Exam 6: Making Capital Investment Decisions

Brennan's Boats is considering a project which will require additional inventory of $128,000 and will also increase accounts payable by $47,000 as suppliers are willing to finance part of these purchases. Accounts receivable are currently $85,000 and are expected to increase by 10% if this project is accepted. What is the initial project cash flow needed for net working capital?

Bluedo's has sales of $435,000,depreciation of $35,000,and net working capital of $56,000. The firm has a tax rate of 34% and a profit margin of 8%. The firm has no interest expense. What is the amount of the operating cash flow?

A project is expected to create operating cash flows of $22,500 a year for three years. The initial cost of the fixed assets is $50,000. These assets will be worthless at the end of the project. An additional $3,000 of net working capital will be required throughout the life of the project. What is the project's net present value if the required rate of return is 10%?

A project will increase sales by $60,000 and cash expenses by $51,000. The project will cost $40,000 and will be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project. The company has a marginal tax rate of 35%. What is the operating cash flow of the project using the tax shield approach?

A cost that has already been paid,or the liability to pay has already been incurred,is a(n):

You own some equipment which you purchased three years ago at a cost of $135,000. The equipment is 5-year property for MACRS. You are considering selling the equipment today for $82,500. Which one of the following statements is correct if your tax rate is 34%?

Tool Makers,Inc. uses tool and die machines to produce equipment for other firms. The initial cost of one customized tool and die machine is $850,000. This machine costs $10,000 a year to operate. Each machine has a life of 3 years before it is replaced. What is the equivalent annual cost of this machine if the required return is 9%? (Round your answer to whole dollars.)

Samoa's Tools has sales of $760,000 and a profit margin of 8%. The annual depreciation expense is $50,000. What is the amount of the operating cash flow if the company has no long-term debt?

A company which uses the MACRS system of depreciation:

Lottie's Boutique needs to maintain 20% of its sales in net working capital. Lottie's is considering a 3-year project which will increase sales from their current level of $110,000 to $130,000 the first year and $145,000 a year for the following two years. What amount should be included in the project analysis for the last year of the project in regards to the net working capital?

Diswo Inc. needs to maintain 15% of its sales in net working capital. Lottie's is considering a 3-year project which will increase sales from their current level of $110,000 to $135,000 the first year and $145,000 a year for the following two years. What amount should be included in the project analysis for the last year of the project in regards to the net working capital?

Humphry Incorporated currently produces boat sails and is considering expanding its operations to include awnings for homes and travel trailers. The company owns land beside its current manufacturing facility that could be used for the expansion. The company bought this land ten years ago at a cost of $250,000. Today,the land is valued at $405,000. The grading and excavation work necessary to build on the land will cost $20,000. The company currently owns some unused equipment valued at $60,000. This equipment could be used for producing awnings if $7,000 is spent for equipment modifications. Other equipment costing $780,000 will also be required. What is the amount of the initial cash flow for this expansion project?

Which of the following should be included in the analysis of a project? I. sunk costs II. opportunity costs III. erosion costs IV. incremental costs

Youngers Inc. paid $95,000,in cash,for a piece of equipment three years ago. Last year,the company spent $15,000 to update the equipment with the latest technology. The company no longer uses this equipment in its current operations and has received an offer of $80,000 from a firm who would like to purchase it. Youngers is debating whether to sell the equipment or to expand its operations such that the equipment can be used. When evaluating the expansion option,what value,if any,should Youngers assign to this equipment as an initial cost of the project?

Kurt's Kabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital. The project is expected to produce sales of $110,000 with associated costs of $70,000. The project has a 4-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 35%. What is the operating cash flow for this project?

The book value of an asset is primarily used to compute the:

Sun Lee's Furniture just purchased some fixed assets classified as 5-year property for MACRS. The assets cost $24,000. What is the amount of the depreciation expense for the third year?

Schroeder Electronics is considering a project which will require the purchase of $5 million in new equipment. The equipment will be depreciated straight-line to a zero book value over the 5-year life of the project. Schroeder's expects to sell the equipment at the end of the project for 10% of its original cost. Annual sales from this project are estimated at $2.3 million. Net working capital equal to 10% of sales will be required to support the project. All of the net working capital will be recouped at the end of the project. Schroeder desires a 12% rate of return on this project. The tax rate is 40%. What is the recovery amount attributable to net working capital at the end of the project?

Camille's Café is considering a project which will produce sales of $17,500 and increase cash expenses by $12,000. If the project is implemented,taxes will increase from $23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. What is the amount of the operating cash flow using the top-down approach?

Jamie's Motor Home Sales currently sells 1,000 Class A motor homes,2,500 Class C motor homes,and 4,000 pop-up trailers each year. Jamie is considering adding a mid-range camper and expects that if she does so she can sell 1,500 of them. However,if the new camper is added,Jamie expects that her Class A sales will decline to 950 units while the Class C campers decline to 2,200. The sales of pop-ups will not be affected. Class A motor homes sell for an average of $125,000 each. Class C homes are priced at $39,500 and the pop-ups sell for $5,000 each. The new mid-range camper will sell for $47,900. What is the erosion cost?