Exam 8: Making Capital Investment Decisions

Assume a machine costs $129,000 and lasts 3 years before it is replaced.The operating cost is $7,200 a year.Ignore taxes.What is the equivalent annual cost if the required rate of return is 14 percent?

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]

Aaron's Paint paid $412,000,in cash,for a piece of equipment 3 years ago.Last year,the company spent $28,000 on equipment upgrades.The equipment is being depreciated using the straight-line method over seven years.The company no longer uses this equipment in its current operations and has received an offer of $164,000 from a firm that would like to purchase it.If the company should decide to use this equipment in an upcoming project,what cost,if any,should be assigned to the project for this equipment?

Sun Lee's Furniture just purchased $387,269 of fixed assets 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 amount of the depreciation expense for the third year?

Sunk costs include any cost that

Capital budgeting analysis is based on

The sale of an asset creates an aftertax cash flow in an amount equal to the

Data,Inc.purchased some fixed assets 4 years ago at a cost of $21,650 and is selling them today at a price of $4,500.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 current book value of these assets?

A project will produce an operating cash flow of $38,400 a year for 4 years.The initial cash outlay for equipment will be $57,300 and the net after-tax salvage value of $8,415 will be received at the end of the project.The project initially requires $1,200 of net working capital that will be fully recovered at project's end.What is the net present value of the project if the required rate of return is 16 percent?

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.

Computers used for business purposes are assigned to which MACRS property class?

Uptown Motors is analyzing a project with annual sales of $420,000,straight-line depreciation of $28,700 a year,and a net working capital requirement of $34,000.The firm has a tax rate of 34 percent and a profit margin of 6.1 percent.The firm has no long-term debt.What is the amount of the operating cash flow?

Ernie's Electrical is evaluating a project that will increase sales by $48,000 and costs by $16,000.The project will initially cost $89,000 for fixed assets that will be depreciated straight-line to a zero book value over the 6-year life of the project.The applicable tax rate is 34 percent.What is the project's annual operating cash flow?

Which one of these is a requirement when computing the net present value of a capital project?

Project analysis is focused on ________ costs.

Ripley Co.is considering a project that will produce sales of $36,700 and increase cash expenses by $14,600.If the project is implemented,the firm's taxes will increase from $17,420 to $21,680 and depreciation will increase from $4,000 to $5,500.What is the amount of the operating cash flow using the top-down approach?

You purchased an asset 3 years ago at a cost of $135,000 and sold it today for $82,500.The equipment is 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.Which one of the following statements is correct if the tax rate is 34 percent?

Global Enterprises is considering a new 5-year project that will require $872,000 for new fixed assets,$210,000 for inventory,and $80,000 for accounts receivable.Short-term debt is expected to increase by $140,000.The fixed assets will be depreciated straight-line to zero over the project's life.At the end of the project,the fixed assets are expected to be sold for 30 percent of their original cost,and the net working capital will return to its original level.The tax rate is 35 percent.What is the initial cost of this project?

The most valuable investment given up if an alternative investment is chosen is referred to as a(n)

Lefty's just purchased some equipment that is classified as 7-year property for MACRS.The equipment cost $123,940.The MACRS table values are 0.1429,0.2449,0.1749,0.1249,and 0.0893,for Years 1 to 5,respectively.What will the book value of this equipment be at the end of 4 years?