Exam 6: Making Capital Investment Decisions

A project which is designed to improve the manufacturing efficiency of a firm but will generate no additional sales revenue is referred to as a(n)________ project.

The Mill Wheel is considering a project with a life of 3 years that will require $289,400 for fixed assets,$36,700 for inventory and $27,800 for accounts receivable.Short-term debt is expected to increase by $16,500.The fixed assets will be depreciated straight-line to a zero book value over 5 years.Ignore bonus depreciation.At the end of the project,the fixed assets can be sold for 20 percent of their original cost and the net working capital will return to its original level.The project is expected to generate annual sales of $275,000 and costs of $198,000.The tax rate is 21 percent and the required rate of return is 16 percent.What is the amount of the cash flow in the project's final year?

For this year,Wilbert's Cakes has costs of $187,400,depreciation of $32,700,interest expense of $14,800,dividends paid of $5,600,taxes of $17,600,and an operating cash flow of $101,900.What is the sales amount?

Kurt's Cabinets 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 annual sales of $110,000 with associated costs of $70,000.The project has a life of 4 years.The company ignores bonus depreciation and instead uses straight-line depreciation to a zero book value over the life of the project.The tax rate is 21 percent.What is the annual operating cash flow for this project?

Reynolds Metals is considering a project with a life of 4 years that will produce annual operating cash flows of $57,000.During the life of the project,inventory will be lowered by $28,000,accounts receivable will increase by $15,000,and accounts payable will increase by $6,000.The project requires the purchase of equipment at an initial cost of $104,000 that will be depreciated straightline to a zero book value over the life of the project.Ignore bonus depreciation.The equipment will be salvaged at the end of the project creating an aftertax cash inflow of $22,000.At the end of the project,net working capital will return to its normal level.What is the net present value of this project given a required return of 16 percent?

The equivalent annual cost method is most useful in determining:

The Galley purchased some 3-year MACRS property two years ago at a cost of $19,800.The MACRS rates are 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent.The firm no longer uses this property so is selling it today at a price of $13,500.What is the amount of the aftertax profit on the sale? Assume the firm applies bonus depreciation and has a tax rate of 21 percent.

Jamie's Motor Home Sales currently sells 110 Class A motor homes,220 Class C motor homes,and 280 pop-up trailers each year.They are considering adding a mid-range camper with expected annual sales of 300 units.However,if the new camper is added,Class A sales will decline to 85 units and the Class C camper sales will decline to 200 units.The sales of pop-ups will not be affected.Class A motor homes sell for an average of $140,000 each.Class C homes are priced at $59,500,and the pop-ups sell for $5,000 each.The new mid-range camper will sell for $42,900.What is the annual erosion cost of adding the mid-range camper?

The pro forma income statement for a cost reduction project:

The Wolf's Den is considering replacing the equipment it uses to produce tents.The equipment would cost $1.4 million and lower manufacturing costs by an estimated $215,000 a year.The equipment will be depreciated over 8 years using straight-line depreciation to a book value of zero.Ignore bonus depreciation.The required rate of return is 13 percent and the tax rate is 21 percent.The equipment will be worthless after 8 years.What is the annual operating cash flow from this proposed project?

A decrease in a firm's current cash flows resulting from the implementation of a new project is referred to as:

For this year,Jessica's has sales of $439,000,depreciation of $32,000,and net working capital of $56,000.The firm has a tax rate of 23 percent and a profit margin of 6 percent.The firm has no interest expense.What is the amount of the operating cash flow?

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

Ernie's Electrical is evaluating a project which will increase annual sales by $50,000 and costs by $30,000.The project has an initial asset cost of $150,000 that will be depreciated straight-line to a zero book value over the 10-year life of the project.Ignore bonus depreciation.The applicable tax rate is 25 percent.What is the annual operating cash flow for this project?

A new project with a life of four years will increase sales by $140,000 and cash expenses by $95,000 annually.The project will cost $100,000 and will be depreciated using the Year 2018 bonus depreciation method.The company has a marginal tax rate of 21 percent.What is the value of the depreciation tax shield in Year 2?

Sunk costs include any cost that:

Lew's Market invested in a project that returned 14.83 percent during a period when inflation averaged 2.69 percent.What real rate of return did the firm earn on its project?

Marshall's purchased a corner lot five years ago at a cost of $498,000 and then spent $63,500 on grading and drainage so the lot could be used for storing outdoor inventory.The lot was recently appraised at $610,000.The company now wants to build a new retail store on the site.The building cost is estimated at $1.1 million.What amount should be used as the initial cash outflow for this building project?

Foamsoft currently sells 16,850 pairs of shoes annually at an average price of $79 a pair.It is considering adding a new line of shoes that would sell for $49 a pair.The company estimates it can sell 5,000 pairs of the lower-priced shoes annually but will sell 1,250 less pairs of the higher-priced shoes each year by doing so.What is the estimated value of the annual erosion cost that should be charged to the lower-priced shoe project?

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: