Exam 8: Making Capital Investment Decisions

A new 5-year project will require $194,000 for fixed assets,$58,000 for inventory,and $42,000 for accounts receivable.Short-term debt is expected to increase by $46,000.The fixed assets will be depreciated straight-line to zero over the project's life and have an expected after-tax salvage value of $2,900.The net working capital returns to its original level at the end of the project.The tax rate is 34 percent,and the required return is 13 percent.What is the cash flow recovery from net working capital at the end of this project?

Bloomfield's has some idle equipment that is debt-free and also fully depreciated.If the company decides to use this equipment for a new project,what cost,if any,should be included for this equipment in the project's start-up costs?

The cash flows of a project include the

Net working capital

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)?

Farris Industrial purchased a machine 5 years ago at a cost of $229,380.The machine is being depreciated using the straight-line method over 8 years.The tax rate is 35 percent and the discount rate is 16 percent.If the machine is sold today for $74,500,what will be the after-tax salvage value?

Kurt's Kabinets is looking at a 4-year project that will require $76,000 in fixed assets and another $20,000 in net working capital.Annual sales are projected at $142,800 with costs of $79,600.The company uses straight-line depreciation to a zero book value over the life of the project.The tax rate is 35 percent.What is the annual operating cash flow for this project?

A project will increase sales by $92,800 and cash expenses by $53,200.The project will cost $89,000 and be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project.The tax rate is 35 percent.What is the operating cash flow of the project using the tax shield approach?

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

Toni's Tools is comparing machines to determine which one to purchase.The machines sell for differing prices,have differing operating costs,differing machine lives,and will be replaced when worn out.These machines should be compared using

The initial cost of a machine is $727,000 with annual operating costs of $39,600.Each machine has a life of 5 years before it is replaced.Ignore taxes.What is the equivalent annual cost of this machine if the required return is 16 percent?

Which one of these represents the difference between a nominal rate and a real rate as they relate to project analysis?

When compiling the relevant cash flows for a project,the after-tax value of any asset sold any time during the life of the project should be treated as a

Which one of the following is an example of an incremental cash flow for Project A?

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?

Erosion can be best explained as the

A company that uses the MACRS system of depreciation

The equivalent annual cost is a method used to primarily compare mutually exclusive machines

Global Enterprises has spent $134,000 on research developing a new type of shoe.For this shoe to now be manufactured,the firm will need to expand into an empty building that it currently owns.The firm was offered $229,000 last week for that building.An additional $342,000 will be required for new equipment and building improvements.Labor and material costs are estimated at $4.98 per pair of shoes.Interest expense on the loan needed to finance the production of this new shoe will be $17,800 a year.Which one of these correctly identifies the sunk costs?

All else equal,a project's operating cash flow will increase when the