____ cash flows.

Erosion can be explained as the: