FIN_3610_CH_10_60

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? A. $146,000 B. $275,000 C. $413,000 D. $623,000 E. $680,000

A. $146,000

Hot and Cold has annual sales of $982,000, annual depreciation of $127,000, and net working capital of $243,000. The tax rate is 34 percent and the profit margin is 6 percent. The firm has no interest expense. What is the amount of the operating cash flow? A. $98,520 B. $185,920 C. $210,220 D. $268,480 E. $691,300

B. $185,920

Houston's is considering a project that will produce incremental annual sales of $234,000 and increase cash expenses by $148,000. If the project is implemented, taxes will increase from $31,000 to $34,000, and depreciation will increase from $41,000 to $46,000. The company is debt-free. What is the amount of the operating cash flow using the top-down approach? A. $88,000 B. $83,000 C. $87,000 D. $89,000 E. $84,000

B. $83,000

Kelly's Corner Bakery purchased a lot in Oil City six years ago at a cost of $278,000. Today, that lot has a market value of $264,000. At the time of the purchase, the company spent $6,000 to level the lot and another $8,000 to install storm drains. The company now wants to build a new facility on that site. The building cost is estimated at $1.03 million. What amount should be used as the initial cash flow for this project? A. -$1,308,000 B. -$1,294,000 C. -$1,322,000 D. -$1,308,000 E. -$1,045,000

B. -$1,294,000

Assume you are considering two mutually exclusive machines and need to select one for a cost-cutting project. Which one of these sets of characteristics best indicates the use of the equivalent annual cost method of analysis? A. Differing costs with no replacement at end of life. B. Differing lives and planned replacement at end of life. C. Differing lives with no replacement at end of life D. Differing manufacturers and differing operating costs. E. Differing required returns with no replacement at end of life.

B. Differing lives and planned replacement at end of life.

The maintenance expenses on a rental house you own average $200 a month. The house cost $219,000 when you purchased it four years ago. A recent appraisal on the house valued it at $239,000. If you sell the house you will incur $14,000 in real estate fees. The annual property taxes are $4,000. 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? A. $211,800 B. $221,000 C. $225,000 D. $235,000 E. $239,000

C. $225,000

Jefferson & Sons is evaluating a project that will increase annual sales by $145,000 and annual cash costs by $94,000. The project will initially require $110,000 in fixed assets that will be depreciated straight-line to a zero book value over the four-year life of the project. The applicable tax rate is 32 percent. What is the operating cash flow for this project? A. $11,220 B. $29,920 C. $43,480 D. $46,480 E. $46,620

C. $43,480

Mason Farms purchased a building for $689,000 eight years ago. Six years ago, repairs costing $136,000 were made to the building. The annual taxes on the property are $11,000. The building has a current market value of $840,000 and a current book value of $494,000. The building is totally paid for and solely owned by the firm. If the company decides to use this building for a new project, what value, if any, should be included in the initial cash flow of the project for this building? A. $0 B. $582,000 C. $840,000 D. $865,000 E. $953,000

C. $840,000

Webster & Moore paid $148,000, in cash, for equipment three 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 $96,000 from a firm that would like to purchase it. The firm is debating whether to sell the equipment or to expand its operations so that the equipment can be used. The equipment, including the updates, has a book value of $44,500. When evaluating the expansion option, what value, if any, should the firm assign to this equipment as an initial cost of the project? A. $0 B. $44,500 C. $96,000 D. $124,500 E. $160,000

C. $96,000

High Breeze currently produces boat sails and is considering expanding into awnings for homes and travel trailers. The company owns land that could be used for the expansion. This land was purchased fiveat a cost of $319,000 and is valued today at $395,000. The company 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 $138,000 will also be required. What is the amount of the initial cash flow for this expansion project? A. -$571,000 B. -$469,000 C. -$583,000 D. -$507,000 E. -$545,000

C. -$583,000

Which one of the following would make a mutually exclusive project unacceptable? A. Cash inflow for net working capital at time zero. B. Requiring fixed assets that would have no salvage value. C. An equivalent annual cost that exceeds that of an alternative project. D. Lack of revenue generation. E. A depreciation tax shield that exceeds the value of the interest expense.

C. An equivalent annual cost that exceeds that of an alternative project.

The bid price always assumes which one of the following? A. A project has a one-year life. B. The aftertax net income of the project is zero. C. The net present value of the project is zero. D. Any assets purchased will have a positive salvage value at the end of the project. E. Assets will be depreciated based on MACRS.

C. The net present value of the project is zero.

Dexter Smith & Co. is replacing a machine simply because it has worn out. The new machine will not affect either sales or operating costs and will not have any salvage value at the end of its five-year life. The firm has a 34 percent tax rate, uses straight-line depreciation over an asset's life, and has a positive net income. Given this, which one of the following statements is correct? A. As a project, the new machine has a net present value equal to minus one times the machine's purchase price. B. The new machine will have a zero rate of return. C. The new machine will generate positive operating cash flows. D. The new machine will create a cash outflow when the firm disposes of it at the end of its life. E. The new machine creates erosion effects.

C. The new machine will generate positive operating cash flows.

Nelson Mfg. owns a manufacturing facility that is currently sitting idle. The facility is located on a piece of land that originally cost $159,000. The facility itself cost $1,390,000 to build. As of now, the book value of the land and the facility are $159,000 and $458,000, respectively. The firm owes no debt on either the land or the facility at the present time. The firm received a bid of $1,700,000 for the land and facility last week. The firm's management rejected this bid even though they were told that it is a reasonable offer in today's market. If the firm was to consider using this land and facility in a new project, what cost, if any, should it include in the project analysis? A. $0 B. $617,000 C. $1,083,000 D. $1,700,000 E. $1,619,000

D. $1,700,000

Webster's has sales of $649,000 and a profit margin of 7.2 percent. The annual depreciation expense is $102,600. What is the amount of the operating cash flow if the company has no long-term debt? A. $55,872 B. $39,341 C. $74,240 D. $149,328 E. $104,760

D. $149,328

Cool Comfort currently sells 300 Class A spas, 450 Class C spas, and 200 deluxe model spas each year. The firm is considering adding a mid-class spa and expects that, if it does, it can sell 375 of them. However, if the new spa is added, Class A sales are expected to decline to 225 units while the Class C sales are expected to decline to 200. The sales of the deluxe model will not be affected. Class A spas sell for an average of $12,000 each. Class C spas are priced at $6,000 and the deluxe model sells for $17,000 each. The new mid-range spa will sell for $8,000. What is the value of the erosion? A. $600,000 B. $1,200,000 C. $1,800,000 D. $2,400,000 E. $3,900,000

D. $2,400,000

A project has projected sales of $26,000, cash expenses of $18,500, depreciation of $1,730, taxes of $1,400, and an initial cash requirement of $2,200 for working capital. What is the amount of the operating cash flow using the top-down approach? A. $4,370 B. $3,900 C. $8,300 D. $6,100 E. $8,900

D. $6,100

Decreasing which one of the following will increase the acceptability of a project? A. Sunk costs. B. Salvage value. C. Depreciation tax shield. D. Equivalent annual cost. E. Accounts payable requirement.

D. Equivalent annual cost.

Marie's Fashions is considering a project that will require $41,000 in net working capital and $64,000 in fixed assets. The project is expected to produce annual sales of $62,000 with associated cash costs of $41,000. The project has a three-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 34 percent. What is the operating cash flow for this project? A. -$220.00 B. -$17,580.00 C. $16,421.15 D. $25,760.00 E. $21,113.33

E. $21,113.33

The equivalent annual cost considers all of the following except the: A. Required rate of return. B. Operating costs. C. Need for replacement. D. Economic life. E. Costs of research conducted to identify equipment choices.

E. Costs of research conducted to identify equipment choices.