frl301chap10

You are working on a bid to build two city parks a year for the next three years What is the minimal amount you should bid per park?

$217,600

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 over is $41,000. What is the equivalent annual cost of an oven if the required rate of return is 13 percent?

-$272,638

Automated Manufacturers uses high-tech equipment to produce specialized aluminum products for its customers. Each one of these machines costs $1,480,000 to purchase plus an additional $49,000 a year to operate. The machines have a 6-year life after which they are worthless. What is the equivalent annual cost of one these machines if the required return is 16 percent?

-$450,657

Which one of the following statements is correct? A. Project analysis should only include the cash flows that affect the income statement. B. A project can create a positive operating cash flow without affecting sales. C. The depreciation tax shield creates a cash outflow for a project. D. Interest expense should always be included as a cash outflow when analyzing a project. E. The opportunity cost of a company-owned building that is going to be used in a new project should be included as a cash inflow to the project.

A project can create a positive operating cash flow without affecting sales.

Which one of the following is the depreciation method which allows accelerated write-offs of property under various lifetime classifications? A. IRR B. ACRS C. AAR D. straight-line to zero E. straight-line with salvage

ACRS

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 A. I and II only B. I and IV only C. II and IV only D. I, II, and IV only E. I, II, III, and IV

I and IV only

The operating cash flow for a project should exclude which one of the following?

Interest Expense

Keyser Petroleum just purchased some equipment at a cost of $67,000. What is the proper methodology for computing the depreciation expense for year 2 if the equipment is classified as 5-year property for MACRS?

Keyser Petroleum -proper methodology computing depriciation expense cost x rate

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?

NI + D

Sailcloth & More currently produces boat sails and is considering expanding its operations to include awnings for homes and travel trailers. The company owns land beside its current manufacturing facility that could be used for the expansion. The company bought this land 5 years ago at a cost of $319,000. At the time of purchase, the company paid $24,000 to level out the land so it would be suitable for future use. Today, the land is valued at $295,000. The company currently has some unused equipment that it currently owns valued at $38,000. This equipment could be used for producing awnings if $12,000 is spent for equipment modifications. Other equipment costing $490,000 will also be required. What is the amount of the initial cash flow for this expansion project?

Sailcloth produces boat sails and wnings - today land value - currently -wnings -required CF= - today - currently - wnings - required CF0 = -$295,000 - $38,000 - $12,000 - $490,000 = -$835,000

The depreciation tax shield is best defined as the: A. amount of tax that is saved when an asset is purchased. B. tax that is avoided when an asset is sold as salvage. C. amount of tax that is due when an asset is sold. D. amount of tax that is saved because of the depreciation expense. E. 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: A. can affect the cash flows of a project every year of the project's life. B. only affect the initial cash flows of a project. C. only affect the cash flow at time zero and the final year of a project. D. are generally excluded from project analysis due to their irrelevance to the total project. E. reflect only the changes in the current asset accounts.

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

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

can be positive even though there are no sales.

Net working capital: A. can be ignored in project analysis because any expenditure is normally recouped at the end of the project. B. requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project. C. is rarely affected when a new product is introduced. D. can create either a cash inflow or a cash outflow at time zero of a project. E. is the only expenditure where at least a partial recovery can be made at the end of a project.

can create either a cash inflow or a cash outflow at time zero of a project.

Morris Motors -correct book value?

cost x (1 - rate - rate) depending what year it wants to end

Which one of the following is a project cash inflow? Ignore any tax effects. A. decrease in accounts payable B. increase in inventory C. decrease in accounts receivable D. depreciation expense based on MACRS E. equipment acquisition

decrease in accounts receivable

The net book value of equipment will: A. remain constant over the life of the equipment. B. vary in response to changes in the market value. C. decrease at a constant rate when MACRS depreciation is used. D. increase over the taxable life of an asset. E. decrease slower under straight-line depreciation than under MACRS.

decrease slower under straight-line depreciation than under MACRS.

The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following? A. yearly incremental costs B. sunk costs C. opportunity costs D. erosion cost E. equivalent annual cost

equivalent annual cost

Which one of the following best describes pro forma financial statements? A. financial statements expressed in a foreign currency B. financial statements where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales C. financial statements showing projected values for future time periods D. financial statements expressed in real dollars, given a stated base year E. financial statements where all accounts are expressed as a percentage of last year's values

financial statements showing projected values for future time periods

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? A. providing both ketchup and mustard for its customer's use B. repairing the roof of the hot dog stand because of water damage C. selling fewer hot dogs because hamburgers were added to the menu D. offering French fries but not onion rings E. losing sales due to bad weather

selling fewer hot dogs because hamburgers were added to the menu

Which one of the following costs was incurred in the past and cannot be recouped? A. incremental B. side C. sunk D. opportunity E. erosion

sunk

Which one of the following is an example of a sunk cost? A. $1,500 of lost sales because an item was out of stock B. $1,200 paid to repair a machine last year C. $20,000 project that must be forfeited if another project is accepted D. $4,500 reduction in current shoe sales if a store commences selling sandals E. $1,800 increase in comic book sales if a store commences selling puzzles

$1,200 paid to repair a machine last year

Which one of the following best describes the concept of erosion? A. expenses that have already been incurred and cannot be recovered B. change in net working capital related to implementing a new project C. the cash flows of a new project that come at the expense of a firm's existing cash flows D. the alternative that is forfeited when a fixed asset is utilized by a project E. 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

Kelly's Corner Bakery purchased a lot in Oil City 6 years ago at a cost of $280,000. Today, that lot has a market value of $340,000. At the time of the purchase, the company spent $15,000 to level the lot and another $20,000 to install storm drains. The company now wants to build a new facility on that site. The building cost is estimated at $1.47 million. What amount should be used as the initial cash flow for this project?

Kelly's Comer Bakery -market value -building cost estimated What amount should be used as initial cash flow for this project? ( - )Market value - estimated building cost = (-) answer CF0 = -$340,000 - $1,470,000 = -$1,810,000

Morris Motors just purchased some MACRS 5-year property at a cost of $216,000. Which one of the following will correctly give you the book value of this equipment at the end of year 2? (there is a table give with year and rate)

cost x ( 1 - rate - rate) $216,000 x (1 - 0.20 - 0.32)

Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets. The firm is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project? A. storing supplies in the same space currently used for materials storage B. utilizing the basket manager to oversee wreath production C. hiring additional employees to handle the increased workload should the firm accept the wreath project D. researching the market to determine if wreath sales might be profitable before deciding to proceed E. planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt

hiring additional employees to handle the increased workload should the firm accept the wreath project

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs? A. sunk B. total C. variable D. incremental E. fixed

incremental

The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's: A. incremental cash flows. B. internal cash flows. C. external cash flows. D. erosion effects. E. financing cash flows.

incremental cash flows

Webster & Moore paid $139,000, in cash, for a piece of equipment 3 years ago. At the beginning of last year, the company spent $21,000 to update the equipment with the latest technology. The company no longer uses this equipment in its current operations and has received an offer of $89,000 from a firm that would like to purchase it. Webster & Moore is debating whether to sell the equipment or to expand its operations so that the equipment can be used. When evaluating the expansion option, what value, if any, should the firm assign to this equipment as an initial cost of the project?

key words: -webster & Moore - received an offer - initial cost Answer: $89,000

The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following? A. salvage value B. wasted value C. sunk cost D. opportunity cost E. erosion

opportunity cost

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? A. underlying value principle B. stand-alone principle C. equivalent cost principle D. salvage principle E. 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? A. opportunity B. fixed C. incremental D. erosion E. sunk

sunk

The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following? A. depreciation tax shield B. tax due on the salvage value of that asset C. current year's operating cash flow D. change in net working capital E. MACRS depreciation for the current year

tax due on the salvage value of that asset

The bid price is: A. an aftertax price. B. the aftertax contribution margin. C. the highest price you should charge if you want the project. D. the only price you can bid if the project is to be profitable. E. the minimum price you should charge if you want to financially breakeven.

the minimum price you should charge if you want to financially breakeven

Danielle's is a furniture store that is considering adding appliances to its offerings. Which of the following should be considered incremental cash flows of this project? I. utilizing the credit offered by a supplier to purchase the appliance inventory II. benefiting from increased furniture sales to appliance customers III. borrowing money from a bank to fund the appliance project IV. purchasing parts for inventory to handle any appliance repairs that might be necessary A. I and II only B. III and IV only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV

utilizing the credit offered by a supplier to purchase the appliance inventory benefiting from increased furniture sales to appliance customers purchasing parts for inventory to handle any appliance repairs that might be necessary

Consider a project to supply 60,800,000 postage stamps to the U.S. Postal Service for the next 5 years. You have an idle parcel of land available that cost $760,000 five years ago; if the land were sold today, it would net you $912,000, aftertax. The land can be sold for $1,500,000 after taxes in 5 years. You will need to install $2,356,000 in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project's 5-year life. The equipment can be sold for $456,000 at the end of the project. You will also need $469,000 in initial net working capital for the project, and an additional investment of $38,000 in every year thereafter. All net working capital will be recovered when the project ends. Your production costs are 0.38 cents per stamp, and you have fixed costs of $608,000 per year. Your tax rate is 31 percent and your required return on this project is 11 percent. What bid price per stamp should you submit?

$0.026

You are working on a bid to build two apartment buildings a year for the next 5 years for a local college. This project requires the purchase of $750,000 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 $325,000. You will also need $140,000 in net working capital over the life of the project. The fixed costs will be $628,000 a year and the variable costs will be $1,298,000 per building. Your required rate of return is 14.5 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?

$1,733,000

Eads Industrial Systems Company (EISC) is trying to decide between two different conveyor belt systems. System A costs $427,000, has a 6-year life, and requires $112,000 in pretax annual operating costs. System B costs $517,000, has an 8-year life, and requires $79,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have a zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. The tax rate is 33 percent and the discount rate is 24 percent. Which system should the firm choose and why?

A; The net present value is -$582,720

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. A. I and II only B. II and III only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV

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.

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 A. I and III only B. II and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV

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

Gateway Communications is considering a project with an initial fixed asset cost of $2.46 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 $725,000 a year. The tax rate is 35 percent. The project will require $45,000 of inventory which will be recouped when the project ends. Should this project be implemented if the firm requires a 14 percent rate of return? Why or why not?

Initial cash flow = -$2,460,000 - $45,000 = -$2,505,000 OCF = $725,000(1 - 0.35) + ($2,460,000/10)(0.35) = $557,350 ANSWER ON DOCUMENT

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) A. Sale price + (Sales price - Book value) T B. Sale price + (Sales price - Book value) (1 - T) C. Sale price + (Book value - Sale price) T D. Sale price + (Book value - Sale price) (1 - T) E. Sale price (1 - T)

KNOX GLASS -machine depreciated -straightline to zero - find After tax salvage value Sale price + (Book value - Sale price) x tax

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 $304,000 a year. The equipment will be depreciated 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 net income from this proposed project?

Keywords: Colors and More replacing crayons equipment cost 12-yr life lower estimated cost tax FIND: NET INCOME NE = estimated cost - (equip. cost / 12 yr life) x [1- tax] NE = [$304,000 - ($1,370,000/12)] x [1 - 0.35] = $123,391.67

Precision Tool is analyzing two machines to determine which one it should purchase. The company requires a 15 percent rate of return and uses straight-line depreciation to a zero book value over the life of its equipment. Machine A has a cost of $892,000, annual operating costs of $26,300, and a 4-year life. Machine B costs $1,127,000, has annual operating costs of $19,500, and has a 5-year life. Whichever machine is purchased will be replaced at the end of its useful life.

MACHINE A : $16,965

Which one of the following will increase a bid price? A. a decrease in the fixed costs B. a reduction in the net working capital requirement C. a reduction in the firm's tax rate D. an increase in the salvage value E. an increase in the required rate of return

an increase in the required rate of return

The Fluffy Feather sells customized handbags. Currently, it sells 18,000 handbags annually at an average price of $89 each. It is considering adding a lower-priced line of handbags that sell for $59 each. The firm estimates it can sell 7,000 of the lower-priced handbags but will sell 3,000 less of the higher-priced handbags by doing so. What is the amount of the sales that should be used when evaluating the addition of the lower-priced handbags?

key words: - FLUFFY FEATHERS Sales= lower price handbags - high price handbags Sales = (7,000 x $59) + (-3,000 x $89) = $146,000

You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines which 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 which has the: A. longest life. B. highest annual operating cost. C. lowest annual operating cost. D. highest equivalent annual cost. E. lowest equivalent annual cost

lowest equivalent annual cost

Chapman Machine Shop is considering a 4-year project to improve its production efficiency. Buying a new machine press for $576,000 is estimated to result in $192,000 in annual pretax cost savings. The press falls in the MACRS 5-year class, and it will have a salvage value at the end of the project of $84,000. The press also requires an initial investment in spare parts inventory of $24,000, along with an additional $3,600 in inventory for each succeeding year of the project. The inventory will return to its original level when the project ends. The shop's tax rate is 35 percent and its discount rate is 11 percent. Should the firm buy and install the machine press? Why or why not?

no; The net present value is -$7,489

A company that utilizes the MACRS system of depreciation: A. will have equal depreciation costs each year of an asset's life. B. will have a greater tax shield in year two of a project than it would have if the firm had opted for straight-line depreciation, given the same depreciation life. C. can depreciate the cost of land, if it so desires. D. will expense less than the entire cost of an asset. E. cannot expense any of the cost of a new asset during the first year of the asset's life.

will have a greater tax shield in year two of a project than it would have if the firm had opted for straight-line depreciation, given the same depreciation life.