Making Capital Investment Decisions

You are evaluating a potential investment in equipment. The equipment's basic price is $126,000, and shipping costs will be $3,800. It will cost another $18,900 to modify it for special use by your firm, and an additional $6,300 to install it. The equipment falls in the MACRS 3-year class that allows depreciation of 33% the first year, 45% the second year, 15% the third year, and 7% the fourth year. You expect to sell the equipment for 23,300 at the end of three years. The equipment is expected to generate revenues of $115,000 per year with annual operating costs of $61,000. The firm's marginal tax rate is 30.0%. What is the initial outlay for the project?

$155,000

You are evaluating a potential purchase of several light-duty trucks. The initial cost of the trucks will be $170,000. The trucks fall in the MACRS 5-year class that allows depreciation of 20% the first year, 32% the second year, 19% the third year, 12% the fourth year, 11% the fifth year, and 6% the sixth year. You expect to sell the trucks for 20,400 at the end of five years. The expected revenue associated with the trucks is $135,000 per year with annual operating costs of $69,000. The firm's marginal tax rate is 25.0%. What is the after-tax cash flow associated with the sale of the equipment?

$17,850

You are evaluating a potential investment in equipment. The equipment's basic price is $163,000, and shipping costs will be $4,900. It will cost another $21,200 to modify it for special use by your firm, and an additional $8,200 to install it. The equipment falls in the MACRS 3-year class that allows depreciation of 33% the first year, 45% the second year, 15% the third year, and 7% the fourth year. You expect to sell the equipment for 29,600 at the end of three years. The equipment is expected to generate revenues of $151,000 per year with annual operating costs of $77,000. The firm's marginal tax rate is 40.0%. What is the initial outlay for the project?

$197,300

You are evaluating a potential purchase of several light-duty trucks. The initial cost of the trucks will be $235,000. The trucks fall in the MACRS 5-year class that allows depreciation of 20% the first year, 32% the second year, 19% the third year, 12% the fourth year, 11% the fifth year, and 6% the sixth year. You expect to sell the trucks for 28,200 at the end of five years. The expected revenue associated with the trucks is $186,000 per year with annual operating costs of $86,000. The firm's marginal tax rate is 45.0%. What is the after-tax cash flow associated with the sale of the equipment?

$21,855

You are evaluating a potential investment in equipment. The equipment's basic price is $184,000, and shipping costs will be $3,700. It will cost another $23,900 to modify it for special use by your firm, and an additional $12,900 to install it. The equipment falls in the MACRS 3-year class that allows depreciation of 33% the first year, 45% the second year, 15% the third year, and 7% the fourth year. You expect to sell the equipment for 29,200 at the end of three years. The equipment is expected to generate revenues of $168,000 per year with annual operating costs of $82,000. The firm's marginal tax rate is 45.0%. What is the initial outlay for the project?

$224,500

You are evaluating a potential purchase of several light-duty trucks. The initial cost of the trucks will be $143,000. The trucks fall in the MACRS 5-year class that allows depreciation of 20% the first year, 32% the second year, 19% the third year, 12% the fourth year, 11% the fifth year, and 6% the sixth year. You expect to sell the trucks for 20,000 at the end of five years. The expected revenue associated with the trucks is $105,000 per year with annual operating costs of $57,000. The firm's marginal tax rate is 30.0%. What is the after-tax operating cash flow for year 3?

$41,751

You are evaluating a potential investment in equipment. The equipment's basic price is $138,000, and shipping costs will be $4,100. It will cost another $20,700 to modify it for special use by your firm, and an additional $6,900 to install it. The equipment falls in the MACRS 3-year class that allows depreciation of 33% the first year, 45% the second year, 15% the third year, and 7% the fourth year. You expect to sell the equipment for 22,100 at the end of three years. The equipment is expected to generate revenues of $131,000 per year with annual operating costs of $67,000. The firm's marginal tax rate is 25.0%. What is the after-tax operating cash flow for year 3?

$54,364

You are evaluating a potential purchase of several light-duty trucks. The initial cost of the trucks will be $170,000. The trucks fall in the MACRS 5-year class that allows depreciation of 20% the first year, 32% the second year, 19% the third year, 12% the fourth year, 11% the fifth year, and 6% the sixth year. You expect to sell the trucks for 20,400 at the end of five years. The expected revenue associated with the trucks is $135,000 per year with annual operating costs of $69,000. The firm's marginal tax rate is 25.0%. What is the after-tax operating cash flow for year 3?

$57,575

You are evaluating a potential investment in equipment. The equipment's basic price is $158,000, and shipping costs will be $6,300. It will cost another $15,800 to modify it for special use by your firm, and an additional $7,900 to install it. The equipment falls in the MACRS 3-year class that allows depreciation of 33% the first year, 45% the second year, 15% the third year, and 7% the fourth year. You expect to sell the equipment for 26,300 at the end of three years. The equipment is expected to generate revenues of $147,000 per year with annual operating costs of $75,000. The firm's marginal tax rate is 25.0%. What is the after-tax operating cash flow for year 3?

$61,050

You are evaluating a potential investment in equipment. The equipment's basic price is $184,000, and shipping costs will be $3,700. It will cost another $23,900 to modify it for special use by your firm, and an additional $12,900 to install it. The equipment falls in the MACRS 3-year class that allows depreciation of 33% the first year, 45% the second year, 15% the third year, and 7% the fourth year. You expect to sell the equipment for 29,200 at the end of three years. The equipment is expected to generate revenues of $168,000 per year with annual operating costs of $82,000. The firm's marginal tax rate is 45.0%. What is the after-tax operating cash flow for year 3?

$62,454

You are evaluating a potential purchase of several light-duty trucks. The initial cost of the trucks will be $196,000. The trucks fall in the MACRS 5-year class that allows depreciation of 20% the first year, 32% the second year, 19% the third year, 12% the fourth year, 11% the fifth year, and 6% the sixth year. You expect to sell the trucks for 29,400 at the end of five years. The expected revenue associated with the trucks is $148,000 per year with annual operating costs of $74,000. The firm's marginal tax rate is 20.0%. What is the after-tax operating cash flow for year 4?

$63,904

Will Do, Inc. just purchased some equipment at a cost of $650,000. What is the proper methodology for computing the depreciation expense for year 3 if the equipment is classified as 5-year property for MACRS?

$650,000 x .192

_________ are effects of a project on cash flows in other parts of the firm.

Externalities

Bet'r Bilt Toys just purchased some MACRS 5-year property at a cost of $230,000.Which of the following will correctly give you the book value of this equipment at the end of year 2?I. 52% of the asset costII. 48% of the asset costIII. 68% of 80% of the asset costIV. the asset cost, minus 20% of the asset cost, minus 32% of 80% of the asset cost

II only

Which of the following should be included in the analysis of a project?I. sunk costsII. opportunity costsIII. erosion costsIV. incremental costs

II, III, and IV only

The depreciation method currently allowed under U.S. tax law governing the accelerated write-off of property under various lifetime classifications is called _____ depreciation.

MACRS

_________ is the return on the best alternative use of an asset, or the highest return that will not be earned if funds are invested in a particular project.

Opportunity cost

___________ is a technique in which "bad" and "good" sets of financial circumstances are compared with a most likely, or base-case, situation.

Scenario analysis

__________ is a technique in which key variables are changed one at a time and the resulting changes in the NPV are observed.

Sensitivity analysis

When evaluating potential projects, which of the following factors should be incorporated as part of a projects estimated cash flows?

Statements b and c are correct.

Beta from the CAPM can be used to measure the market risk of a project.

True

A cash outlay that has already been incurred and that cannot be recovered regardless of whether the project is accepted or rejected is called:

a sunk cost.

Risk in a revenue-producing project can best be adjusted for by:

adjusting the discount rate upward for increasing risk.

Sunk costs include any cost that:

has previously been incurred and cannot be changed.

The cash flows of a project should:

include all incremental costs, including opportunity costs.

The changes in a firm's future cash flows that are a direct consequence of accepting a project are called _____ cash flows.

incremental

The net cash flows attributable to an investment project which represent the change in the firm's total cash flow that occurs as a direct result of accepting the project are called:

incremental cash flows

The pre-tax salvage value of an asset is equal to the:

market value.

The most valuable investment given up if an alternative investment is chosen is a(n):

opportunity cost.

A pro forma financial statement is one that:

projects future years' operations.

The salvage value of an asset creates an after-tax cash inflow to the firm in an amount equal to the:

sales price minus the tax due based on the sales price minus the book value.

You spent $500 last week fixing the transmission in your car. Now, the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the $500 you spent fixing the transmission is a(n) _____ cost.

sunk

A cost that has already been paid, or the liability to pay has already been incurred, is a(n):

sunk cost.