Exam 8: Making Capital Investment Decisions

A project requires $1.08 million of new equipment that will be depreciated straight-line to zero over the project's 4-year life.The equipment is expected to be sold at the end of the project for 33 percent of its original cost.Net working capital equal to 12 percent of sales is required and will be recouped at the end of the project.Annual sales are projected at $487,500 with annual costs of $302,400.What is the recovery amount attributable to net working capital at the end of the project?

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?

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

Margarite's Enterprises is considering a new 5-year project that will require $612,000 for new fixed assets,$160,000 for inventory,and $35,000 for accounts receivable.Short-term debt is expected to increase by $110,000.The fixed assets will be depreciated straight-line to zero over the life of the project.The project is expected to generate annual sales of $694,000 with costs of $428,000.The tax rate is 35 percent,and the required rate of return is 15 percent.What is the amount of the earnings before interest and taxes (EBIT)for the first year of this project?

The pretax salvage value of an asset is equal to the

When determining a minimum bid price,you should assume the

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?

You have the opportunity to bid on a project that involves manufacturing 110,000 units per year for 4 years.The project will require $698,000 in fixed assets that would be depreciated straight-line to zero over the project's life.These assets have an expected pretax salvage value of $149,000 at the end of the project.The project would require $56,000 of net working capital,all of which is recoverable,along with $312,000 in annual expenses.What is the minimum price per unit you should bid on this project if you require a rate of return of 18 percent and have a tax rate of 34 percent?

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?

Riverton Sails is considering expanding its sail production operations to include awnings.The expansion would use land currently valued at $898,000 that was purchased for $779,000 cash.The expansion would require modifications costing $18,400 to some unused equipment along with the purchase of $314,800 of new equipment.The unused equipment is debt-free,fully depreciated,and has a market value of $27,900.What is the Time 0 cash flow for this expansion project?

Which one of the following will decrease a firm's net working capital?

Walks Softly sells customized shoes.Currently,it sells 14,800 pairs of shoes annually at an average price of $79 a pair.The company is considering adding a lower-priced line of shoes that will sell for $59 a pair.The company estimates it can sell 4,800 pairs of the lower-priced shoes but will sell 1,900 less pairs of the higher-priced shoes by doing so.What is the amount of the sales that should be used when evaluating the addition of the lower-priced shoes?

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

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?

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

Julian's has spent $47,200 to design a new airline carryon bag.It spent another $56,500 testing various materials for their durability.An additional $75,000 was spent on test marketing to determine both the market demand and color preference.Since the test marketing proved successful,the firm is now compiling data to evaluate the addition of this bag to its production runs.The estimated production start up costs are $932,300 with annual costs thereafter of $57,000.The discount rate is 11 percent and the estimated life of the project is 5 years.What value should be used for the Time 0 cash flow?

A new machine,with a 4-year life,has an initial cost of $1,200 and annual costs of $380.The equivalent annual cost of this machine is best described as the

The cash flows of a new project that come at the expense of a firm's existing projects are called

A project will produce operating cash flows of $39,000 a year for 4 years.During the life of the project,inventory will be lowered by $9,000,accounts receivable will increase by $14,000,and accounts payable will increase by $11,000.The project requires $118,000 of new equipment that will be depreciated straight-line to a zero book value over 4 years.At the end of the project,net working capital will return to its normal level and the equipment will be sold for $21,000,aftertaxes.What is the net present value given a required return of 13 percent?

Changes in net working capital