FIN 3101 CH 10 HW

The Lunch Counter is expanding and expects operating cash flows of $32,500 a year for seven years as a result. This expansion requires $28,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $2,800 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 14 percent? $111,369.91 $121,033.33 $98,288.70 $108,569.91 $109,688.89

$109,688.89

A project is expected to create operating cash flows of $27,500 a year for three years. The initial cost of the fixed assets is $57,000. These assets will be worthless at the end of the project. An additional $2,500 of net working capital will be required throughout the life of the project. What is the project's net present value if the required rate of return is 8 percent? $11,370.17 $3,375.00 $10,854.75 $13,354.75 $15,854.75

$13,354.75

Use the table below to answer this question. MACRS 5-year property Year Rate 1 20.00% 2 32.00% 3 19.20% 4 11.52% 5 11.52% 6 5.76% Sun Lee's Furniture just purchased some fixed assets classified as 5-year property for MACRS. The assets cost $73,000. What is the amount of the depreciation expense for the first year? $14,600 $146 $8,410 $4,205 $7,300

$14,600

Webster's has sales of $649,000 and a profit margin of 7.2 percent. The annual depreciation expense is $102,600. What is the amount of the operating cash flow if the company has no long-term debt? $55,872 $39,341 $74,240 $149,328 $104,760

$149,328

A potential project requires the purchase of $612,000 of equipment. The equipment will be depreciated straight-line to a zero book value over the three-year life of the project. The equipment can be scraped at the end of the project for 45 percent of its original cost. Annual sales from this project are estimated at $418,000 with cash expenses of $287,000. Net working capital equal to 25 percent of sales will be required to support the project. The required return is 12 percent and the tax rate is 35 percent. What is the cash flow in Year 2 of the project? $121,000 $154,600 $156,550 $335,560 $296,440

$156,550

A proposed expansion project is expected to increase sales of JJ's Store by $58,000 and increase cash expenses by $36,100. The project will require $36,900 of fixed assets that will be depreciated using straight-line depreciation to a zero book value over the three-year life of the project. The store has a marginal tax rate of 35 percent. What is the operating cash flow of the project using the tax shield approach? $25,600 $17,900 $18,540 $22,800 $14,600

$18,540

You are working on a bid to build two apartment buildings a year for the next three years. This project requires the purchase of $1,089,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the project's life. The equipment can be sold at the end of the project for $815,000. You will also need $280,000 in net working capital over the life of the project. The fixed costs will be $528,000 a year and the variable costs will be $1,640,000 per building. Your required rate of return is 18 percent for this project and your tax rate is 35 percent. What is the minimal amount, rounded to the nearest $100, you should bid per building? $4,233,000 $4,489,500 $2,116,200 $2,780,600 $2,244,800

$2,116,200

Colors and More is considering replacing the equipment it uses to produce crayons. The equipment would cost $1.37 million, have a 12-year life, and lower manufacturing costs by an estimated $310,000 a year. The equipment will be depreciated over 12 years using straight-line depreciation to a book value of zero. The required rate of return is 15 percent and the tax rate is 35 percent. What is the annual operating cash flow? $156,947.92 $40,211.24 $266,441.67 $241,458.33 $136,709.48

$241,458.33

Pet Supply purchased some fixed assets two years ago at a cost of $43,800. It no longer needs these assets so it is going to sell them today for $32,500. The assets are classified as five-year property for MACRS. The MACRS rates are .2, .32, .192, .1152, .1152, .0576, for years 1 to 6, respectively. What is the net cash flow from this sale if the firm's tax rate is 35 percent? $36,516.60 $18,576.00 $7,459.40 $28,483.40 $25,211.09

$28,483.40

A proposed three-year project will require $627,000 for fixed assets, $169,000 for inventory, and $43,000 for accounts receivable. Accounts payable are expected to increase by $178,000. The fixed assets will be depreciated straight-line to a zero book value over five years. At the end of the project, the fixed assets can be sold for $225,000. The net working capital returns to its original level at the end of the project. The operating cash flow per year is $62,000. The tax rate is 35 percent and the discount rate is 12 percent. What is the total cash flow in the final year of the project? $292,250 $321,000 $330,030 $311,970 $322,770

$330,030

A firm is reviewing a project with labor cost of $9.00 per unit, raw materials cost of $25.25 a unit, and fixed costs of $13,000 a month. Sales are projected at 11,000 units over the 3-month life of the project. What are the total variable costs of the project? $376,750 $194,875 $363,750 $389,750 $277,750

$376,750

A project has projected sales of $26,000, cash expenses of $18,500, depreciation of $1,730, taxes of $1,400, and an initial cash requirement of $2,200 for working capital. What is the amount of the operating cash flow using the top-down approach? $4,370 $3,900 $8,300 $6,100 $8,900

$6,100

You just purchased some equipment that is classified as five-year property for MACRS. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for Years 1 to 6, respectively. The equipment cost $218,000. What will the book value of this equipment be at the end of 3 years should you decide to resell the equipment at that point in time? $58,467.20 $62,784.00 $42,336.67 $67,670.40 $38,532.80

$62,784.00

Home Furnishings is expanding its product offerings to reach a wider range of customers. The expansion project includes increasing floor inventory by $656,000 and increasing its debt to suppliers by 85 percent of that amount. The company will also spend $1,110,000 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 $275,000. For the project analysis, what amount should be used as the initial cash flow for net working capital? -$239,900 -$176,600 -$156,000 -$373,400 -$391,000

-$373,400

Precision Dyes is analyzing two machines to determine which one it should purchase. The company requires a rate of return of 14 percent and uses straight-line depreciation to a zero book value over the life of its equipment. Machine A has a cost of $512,000, annual aftertax cash outflows of $34,200, and a four-year life. Machine B costs $798,000, has annual aftertax cash outflows of $21,500, and has a six-year life. Whichever machine is purchased will be replaced at the end of its useful life. The firm should purchase Machine _____ because it lowers the firm's annual costs by approximately _______ as compared to the other machine. rev: 12_09_2015_CS-35726, 12_15_2015_CS-35726 A; $16,791 A; $17,404 B; $16,791 B; $17,404 B; $17,521

A; $16,791

The depreciation tax shield is best defined as the: Amount of tax that is saved when an asset is purchased. Tax that is avoided when an asset is sold as salvage. Amount of tax that is due when an asset is sold. Amount of tax that is saved because of the depreciation expense. Amount by which the aftertax depreciation expense lowers net income.

Amount of tax that is saved because of the depreciation expense.

Changes in the net working capital requirements: Can affect the cash flows of a project every year of the project's life. Only affect the initial cash flows of a project. Only affect the initial and final cash flows of a project. Are generally excluded from project analysis due to their irrelevance to the total project. Are excluded from the analysis as long as they are recovered when the project ends.

Can affect the cash flows of a project every year of the project's life.

The operating cash flow of a cost-cutting project: Is equal to the depreciation tax shield. Is equal to zero because there is no incremental sales. Can only be analyzed by projecting the sales and costs for a firm's entire operations. Includes any changes that occur in the current accounts. Can be positive even though there are no sales.

Can be positive even though there are no sales.

The net book value of equipment will: Remain constant over the life of the equipment. Vary in response to changes in the market value. Decrease at a constant rate when MACRS depreciation is used. Increase over the taxable life of an asset. Decrease slower under straight-line depreciation than under MACRS.

Decrease slower under straight-line depreciation than under MACRS.

Increasing which one of the following will increase the operating cash flow assuming that the bottom-up approach is used to compute the operating cash flow? Erosion effects. Taxes. Fixed expenses. Salaries. Depreciation expense.

Depreciation expense.

You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines that have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine that has the: Longest life. Highest annual operating cost. Lowest annual operating cost. Highest equivalent annual cost. Lowest equivalent annual cost.

Lowest equivalent annual cost.

Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero? EBIT + Depreciation EBIT - Taxes Net income + Depreciation (Sales - Costs)×(1Depreciation)×(1- Taxes) (Sales - Costs) ×(1 - Taxes)

Net income + Depreciation

Frank's is a furniture store that is considering adding appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances? Moving furniture to provide floor space for the appliances. Paying the rent for the store. Selling furniture to appliance customers. Having the current store manager oversee appliance sales. Using the store's billing system for appliance sales.

Selling furniture to appliance customers.

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles? Underlying value principle. Stand-alone principle. Equivalent cost principle. Salvage principle. Fundamental principle.

Stand-alone principle.

G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost? Opportunity Fixed Incremental Erosion Sunk

Sunk

Which one of the following best describes the concept of erosion? Expenses that have already been incurred and cannot be recovered. Change in net working capital related to implementing a new project. The cash flows of a new project that come at the expense of a firm's existing cash flows. The alternative that is forfeited when a fixed asset is utilized by a project. The differences in a firm's cash flows with and without a particular project.

The cash flows of a new project that come at the expense of a firm's existing cash flows.

The bottom-up approach to computing the operating cash flow applies only when: Both the depreciation expense and the interest expense are equal to zero. The interest expense is equal to zero. The project is a cost-cutting project. No fixed assets are required for a project. Both taxes and the interest expense are equal to zero.

The interest expense is equal to zero.