FIN_3610_CH_10_80

Corner Market is considering adding a new product line that is expected to increase annual sales by $418,000 and cash expenses by $337,000. The initial investment will require $237,000 in fixed assets that will be depreciated using the straight-line method to a zero book value over the five-year life of the project. The company has a marginal tax rate of 34 percent. What is the annual value of the depreciation tax shield? A. $16,116 B. $13,160 C. $80,580 D. $32,560 E. $69,576

A. $16,116

A new molding machine is expected to produce operating cash flows of $68,000 a year for six years. At the beginning of the project, inventory will decrease by $14,700, accounts receivables will increase by $5,500, and accounts payable will increase by $3,200. All net working capital will be recovered at the end of the project. The initial cost of the molding machine is $279,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating a $51,600 aftertax cash inflow. What is the net present value of this project given a required return of 13 percent? A. $24,061.87 B. -$418.80 C. $28,336.01 D. $22,863.16 E. $7,925.54

A. $24,061.87

ALUM, Inc. uses high-tech equipment to produce specialized aluminum products for its customers. Each one of these machines costs $1,520,000 to purchase plus an additional $48,000 a year to operate. The machines have a five-year life after which they are worthless. What is the equivalent annual cost of one these machines if the required return is 15.5 percent? A. -$506,819.32 B. -$427,109.10 C. -$335,803.37 D. -$295,666.67 E. -$556,947.08

A. -$506,819.32

Hunter's Hut is considering a project that will require additional inventory of $176,000 and will increase accounts payable by $148,000. Accounts receivable is currently $305,000 and is expected to increase by 11 percent if this project is accepted. What is the project's initial cash flow for net working capital? A. -$61,550 B. -$5,550 C. -$112,250 D. -$366,550 E. -$357,550

A. -$61,550

Country Breads uses specialized ovens to bake its bread. One oven costs $189,000 and lasts about seven years before it needs to be replaced. The annual operating cost per oven is $23,800. What is the equivalent annual cost of an oven if the required rate of return is 11 percent? A. -$63,908.69 B. -$48,313.04 C. -$52,407.49 D. -$50,561.10 E. -$96,210.00

A. -$63,908.69

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 operating costs of $34,200, and a four-year life. Machine B costs $798,000, has annual operating costs 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. A. A; $16,791 B. A; $17,404 C. B; $16,791 D. B; $17,404 E. B; $17,521

A; $16,791

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 three years should you decide to resell the equipment at that point in time? A. $58,467.20 B. $62,784.00 C. $42,336.67 D. $67,670.40 E. $38,532.80

B. $62,784.00

Kwik Dogs is considering the installation of a new computerized pressure cooker that will cut annual operating costs by $18,400. The system will cost $42,900 to purchase and install and will be depreciated to zero using straight-line depreciation over its four-year life. What is the amount of the earnings before interest and taxes for this project? A. $10,725 B. $7,675 C. $5,525 D. $6,900 E. $29,125

B. $7,675

A project will produce an operating cash flow of $31,200 a year for 7 years. The initial fixed asset investment in the project will be $204,900. The net aftertax salvage value is estimated at $62,000 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 11 percent? A. -$22,627.54 B. -$28,016.66 C. $4,120.52 D. $9,070.26 E. $21,040.83

B. -$28,016.66

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? A. $25,600 B. $17,900 C. $18,540 D. $22,800 E. $14,600

C. $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? A. $4,233,000 B. $4,489,500 C. $2,116,200 D. $2,780,600 E. $2,244,800

C. $2,116,200

Overland Trucking just purchased some fixed assets that are classified as three-year property for MACRS. The MACRS rates are .3333, .4445, .1481, and .0741 for years 1 to 4, respectively. What is the amount of the depreciation expense in year 3 if the initial cost is $387,950? A. $28,747.10 B. $122,399.29 C. $57,455.40 D. $119,929.11 E. $42,177.56

C. $57,455.40

Pre-Fab purchased some machinery two years ago for $337,600. These 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. The company is currently replacing this equipment with newer models at a cost of $528,000. The old equipment is being sold for $149,000. What is the aftertax salvage value from this sale if the tax rate is 35 percent? A. 144,433.20 B. $140,287.09 C. $142,311.12 D. $153,566.80 E. $149,000.00

D. $153,566.80

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? A. $156,947.92 B. $40,211.24 C. $266,441.67 D. $241,458.33 E. $136,709.48

D. $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? A. $36,516.60 B. $18,576.00 C. $7,459.40 D. $28,483.40 E. $25,211.09

D. $28,483.40

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? A. $111,369.91 B. $121,033.33 C. $98,288.70 D. $108,569.91 E. $109,688.89

E. $109,688.89

Gateway Communications is considering a project with an initial fixed asset cost of $2.872 million which will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $300,000. The project will not directly produce any sales but will reduce operating costs by $714,000 a year. The tax rate is 35 percent. The project will require $52,000 of inventory which will be recouped when the project ends. What is the net present value at the required rate of return of 13.6 percent? A. $68,019.24 B. $101,414.14 C. $152,108.10 D. $70,475.57 E. $136,691.88

E. $136,691.88

You are working on a bid to build two city parks a year for the next three years. This project requires the purchase of $218,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the three-year project life. The equipment can be sold at the end of the project for $65,000. You will also need $12,000 in net working capital for the duration of the project. The fixed costs will be $22,000 a year and the variable costs will be $171,000 per park. Your required rate of return is 16 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) A. $232,500 B. $178,600 C. $154,300 D. $189,100 E. $229,000

E. $229,000

Better Beverages purchased some fixed assets classified as five-year property for MACRS. The assets cost $108,000. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for years 1 to 6, respectively. What will the accumulated depreciation be at the end of year 4? A. $101,779.20 B. $25,056.67 C. $42,002.89 D. $48,755.09 E. $89,337.60

E. $89,337.60

You own some equipment that you purchased four years ago at a cost of $287,000. The equipment is five-year property for MACRS. The MACRS rates are .2, .32, .192, .1152, .1152, .0576, for years 1 to 6, respectively. You are considering selling the equipment today for $99,000. Which one of the following statements is correct if your tax rate is 35 percent? A. The tax due on the sale is $17,357.76. B. The book value today is $49,406.40. C. The accumulated depreciation to date is $270,468.80. D. The taxable amount on the sale is $49,593.60. E. The aftertax salvage value is $81,707.76.

E. The aftertax salvage value is $81,707.76.