Exam 10: Making Capital Investment Decisions

Bi-Lo Traders is considering a project that will produce sales of $28,000 and increase cash expenses by $17,500.If the project is implemented,taxes will increase by $3,000.The additional depreciation expense will be $1,600.An initial cash outlay of $1,400 is required for net working capital.What is the amount of the operating cash flow using the top-down approach?

Dan is comparing three 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.Which one of the following computational methods should Dan use as the basis for his decision?

Three years ago,Knox Glass purchased a machine for a 3-year project.The machine is being depreciated straight-line to zero over a 5-year period.Today,the project ended and the machine was sold.Which one of the following correctly defines the aftertax salvage value of that machine? (T represents the relevant tax rate)

Mason Farms purchased a building for $689,000 eight years ago.Six years ago,repairs were made to the building which cost $136,000.The annual taxes on the property are $11,000.The building has a current market value of $840,000 and a current book value of $494,000.The building is totally paid for and solely owned by the firm.If the company decides to use this building for a new project,what value,if any,should be included in the initial cash flow of the project for this building?

Which one of the following best describes pro forma financial statements?

The bottom-up approach to computing the operating cash flow applies only when:

Keyser Mining is considering a project that will require the purchase of $875,000 in new equipment.The equipment will be depreciated straight-line to a zero book value over the 7-year life of the project.The equipment can be scraped at the end of the project for 5 percent of its original cost.Annual sales from this project are estimated at $420,000.Net working capital equal to 20 percent of sales will be required to support the project.All of the net working capital will be recouped.The required return is 16 percent and the tax rate is 34 percent.What is the value of the depreciation tax shield in year 4 of the project?

Consider the following income statement: What is the amount of the depreciation tax shield?

You are working on a bid to build two city parks a year for the next three years.This project requires the purchase of $185,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the 3-year project life.The equipment can be sold at the end of the project for $34,000.You will also need $20,000 in net working capital for the duration of the project.The fixed costs will be $18,000 a year and the variable costs will be $168,000 per park.Your required rate of return is 15 percent and your tax rate is 34 percent.What is the minimal amount you should bid per park? (Round your answer to the nearest $100)

Champion Bakers uses specialized ovens to bake its bread.One oven costs $689,000 and lasts about 4 years before it needs to be replaced.The annual operating cost per oven is $41,000.What is the equivalent annual cost of an oven if the required rate of return is 13 percent?

Nelson Mfg.owns a manufacturing facility that is currently sitting idle.The facility is located on a piece of land that originally cost $159,000.The facility itself cost $1,390,000 to build.As of now,the book value of the land and the facility are $159,000 and $458,000,respectively.The firm owes no debt on either the land or the facility at the present time.The firm received a bid of $1,700,000 for the land and facility last week.The firm's management rejected this bid even though they were told that it is a reasonable offer in today's market.If the firm was to consider using this land and facility in a new project,what cost,if any,should it include in the project analysis?

Pro forma statements for a proposed project should: I.be compiled on a stand-alone basis. II.include all the incremental cash flows related to the project. III.generally exclude interest expense. IV.include all project-related fixed asset acquisitions and disposals.

The Lumber Yard is considering adding a new product line that is expected to increase annual sales by $238,000 and cash expenses by $184,000.The initial investment will require $96,000 in fixed assets that will be depreciated using the straight-line method to a zero book value over the 6-year life of the project.The company has a marginal tax rate of 32 percent.What is the annual value of the depreciation tax shield?

Kwik 'n Hot Dogs is considering the installation of a new computerized pressure cooker that will cut annual operating costs by $23,000.The system will cost $39,900 to purchase and install.This system is expected to have a 4-year life and will be depreciated to zero using straight-line depreciation.What is the amount of the earnings before interest and taxes for this project?

Which one of the following costs was incurred in the past and cannot be recouped?

Home Furnishings Express is expanding its product offerings to reach a wider range of customers.The expansion project includes increasing the floor inventory by $430,000 and increasing its debt to suppliers by 70 percent of that amount.The company will also spend $450,000 for a building contractor to expand the size of its showroom.As part of the expansion plan,the company will be offering credit to its customers and thus expects accounts receivable to rise by $90,000.For the project analysis,what amount should be used as the initial cash flow for net working capital?

All of the following are related to a proposed project.Which of these should be included in the cash flow at time zero? I.purchase of $1,400 of parts inventory needed to support the project II.loan of $125,000 used to finance the project III.depreciation tax shield of $1,100 IV.$6,500 of equipment needed to commence the project

Which of the following should be included in the analysis of a new product? I.money already spent for research and development of the new product II.reduction in sales for a current product once the new product is introduced III.increase in accounts receivable needed to finance sales of the new product IV.market value of a machine owned by the firm which will be used to produce the new product

Jefferson & Sons is evaluating a project that will increase annual sales by $145,000 and annual cash costs by $94,000.The project will initially require $110,000 in fixed assets that will be depreciated straight-line to a zero book value over the 4-year life of the project.The applicable tax rate is 32 percent.What is the operating cash flow for this project?

Edward's Manufactured Homes purchased some machinery 2 years ago for $319,000.These assets are classified as 5-year property for MACRS.The company is replacing this machinery today with newer machines that utilize the latest in technology.The old machines are being sold for $140,000 to a foreign firm for use in its production facility in South America.What is the aftertax salvage value from this sale if the tax rate is 35 percent?