Exam 6: Making Capital Investment Decisions

Lester's has a new project with projected real cash flows of $12,200,$14,600,and $16,300 for Years 1 to 3,respectively.The nominal discount rate is 15.96 percent and the inflation rate is 4 percent.What is the net present value of the project if the initial cost is $25,000?

MTM Ltd.earns 10.25 percent on its current investments after adjusting for inflation.Inflation is expected to average 2.8 percent annually over the next 5 years.What discount rate should the firm assign to a project assuming the project has a life of 5 years and the same level of risk as the firm's current operations?

The Down Towner is considering a project with a life of 4 years that will require $164,800 for fixed assets and $42,400 for net working capital.The fixed assets will be depreciated using the Year 2018 bonus depreciation method.At the end of the project,the fixed assets can be sold for $37,500 cash and the net working capital will return to its original level.The project is expected to generate annual sales of $195,000 and costs of $117,500.The tax rate is 24 percent and the required rate of return is 13 percent.What is the project's net present value?

Winslow Motors purchased $225,000 of MACRS 5-year property.The MACRS rates are 20 percent,32 percent,19.2 percent,11.52 percent,11.52 percent,and 5.76 percent for Years 1 to 6,respectively.The tax rate is 21 percent.If the firm sells the asset after four years for $10,000,what will be the aftertax cash flow from the sale if the firm applies bonus depreciation?

Leisure Vacations is considering a project with a life of 5 years that will require the purchase of $1.4 million in new 5-year MACRS equipment.The MACRS rates are 20 percent,32 percent,19.2 percent,11.52 percent,11.52 percent,and 5.76 percent for Years 1 to 6,respectively.Ignore bonus depreciation.The firm desires a minimum 14 percent rate of return and the tax rate is 22 percent.The equipment can be sold at the end of the project for an estimated $225,000.What is the amount of the aftertax salvage value?

The cash flows of a project should:

Explain the underlying assumptions that are being made when a project's total investment in net working capital is recouped when the project ends.

Which one of the following should be excluded from the analysis of a project?

Ronnie's Coffee House is considering a project with a life of one year that will produce sales of $6,000 and increase cash expenses by $2,500.If the project is implemented,taxes will increase by $700.The additional depreciation expense will be $200 and interest expense will increase by $100.An initial cash outlay of $200 is required for net working capital.What is the amount of the operating cash flow using the top-down approach?

For a profitable firm,an increase in which one of the following will increase the operating cash flow?

Which depreciation method currently permitted under U.S.tax law provides the fastest means of depreciating an asset?

Samoa's Tools has annual sales of $760,000 and a profit margin of 8 percent.The annual depreciation expense is $50,000.What is the amount of the annual operating cash flow if the company has no long-term debt?

A project's operating cash flow will increase when the:

Net working capital:

Custom Cars purchased $39,000 of fixed assets two years ago that are classified as 5-year MACRS property.The MACRS rates are 20 percent,32 percent,19.2 percent,11.52 percent,11.52 percent,and 5.76 percent for Years 1 to 6,respectively.The tax rate is 21 percent.If the assets are sold today for $19,000,what will be the aftertax cash flow from the sale? Ignore bonus depreciation.

Brennan's Boats is considering a project which will require additional inventory of $128,000,will decrease accounts payable by $7,000,and will increase accounts receivable by $56,000.What is the initial net working capital requirement for this project?

Erosion can be explained as the:

Ben's Border Café is considering a project that will produce sales of $16,000,increase cash expenses by $10,000,increase taxes by $950,and increase depreciation by $1,500 for each year of the project's 9-year life.What is the amount of the annual operating cash flow using the top-down approach?

The increase you realize in buying power as a result of owning an investment is referred to as the ________ rate of return.

Assume a project will increase inventory by $61,000,accounts payable by $28,000,and accounts receivable by $36,000.What is the initial net working capital requirement for this project?