EXAM TWO - BUS 311 02/25

A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as a(n):

sunk cost

The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:

tax shield

Micro, Inc., started the year with net fixed assets of $74,925. At the end of the year, there was $96,175 in the same account, and the company's income statement showed depreciation expense of $12,985 for the year. What was the company's net capital spending for the year?

$34235

At the beginning of the year, a firm has current assets of $316 and current liabilities of $220. At the end of the year, the current assets are $469 and the current liabilities are $260. What is the change in net working capital?

$113

Teddy's Pillows had beginning net fixed assets of $471 and ending net fixed assets of $550. Assets valued at $319 were sold during the year. Depreciation was $42. What is the amount of net capital spending?

$121

Earnings before interest & taxes -$1,588 Depreciation - 130 Beginning net fixed assets - 1,650 Net new equity raised - 450 Taxes - 424 how much is the operating cash flow?

$1294

At the beginning of the year, Vendors, Inc., had owners' equity of $50,435. During the year, net income was $6,675 and the company paid dividends of $4,535. The company also repurchased $8,785 in equity. What was the cash flow to stockholders for the year?

$13320

A company. has a project available with the following cash flows: 0 : -$31,910 1 : $13,080 2 : $14,740 3 : $20,850 4 : $12,020 If the required return for the project is 9.6 percent, what is the project's NPV?

$16462.59

Cori's Dog House is considering the installation of a new computerized pressure cooker for hot dogs. The cooker will increase sales by $5,800 per year and will cut annual operating costs by $14,300. The system will cost $49,800 to purchase and install. This system is expected to have a 7-year life and will be depreciated to zero using straight-line depreciation and have no salvage value. The tax rate is 40 percent and the required return is 12.7 percent. What is the NPV of purchasing the pressure cooker?

$16742

A 4-year project has an annual operating cash flow of $48,500. At the beginning of the project, $3,950 in net working capital was required, which will be recovered at the end of the project. The firm also spent $21,800 on equipment to start the project. This equipment will have a book value of $4,420 at the end of the project, but can be sold for $5,490. The tax rate is 34 percent. What is the Year 4 cash flow?

$57576

Outdoor Sports is considering adding a putt putt golf course to its facility. The course would cost $179,000, would be depreciated on a straight-line basis over its 4-year life, and would have a zero salvage value. The sales would be $93,500 a year, with variable costs of $28,350 and fixed costs of $12,950. In addition, the firm anticipates an additional $22,900 in revenue from its existing facilities if the putt putt course is added. The project will require $3,550 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 11 percent and a tax rate of 34 percent?

$20768

You own a house that you rent for $1,700 per month. The maintenance expenses on the house average $320 per month. The house cost $243,000 when you purchased it 4 years ago. A recent appraisal on the house valued it at $265,000. If you sell the house you will incur $21,200 in real estate fees. The annual property taxes are $3,700. You are deciding whether to sell the house or convert it for your own use as a professional office. What value should you place on this house when analyzing the option of using it as a professional office?

$243800

Bubbly Waters currently sells 370 Class A spas, 520 Class C spas, and 270 deluxe model spas each year. The firm is considering adding a mid-class spa and expects that if it does, it can sell 445 units per year. However, if the new spa is added, Class A sales are expected to decline to 260 units while the Class C sales are expected to increase to 545. The sales of the deluxe model will not be affected. Class A spas sell for an average of $13,300 each. Class C spas are priced at $6,700 and the deluxe models sell for $17,700 each. The new mid-range spa will sell for $8,700. What annual sales figure should you use in your analysis?

$2576000

Hoodoo Voodoo Co. has total assets of $64,200, net working capital of $19,300, owners' equity of $31,500, and long-term debt of $21,800. What is the company's current assets?

$30200

Your firm has net income of $259 on total sales of $1,100. Costs are $620 and depreciation is $110. The tax rate is 30 percent. The firm does not have interest expenses. What is the operating cash flow?

$369

You are examining a company's balance sheet and find that it has total assets of $21,156, a cash balance of $2,424, inventory of $5,169, current liabilities of $6,341 and accounts receivable of $2,935. What is the company's net working capital?

$4187

At the beginning of the year, Nothing More, Corp., had a long-term debt balance of $36,929. During the year, the company repaid a long-term loan in the amount of $9,439. The company paid $3,475 in interest during the year, and opened a new long-term loan for $8,365. What was the cash flow to creditors during the year?

$4549

Disturbed, Inc., had the following operating results for the past year: sales = $22,630; depreciation = $1,420; interest expense = $1,144; costs = $16,545. The tax rate for the year was 30 percent. What was the company's operating cash flow?

$5029

At the beginning of the year, long-term debt of a firm is $288 and total debt is $329. At the end of the year, long-term debt is $259 and total debt is $339. The interest paid is $25. What is the amount of the cash flow to creditors?

$54

Power Manufacturing has equipment that it purchased 6 years ago for $2,900,000. The equipment was used for a project that was intended to last for 8 years and was being depreciated over the life of the project. However, due to low demand, the project is being shut down. The equipment was depreciated using the straight-line method and can be sold for $470,000 today. The company's tax rate is 34 percent. What is the aftertax salvage value of the equipment?

$556700

Iron Works International is considering a project that will produce annual cash flows of $37,400, $46,100, $56,800, and $22,300 over the next four years, respectively. What is the internal rate of return if the project has an initial cost of $113,600?

16.73%

Using the method of your choice, calculate the Net Present Value of the following cash flows. Assume that the required return on this project is 15%. Initial Cost -$150 Year 1 $175 Year 2 $100

$78

Peggy Grey's Cookies has net income of $460. The firm pays out 37 percent of the net income to its shareholders as dividends. During the year, the company sold $91 worth of common stock. What is the cash flow to stockholders?

$79.20

Rossdale Flowers has a new greenhouse project with an initial cost of $277,500 that is expected to generate cash flows of $45,500 for 7 years and a cash flow of $60,900 in Year 8. If the required return is 8.1 percent, what is the project's NPV?

- $8758.52

Shannon's Irish Cookware is implementing a project that will initially increase accounts payable by $5,000, increase inventory by $3,200, and decrease accounts receivable by $1,800. All net working capital will be recouped when the project terminates. What is the cash flow related to the net working capital for the last year of the project?

-$3600

A project with an initial cost of $60,000 is expected to provide annual cash flows of $12,900 over the 8-year life of the project. If the required return is 8.4 percent, what is the project's profitability index?

1.217

A project with an initial cost of $30,800 is expected to provide cash flows of $11,100, $11,900, $15,000, and $9,500 over the next four years, respectively. If the required return is 9.3 percent, what is the project's profitability index?

1.242

POD has a project with the following cash flows: 0 : -$267,000 1 : $146,200 2 : $163,700 3 : $128,800 The required return is 9 percent. What is the profitability index for this project?

1.391

A project will generate annual cash flows of $237,600 for each of the next three years, and a cash flow of $274,800 during the fourth year. The initial cost of the project is $751,600. What is the internal rate of return of this project?

11.61%

A new project has an initial cost of $240,000. The equipment will be depreciated on a straight-line basis to a zero-book value over the five-year life of the project. The projected net income each year is $13,150, $17,800, $20,000, $15,050, and $11,700, respectively. What is the average accounting return?

12.95%

A new project has an initial cost of $181,000. The equipment will be depreciated on a straight-line basis to a book value of $71,000 at the end of the four-year life of the project. The projected net income each year is $15,600, $18,250, $23,700, and $15,500, respectively. What is the average accounting return?

14.49%

Cirice Corp. is considering opening a branch in another state. The operating cash flow will be $179,800 a year. The project will require new equipment costing $550,000 that would be depreciated on a straight-line basis to zero over the 4-year life of the project. The equipment will have a market value of $149,000 at the end of the project. The project requires an initial investment of $34,000 in net working capital, which will be recovered at the end of the project. The tax rate is 34 percent. What is the project's IRR?

15.39%

Mountain Frost is considering a new project with an initial cost of $245,000. The equipment will be depreciated on a straight-line basis to a zero-book value over the four-year life of the project. The projected net income for each year is $20,800, $21,700, $24,600, and $17,700, respectively. What is the average accounting return?

17.31%

Guerilla Radio Broadcasting has a project available with the following cash flows : 0 : -$13,400 1 : $5,500 2 : $6,800 3 : $6,200 4 : $4,600 What is the payback period?

2.18 years

A project that costs $23,000 today will generate cash flows of $8,900 per year for seven years. What is the project's payback period?

2.58 years

A project with an initial cost of $25,500 is expected to generate cash flows of $6,100, $8,200, $8,850, $7,750, and $6,900 over each of the next five years, respectively. What is the project's payback period?

3.30 years

What are non-conventional cash flows?

A combination of cash outflows and inflows.

The Payback Period Rule states that a company will accept a project if:

The calculated payback is less than a pre-specified number of years.

Your company has a project available with the following cash flows: 0 : -$81,800 1 : $21,150 2 : $24,300 3 : $30,100 4 : $25,650 5 : $19,100 If the required return is 13 percent, should the project be accepted based on the IRR?

Yes, because the IRR is 14.44 percent

The highest NPV is always the best option.

best method when choosing between mutually exclusive projects

cash flow to creditors + cash flow to stockholders

cash flow from assets

interest paid minus net new borrowing

cash flow to creditors

dividends paid minus net new equity raised.

cash flow to stockholders

The net present value of an investment represents the difference between the investment's:

cost and its market value

CrossTown Builders is considering remodeling an old building it currently owns. The building was purchased ten years ago for $1.2 million. Over the past ten years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $1.9 million. The company is considering remodeling the building into industrial-type apartments at an estimated cost of $1.6 million. The estimated present value of the future income from these apartments is $4.1 million. Which one of the following defines the opportunity cost of the remodeling project?

current market value of the building

Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project?

erosion

The Average Accounting Return (AAR) Rule states that a company will accept a project that has an average account return that:

exceeds a pre-determined target average accounting return

Net working capital represents current assets plus current liabilities.

false

Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as:

incremental cash flows

the discount rate that makes the net present value equal to zero

internal rate of return (IRR)

Taking one project means that we cannot take the other.

mutually exclusive

Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities?

net present value

the cash that a firm generates from its normal business activities

operating cash flow

Which one of the following terms refers to the best option that was foregone when a particular investment is selected?

opportunity cost

Which one of the following indicates that a project is expected to create value for its owners?

positive NPV

the net working capital invested in a project is generally

recouped at the end of the project.

Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million. Last year, the government changed the emission requirements and this furnace cannot meet those standards. Thus, the company can no longer use the furnace, nor has it been able to locate anyone willing to purchase the furnace. Given the current situation, the furnace is best described as which type of cost?

sunk

Thrill Rides is considering adding a new roller coaster to its amusement park. The addition is expected to increase its overall ticket sales. In particular, the company expects to sell more tickets for its current roller coaster and experience extremely high demand for its new coaster. Sales for its boat ride are expected to decline but food and beverage sales are expected to increase significantly. All of the following are side effects associated with the new roller coaster with the exception of the:

ticket sales for the new coaster