EXAM 2 CHAPTER 6 Finance

Modern Flooring is considering a new product line. The new line would require $134,000 of fixed assets and net working capital of $24,000. The firm will apply straight-line depreciation over three years to the fixed assets. The new line is expected to produce an operating cash flow of $35,000 the first year with that amount decreasing by 10 percent annually for two years before the new line will be discontinued. The fixed assets can be sold for $25,000 at the end of the project and all net working capital will be recovered. What is the net present value of the new line at a discount rate of 11.5 percent and a tax rate of 35 percent? A. −$31,209.17 B. $15,311.09 C. $17,456.32 D. $48,548.67

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Lew just purchased $67,600 of equipment that is classified as 5-year MACRS property. The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. What will the book value of this equipment be at the end of four years should he decide to resell the equipment at that point in time? A. $11,681.28 B. $18,280.20 C. $17,040.00 D. $19,468.80 E. $22,672.00

A. $11,681.28

Champion Toys just purchased some MACRS 5-year property at a cost of $230,000. The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. The book value of the asset as of the end of Year 2 can be calculated as: A. $230,000 × (1 −.20 −.32). B. $230,000 × ([1 - (.20 × .32)]. B. $230,000 × (1 - .20) × (1 - .32). C. $230,000 / (1 - .20 - .32). D. $230,000 - ($230,000 × .20 × .32).

A. $230,000 × (1 −.20 −.32). B. $230,000 × ([1 - (.20 × .32)].

Walks Softly sells customized shoes. Currently, it sells 14,800 pairs of shoes annually at an average price of $59 a pair. It is considering adding a lower-priced line of shoes that will be priced at $39 a pair. Walks Softly estimates it can sell 6,000 pairs of the lower-priced shoes but will sell 3,500 less pairs of the higher-priced shoes by doing so. What annual sales revenue should be used when evaluating the addition of the lower-priced shoes? A. $27,500 B. $24,000 C. $31,300 D. $789,100 E. $900,700

A. $27,500

A project will produce an operating cash flow of $7,300 a year for three years. The initial investment for fixed assets will be $11,600, which will be depreciated straight-line to zero over the asset's 4-year life. The project will require an initial $500 in net working capital plus an additional $500 every year with all net working capital levels restored to their original levels when the project ends. The fixed assets can be sold for an estimated $2,500 at the end of the project, the tax rate is 34 percent, and the required rate of return is 12 percent. What is the net present value of the project? A. $7,532.27 B. $9,896.87 C. $7,072.72 D. $6,353.41 E. $8,398.29

A. $7,532.27

A project will increase sales by $140,000 and cash expenses by $95,000. The project will cost $100,000 and will be depreciated using the straight-line method to a zero book value over the 4-year life of the project. The company has a marginal tax rate of 34 percent. What is the value of the depreciation tax shield? A. $8,500 B. $17,000 C. $22,500 D. $25,000 E. $37,750

A. $8,500

Which one of these is an example of erosion that should be included in project analysis? A. The anticipated loss of current sales when a new product is launched. B. The expected decline in sales as a new product ages. C. The reduction in your sales that occurs when a competitor introduces a new product. D. The sudden loss of sales due to a major employer in your community implementing massive layoffs. E. The reduction in sales price that will most likely be required to sell inventory that has aged.

A. The anticipated loss of current sales when a new product is launched.

Three years ago, you purchased some 5-year MACRS equipment at a cost of $135,000. The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. You sold the equipment today for $82,500. Which of these statements is correct if your tax rate is 34 percent? A. The tax due on the sale is $14,830.80. B. The book value today is $40,478. C. The book value today is $37,320. D. The taxable amount on the sale is $47,380. E. The tax refund from the sale is $13,219.20.

A. The tax due on the sale is $14,830.80.

Changes in the net working capital: 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. are included in project analysis only if they represent cash outflows. D. are generally excluded from project analysis due to their irrelevance to the total project. E. affect the initial and the final cash flows of a project but not the cash flows of the middle years.

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

A project's operating cash flow will increase when the: A. depreciation expense increases. B. sales projections are lowered. C. interest expense is lowered. D. net working capital requirement increases. E. earnings before interest and taxes decreases.

A. depreciation expense increases.

The top-down approach to computing the operating cash flow: A. ignores all noncash items. B. applies only if a project produces sales. C. can only be used if the entire cash flows of a firm are included. D. is equal to Sales −Costs −Taxes + Depreciation. E. includes the interest expense related to a project.

A. ignores all noncash items.

The changes in a firm's future cash flows that are a direct consequence of accepting a project are called _____ cash flows. A. incremental B. stand-alone C. opportunity D. net present value E. erosion

A. incremental

Interest rates or rates of return on investments that have been adjusted for the effects of inflation are called _____ rates. A. real B. nominal C. effective D. stripped E. coupon

A. real

Camille's Café is considering a project that will not produce any sales but will decrease cash expenses by $12,000. If the project is implemented, taxes will increase from $23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. What is the amount of the operating cash flow using the top-down approach? A. $15,000 B. $10,500 C. $5,500 D. $17,500 E. $13,500

B. $10,500

The Wolf's Den Outdoor Gear is considering replacing the equipment it uses to produce tents. The equipment would cost $1.4 million and lower manufacturing costs by an estimated $215,000 a year. The equipment will be depreciated over 8 years using straight-line depreciation to a book value of zero. The required rate of return is 13 percent and the tax rate is 34 percent. The equipment will be used for 8 years and thereafter will be worthless. What is the annual operating cash flow from this proposed project? A. $141,900 B. $201,400 C. $232,400 D. $160,000 E. $40,000

B. $201,400

The Down Towner is considering a 4-year project that will require $164,800 for fixed assets and $42,400 for net working capital. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for $37,500 and the net working capital will return to its original level. The project is expected to generate annual sales of $195,000 and costs of $117,500. The tax rate is 35 percent and the required rate of return is 13 percent. What is the project's net present value? A. $48,909.09 B. $26,485.23 C. $67,316.67 D. $36,500.00 E. $59,488.87

B. $26,485.23

Ben's Border Café is considering a project that will produce sales of $16,000 and increase cash expenses by $10,000. If the project is implemented, taxes will increase from $23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. What is the amount of the operating cash flow using the top-down approach? A. $4,000 B. $4,500 C. $6,000 D. $7,500 E. $8,500

B. $4,500

Jamie's Motor Home Sales currently sells 1,100 Class A motor homes, 2,200 Class C motor homes, and 2,800 pop-up trailers each year. Jamie is considering adding a mid-range camper and expects that if she does so she can sell 1,500 of them. However, if the new camper is added, Jamie expects that her Class A sales will decline to 850 units while the Class C camper sales decline to 2,000. The sales of pop-ups will not be affected. Class A motor homes sell for an average of $140,000 each. Class C homes are priced at $59,500 and the pop-ups sell for $5,000 each. The new mid-range camper will sell for $42,900. What is the erosion cost of adding the mid-range camper? A. $54,250,000 B. $46,900,000 C. $53,750,000 D. $63,150,000 E. $78,750,000

B. $46,900,000

Jackson amp; Sons uses packing machines to prepare its products for shipping. One machine costs $178,000 and lasts about 5 years before it needs replaced. The operating cost per machine is $16,000 a year. What is the equivalent annual cost of one machine if the required rate of return is 12 percent? A. $38,556.67 B. $65,378.93 C. $79,004.12 D. $81,006.15 E. $54,224.08

B. $65,378.93

The Galley purchased some 3-year MACRS property two years ago at a cost of $19,800. The MACRS rates are 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent. The firm no longer uses this property so is selling it today at a price of $13,500. What is the amount of the pretax profit on the sale? A. $11,140.48 B. $9,098.46 C. $10,500.00 D. $8,016.67 E. $10,702.40

B. $9,098.46

Kay's Nautique is considering a project which will require additional inventory of $128,000 and will also increase accounts payable by $45,000. Accounts receivable are currently $80,000 and are expected to increase by 10 percent if this project is accepted. What is the initial project cash flow needed for net working capital? A. $75,000 B. $91,000 C. $99,000 D. $136,000 E. $181,000

B. $91,000

The depreciation method currently allowed under U.S. tax law governing the accelerated write-off of property under various lifetime classifications is called _____ depreciation. A. FIFO B. MACRS C. straight-line D. sum-of-years digits E. curvilinear

B. MACRS

One purpose of identifying all of the incremental cash flows related to a proposed project is to: A. isolate the total sunk costs so they can be evaluated to determine if the project will add value to the firm. B. eliminate any cost which has previously been incurred so that it can be omitted from the analysis of the project. C. make each project appear as profitable as possible for the firm. D. include both the proposed and the current operations of a firm in the analysis of the project. E. identify any and all changes in the cash flows of the firm for the past year so they can be included in the analysis.

B. eliminate any cost which has previously been incurred so that it can be omitted from the analysis of the project.

Erosion can be explained as the: A. additional income generated from the sales of a newly added product. B. loss of current sales due to a new project being implemented. C. loss of revenue due to employee theft. D. loss of revenue due to customer theft. E. loss of cash due to the expenses required to fix a parking lot after a heavy rain storm.

B. loss of current sales due to a new project being implemented.

The bottom-up approach to computing the operating cash flow applies only when: A. both the depreciation expense and the interest expense are equal to zero. B. the interest expense is equal to zero. C. the project is a cost-cutting project. D. no fixed assets are required for the project. E. taxes are ignored and the interest expense is equal to zero.

B. the interest expense is equal to zero.

The pro forma income statement for a cost reduction project: A. will reflect a reduction in the sales of the firm. B. will generally reflect no incremental sales. C. has to be prepared reflecting the total sales and expenses of the entire firm. D. cannot be prepared due to the lack of any project related sales. E. will always reflect a negative project operating cash flow.

B. will generally reflect no incremental sales.

Thornley Machines is considering a 3-year project with an initial cost for fixed assets of $618,000. The project will reduce operating costs by $265,000 a year. The equipment will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the equipment will be sold for an estimated $60,000. The tax rate is 34 percent. The project will require $23,000 in extra inventory over the project's life. What is the NPV if the discount rate assigned to the project is 14 percent? A. −$2,646.00 B. −$30,086.23 C. −$32,593.78 D. $43,106.54 E. $16,884.40

B. −$30,086.23

Jeff's Stereos is expanding its product offerings which includes increasing the floor inventory by $150,000, increasing accounts receivable by $35,000, and increasing its debt to suppliers by $75,000. The company will also spend $200,000 for a building contractor to expand the size of the showroom. What is the amount of the project's initial cash flow? A. −$240,000 B. −$310,000 C. −$160,000 D. −$295,000 E. −$175,000

B. −$310,000

Tech Enterprises is considering a new project that will require $325,000 for fixed assets, $160,000 for inventory, and $35,000 for accounts receivable. Short-term debt is expected to increase by $100,000. The project has a 5-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 25 percent of their original cost and the net working capital will return to its original level. The project is expected to generate annual sales of $554,000 and costs of $430,000. The tax rate is 35 percent and the required rate of return is 15 percent. What is the net present value of this project? A. $3,026.45 B. −$65.83 C. $4,138.25 D. −$2,318.29 E. $6,202.48

B. −$65.83

Winslow Motors purchased $225,000 of MACRS 5-year property. The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. The tax rate is 34 percent. If the firm sells the asset after five years for $10,000, what will be the aftertax cash flow from the sale? A. $8,993.60 B. $8,880.20 C. $11,006.40 D. $7,770.40 E. $12,892.00

C. $11,006.40

Samoa's Tools has sales of $760,000 and a profit margin of 8 percent. The annual depreciation expense is $50,000. What is the amount of the operating cash flow if the company has no long-term debt? A. $50,000 B. $60,800 C. $110,800 D. $810,000 E. $930,000

C. $110,800

Peter's Boats has sales of $760,000 and a profit margin of 5 percent. The annual depreciation expense is $80,000. What is the amount of the operating cash flow if the company has no long-term debt? A. $34,000 B. $86,400 C. $118,000 D. $120,400 E. $123,900

C. $118,000

The By-Way has sales of $435,000, costs of $254,000, depreciation of $35,000, interest expense of $22,000, and taxes of $43,400. What is the amount of the operating cash flow? A. $115,600 B. $157,900 C. $137,600 D. $322,100 E. $114,340

C. $137,600

Brennan's Boats is considering a project which will require additional inventory of $128,000, will decrease accounts payable by $7,000, and will increase accounts receivable by $56,000. What is the initial project cash flow needed for net working capital? A. $177,000 B. $184,000 C. $191,000 D. $79,000 E. $198,000

C. $191,000

The Mill Wheel is considering a 3-year project that will require $289,400 for fixed assets, $36,700 for inventory and $27,800 for accounts receivable. Short-term debt is expected to increase by $16,500. The fixed assets will be depreciated straight-line to a zero book value over 5 years. At the end of the project, the fixed assets can be sold for 20 percent of their original cost and the net working capital will return to its original level. The project is expected to generate annual sales of $275,000 and costs of $198,000. The tax rate is 34 percent and the required rate of return is 16 percent. What is the amount of the cash flow in the project's final year? A. $248,433.33 B. $237,908.18 C. $196,058.40 D. $160,087.09 E. $181,250.24

C. $196,058.40

Ronnie's Coffee House is considering a project which will produce sales of $6,000 and increase cash expenses by $2,500. If the project is implemented, taxes will increase by $1,300. The additional depreciation expense will be $1,000. An initial cash outlay of $2,000 is required for net working capital. What is the amount of the operating cash flow using the top-down approach? A. $200 B. $1,500 C. $2,200 D. $3,500 E. $4,200

C. $2,200

A project will produce operating cash flows of $45,000 a year for four years. During the life of the project, inventory will be lowered by $30,000 and accounts receivable will increase by $15,000. Accounts payable will decrease by $10,000. The project requires the purchase of equipment at an initial cost of $120,000. 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 $25,000 aftertax cash inflow. At the end of the project, net working capital will return to its normal level. What is the net present value of this project given a required return of 15 percent? A. $23,483.48 B. $16,117.05 C. $24,909.09 D. $22,037.86 E. $19,876.02

C. $24,909.09

Matty's Place is considering the installation of a new computer system that will cut annual operating costs by $12,000. The system will cost $42,000 to purchase and install. This system is expected to have a 5-year life and will be depreciated to zero using straight-line depreciation. What is the amount of the earnings before interest and taxes for each year of this project? A. −$20,400 B. $5,400 C. $3,600 D. $12,000 E. $8,400

C. $3,600

Tool Makers manufactures equipment for use by other firms. The initial cost of one customized machine is $850,000 with an annual operating cost of $10,000, and a life of 3 years. The machine will be replaced at the end of its life. What is the equivalent annual cost of this machine if the required rate of return is 15 percent and we ignore taxes? A. $375,797.41 B. $340,008.02 C. $382,280.42 D. $347,647.78 E. $351,610.29

C. $382,280.42

A project will increase sales by $60,000 and cash expenses by $51,000. The project will cost $40,000 and will be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project. The company has a marginal tax rate of 35 percent. What is the operating cash flow of the project using the tax shield approach? A. $5,850 B. $8,650 C. $9,350 D. $9,700 E. $10,350

C. $9,350

Foamsoft sells customized boat shoes. Currently, it sells 16,850 pairs of shoes annually at an average price of $79 a pair. It is considering adding a lower-priced line of shoes which sell for $49 a pair. Foamsoft estimates it can sell 5,000 pairs of the lower-priced shoes but will sell 1,250 less pairs of the higher-priced shoes by doing so. What is the estimated value of the erosion cost that should be charged to the lower-priced shoe project? A. $138,750 B. $146,250 C. $98,750 D. $52,000 E. $123,240

C. $98,750

Sue purchased a house for $89,000, spent $56,000 upgrading it, and currently had it appraised at $212,900. The house is being rented to a family for $1,200 a month, the maintenance expenses average $200 a month, and the property taxes are $4,800 a year. If she sells the house she will incur $20,000 in expenses. She is considering converting the house into professional office space. What opportunity cost, if any, should she assign to this property if she has been renting it for the past two years? A. $178,500 A. $120,000 B. $185,000 C. ANSD. $192,900 D. $232,900

C. ANSD. $192,900

The net working capital of a firm will decrease if there is: A. a decrease in accounts payable. B. an increase in inventory. C. a decrease in accounts receivable. D. an increase in the firm's checking account balance. E. a decrease in fixed assets.

C. a decrease in accounts receivable.

A project which is designed to improve the manufacturing efficiency of a firm but will generate no additional sales revenue is referred to as a(n) _____ project. A. sunk cost B. opportunity C. cost-cutting D. revenue-cutting E. revenue-generating

C. cost-cutting

The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called the: A. aftertax depreciation savings. B. depreciable basis. C. depreciation tax shield. D. operating cash flow. E. aftertax salvage value.

C. depreciation tax shield.

Sunk costs include any cost that: A. will change if a project is undertaken. B. will be incurred if a project is accepted. C. has previously been incurred and cannot be changed. D. will be paid to a third party and cannot be refunded for any reason whatsoever. E. will occur if a project is accepted and once incurred, cannot be recouped.

C. has previously been incurred and cannot be changed.

The cash flows of a project should: A. be computed on a pretax basis. B. include all sunk costs and opportunity costs. C. include all incremental and opportunity costs. D. be applied to the year when the related expense or income is recognized by GAAP. E. include all financing costs related to new debt acquired to finance the project.

C. include all incremental and opportunity costs.

Tax shield refers to a reduction in taxes created by: A. a reduction in sales. B. an increase in interest expense. C. noncash expenses. D. a project's incremental expenses. E. opportunity costs.

C. noncash expenses.

All of the following are anticipated effects of a proposed project. Which of these should be considered when computing the cash flow for the final year of a project? A. operating cash flow and salvage values B. salvage values and net working capital recovery C. operating cash flow, net working capital recovery, salvage values D. net working capital recovery and operating cash flow E. operating cash flow only

C. operating cash flow, net working capital recovery, salvage values

The salvage value of an asset creates an aftertax cash flow in an amount equal to the: A. sales price of the asset. B. sales price minus the book value. C. sales price minus the tax due based on the sales price minus the book value. D. sales price plus the tax due based on the sales price minus the book value. E. sales price plus the tax due based on the book value minus the sales price.

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

A cost that has already been paid, or the liability to pay has already been incurred, is a(n): A. salvage value expense. B. net working capital expense. C. sunk cost. D. opportunity cost. E. erosion cost.

C. sunk cost.

Toni's Tools is comparing machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs, differing machine lives, and will be replaced when worn out. These machines should be compared using: A. net present value only. B. both net present value and the internal rate of return. C. their equivalent annual costs. D. the depreciation tax shield approach. E. the replacement parts approach.

C. their equivalent annual costs.

Marshall's purchased a corner lot five years ago at a cost of $498,000 and then spent $63,500 on grading and drainage so the lot could be used for storing outdoor inventory. The lot was recently appraised at $610,000. The company now wants to build a new retail store on the site. The building cost is estimated at $1.1 million. What amount should be used as the initial cash flow for this building project? A. $1,661,500 B. $1,100,000 C. $1,208,635 D. $1,710,000 E. $1,498,000

D. $1,710,000

In working on a bid project you have determined that $245,000 of fixed assets will be required and that they will be depreciated straight-line to zero over the 5-year life of the project. You have also determined that the discount rate should be 14.5 percent and the tax rate will be 35 percent. In addition, the annual cash costs will be $68,500. After considering all of the project's cash flows you have determined that the required operating cash flow is $68,700. What is the amount of annual sales revenue that is required? A. $162,515.75 B. $142,018.27 C. $157,202.19 D. $147,807.69 E. $152,311.89

D. $147,807.69

A project is expected to create operating cash flows of $26,500 a year for four years. The initial cost of the fixed assets is $62,000. These assets will be worthless at the end of the project. An additional $3,000 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 12 percent? A. $19,208.11 B. $14,028.18 C. $15,306.09 D. $17,396.31 E. $21,954.17

D. $17,396.31

Custom Cars purchased some $39,000 of fixed assets two years ago that are classified as 5-year MACRS property. The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. The tax rate is 34 percent. If the assets are sold today for $19,000, what will be the aftertax cash flow from the sale? A. $16,358.88 B. $17,909.09 C. $18,720.00 D. $18,904.80 E. $19,000.00

D. $18,904.80

In working on a bid project you have determined that $318,000 of fixed assets will be required and that they will be depreciated straight-line to zero over the 6-year life of the project. You have also determined that the discount rate should be 18 percent and the tax rate will be 35 percent. In addition, the annual cash costs will be $198,200. After considering all of the project's cash flows you have determined that the required operating cash flow is $92,400. What is the amount of annual sales revenue that is required? A. $299,811.17 B. $302,006.64 C. $284,849,92 D. $311,815.38 E. $279,407.72

D. $311,815.38

Kurt's Cabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital. The project is expected to produce sales of $110,000 with associated costs of $70,000. The project has a 4-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 35 percent. What is the operating cash flow for this project? A. $7,000 B. $13,000 C. $27,000 D. $33,000 E. $40,000

D. $33,000

The Boat Works currently produces boat sails and is considering expanding its operations to include awnings. The expansion would require the use of land the firm purchased three years ago at a cost of $197,000 that is currently valued at $209,500. The expansion could use some equipment that is currently sitting idle if $7,500 of modifications were made to it. The equipment originally cost $387,500 five years ago, has a current book value of $132,700, and a current market value of $139,000. Other capital purchases costing $520,000 will also be required. What is the value of the opportunity costs that should be included in the initial cash flow for the expansion project? A. $425,000 B. $485,000 C. $329,700 D. $348,500 E. $537,200

D. $348,500

Schroeder Electronics is considering a project which will require the purchase of $5.68 million in new equipment that will be depreciated straight-line to a zero book value over the 5-year life of the project. Schroeder desires a 12 percent rate of return and the tax rate is 35 percent. What is the value of the depreciation tax shield in Year 5 of the project? A. $225,608.92 B. $228,406.12 C. $334,800.00 D. $397,600.00 E. $1,136,000.00

D. $397,600.00

Lottie's Boutique needs to maintain 12 percent of its sales in net working capital. Lottie's is considering a 3-year project which will increase sales from their current level of $110,000 to $130,000 the first year and $145,000 a year for the following two years. When analyzing the project, what amount should be included for net working capital for the last year if the net working capital returns to its original level at that time? A. $1,800 B. $7,000 C. $13,200 D. $4,200 E. $17,400

D. $4,200

Lee's Furniture just purchased $24,000 of fixed assets that are classified as 5-year MACRS property. The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. What is the amount of the depreciation expense for the third year? A. $2,304 B. $2,507 C. $2,765 D. $4,608 E. $4,800

D. $4,608

Wheels and More needs to maintain 8 percent of its sales in net working capital. The firm is considering a 5-year project which will increase sales from their current level of $110,000 to $146,000, $152,000, $158,000, $164,000, and $155,000 for Years 1 to 5 of the project, respectively. What amount should be included in the project analysis for net working capital for Year 3 of the project? A. −$12,640 B. −$480 C. $0 D. $480 E. $12,640

D. $480

You are working on a bid for a contract. Thus far, you have determined that you will need $156,000 for fixed assets and another $32,000 for net working capital at Time 0. You have also determined that you can recover $68,400 aftertax for the combined fixed assets and net working capital at the end of the 4-year project. What operating cash flow will be required each year for the project to return 16 percent in nominal terms? A. $46,666.67 B. $48,929.74 C. $55,200,16 D. $53,686.06 E. $50,725.50

D. $53,686.06

Le Place has sales of $439,000, depreciation of $32,000, and net working capital of $56,000. The firm has a tax rate of 34 percent and a profit margin of 6 percent. The firm has no interest expense. What is the amount of the operating cash flow? A. $49,384 B. $52,616 C. $54,980 D. $58,340 E. $114,340

D. $58,340

Northern Enterprises just purchased $1,900 of fixed assets that are classified as 3-year MACRS property. The MACRS rates are 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent for Years 1 to 4, respectively. What is the amount of the depreciation expense for Year 2? A. $562.93 B. $633.27 C. $719.67 D. $844.36 E. $1,477.63

D. $844.36

Stu is working on a bid for a contract. Thus far, he has determined that he will need $218,000 for fixed assets and another $41,000 for net working capital at Time 0. He had also determined that he can recover $79,900 aftertax for the combined fixed assets and net working capital at the end of the 3-year project. What operating cash flow will be required each year for the project to return 14 percent in nominal terms? A. $116,079.42 B. $97,487.79 C. $110,220.48 D. $88,330.01 E. $113,360.69

D. $88,330.01

Lester's has a new project with projected real cash flows of $12,200, $14,600, and $16,300 for Years 1 to 3, respectively. The nominal discount rate is 15.752 percent and the inflation rate is 4 percent. What is the net present value of the project if the initial cost is $25,000? A. $7,711.64 B. $6,946.48 C. $10,508.70 D. $9,569.56 E. $9,248.74

D. $9,569.56

Lew's Market invested in a project that returned 16.67 percent during a period when inflation averaged 3.26 percent. What real rate of return did Lew's earn on its project? A. 13.41% B. 13.03% C. 12.87% D. 12.99% E. $13.29%

D. 12.99%

MTM Ltd. wants to earn 14.25 percent on its current investments after inflation. Inflation is expected to average 2.8 percent over the next 5 years. What discount rate should MTM assign to a 5-year project assuming the project has the same level of risk as the firm's current operations? A. 16.96% B. 17.05% C. 11.14% D. 17.45% E. 12.09%

D. 17.45%

Bruno's 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. Machine A has a cost of $290,000, annual operating costs of $8,000, and a 3-year life. Machine B costs $180,000, has annual operating costs of $12,000, and has a 2-year life. Whichever machine is purchased will be replaced at the end of its useful life. Which machine should Bruno's purchase and why? A. Machine A; because it will save the company about $8,600 a year B. Machine A; because it will save the company about $132,912 a year C. Machine B; because it will save the company about $200,000 a year D. Machine B; because it will save the company about $11,600 a year E. Machine B; because its equivalent annual cost is $199,759

D. Machine B; because it will save the company about $11,600 a year

The book value of an asset is primarily used to compute the: A. annual depreciation tax shield. B. amount of cash received from the sale of an asset. C. amount of tax saved annually due to the depreciation expense. D. amount of tax due on the sale of an asset. E. change in depreciation needed to reflect the market value of the asset.

D. amount of tax due on the sale of an asset.

For a profitable firm, an increase in which one of the following will increase the operating cash flow? A. employee salaries B. office rent C. building maintenance D. depreciation E. equipment rental

D. depreciation

Net working capital: A. can be ignored in project analysis because any expenditure is normally recouped by the end of the project. B. requirements generally, but not always, create a cash inflow at the beginning of a project. C. expenditures commonly occur at the end of a project. D. is frequently affected by the additional sales generated by a new project. E. is the only expenditure where at least a partial recovery can be made at the end of a project.

D. is frequently affected by the additional sales generated by a new project.

The most valuable investment given up if an alternative investment is chosen is a(n): A. salvage value expense. B. net working capital expense. C. sunk cost. D. opportunity cost. E. erosion cost.

D. opportunity cost.

The increase you realize in buying power as a result of owning an investment is referred to as the _____ rate of return. A. inflated B. realized C. nominal D. real E. risk-free

D. real

The cash flow from a project is computed as the: A. net operating cash flow generated by the project, less any sunk costs and erosion costs. B. sum of the incremental operating cash flow and aftertax salvage value of the project. C. net income generated by the project, plus the annual depreciation expense. D. sum of the incremental operating cash flow, capital spending, and net working capital cash flows incurred by the project. E. sum of the sunk costs, opportunity costs, and erosion costs of the project.

D. sum of the incremental operating cash flow, capital spending, and net working capital cash flows incurred by the project.

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. A. opportunity B. fixed C. incremental D. sunk E. relevant

D. sunk

Which one of the following should be excluded from the analysis of a project? A. erosion costs B. incremental fixed costs C. incremental variable costs D. sunk costs E. opportunity costs

D. sunk costs

A company which uses the MACRS system of depreciation: A. will have equal depreciation costs each year of an asset's life. B. will expense the largest percentage of the cost during an asset's first year of life. C. can depreciate the cost of land, if it so desires. D. will write off the entire cost of an asset over the asset's class life. E. cannot expense any of the cost of a new asset during the first year of the asset's life.

D. will write off the entire cost of an asset over the asset's class life.

Leisure Vacations is considering a project which will require the purchase of $1.4 million in new 5-Year MACRS equipment The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. The firm desires a minimal 14 percent rate of return and the tax rate is 34 percent. What is the value of the depreciation tax shield in Year 2 of the project? A. $95,200.00 B. $117,205.29 C. $140,000.00 D. $123,416.79 E. $152,320.00

E. $152,320.00

Leisure Vacations is considering a 5-year project which will require the purchase of $1.4 million in new 5-Year MACRS equipment The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. The firm desires a minimal 14 percent rate of return and the tax rate is 34 percent. The equipment can be sold at the end of the project for an estimated $225,000. What is the amount of the aftertax salvage value? A. $147,600.00 B. $162,418.54 C. $95,322.15 D. $144,238.97 E. $175,917.60

E. $175,917.60

Ernie's Electrical is evaluating a project which will increase sales by $50,000 and costs by $30,000. The project will cost $150,000 and will be depreciated straight-line to a zero book value over the 10-year life of the project. The applicable tax rate is 34 percent. What is the operating cash flow for this project? A. $19,200 B. $15,000 C. $21,300 D. $17,900 E. $18,300

E. $18,300

Samson's purchased a lot four years ago at a cost of $398,000. At that time, the firm spent $289,000 to build a small retail outlet on the site. The most recent appraisal on the property placed a value of $629,000 on the property and building. Samson's now wants to tear down the original structure and build a new strip mall on the site at an estimated cost of $2.3 million. What amount should be used as the initial cash flow for new project? A. $2,987,000 B. $2,242,000 C. $2,058,000 D. $2,300,000 E. $2,929,000

E. $2,929,000

Pete's Garage 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? The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. A. $650,000 ×(1 − .20) ×(1 −.32) ×(1 −.192) B. $650,000 ×(1 − .20) ×(1 −.32) C. $650,000 ×(1 − .20) ×(1 − .32) × .192) D. $650,000 ×(1 −.192) E. $650,000 ×.192

E. $650,000 ×.192

Jamestown Ltd. currently produces boat sails and is considering expanding its operations to include awnings. The expansion would require the use of land the firm purchased three years ago at a cost of $142,000 that is currently valued at $137,500. The expansion could use some equipment that is currently sitting idle if $6,700 of modifications were made to it. The equipment originally cost $139,500 six years ago, has a current book value of $24,700, and a current market value of $39,000. Other capital purchases costing $780,000 will also be required. What is the amount of the initial cash flow for this expansion project? A. $953,400 B. $962,300 C. $948,900 D. $927,800 E. $963,200

E. $963,200

Assume a firm has no interest expense or extraordinary items. Given this, the operating cash flow can be computed as: A. EBIT - Taxes. B. EBIT × (1 - Tax rate) + Depreciation × Tax rate. C. (Sales - Costs) × (1 - Tax rate). D. EBIT - Depreciation + Taxes. E. Net income + Depreciation.

E. Net income + Depreciation.

The annual annuity stream of payments with the same present value as a project's costs is called the project's _____ cost. A. incremental B. sunk C. opportunity D. erosion E. equivalent annual

E. equivalent annual

A decrease in a firm's current cash flows resulting from the implementation of a new project is referred to as: A. salvage value expenses. B. net working capital expenses. C. sunk costs. D. opportunity costs. E. erosion costs.

E. erosion costs.

The pretax salvage value of an asset is equal to the: A. book value if straight-line depreciation is used. B. book value if MACRS depreciation is used. C. market value minus the book value. D. book value minus the market value. E. market value.

E. market value.

The equivalent annual cost method is useful in determining: A. the annual operating cost of a machine if the annual maintenance is performed versus when the maintenance is not performed as recommended. B. the tax shield benefits of depreciation given the purchase of new assets for a project. C. operating cash flows for cost-cutting projects of equal duration. D. which one of two machines to acquire given equal machine lives but unequal machine costs. E. which one of two machines to purchase when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.

E. which one of two machines to purchase when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.