Finance Chapter 9
Little Giant is building a manufacturing plant that will require a cash outlay of $300,000 for the initial purchase of a building, $450,000 for remodeling the first year, and $710,00 for new equipment in the second year. If the firm's cost of capital is 12 percent, what is the present value of the net investment at time 0?
$1,267,720
Rupp Pumps is purchasing an extruder for $80,000. The extruder will require an expenditure of $12,000 for installation and $4,000 for training new operators. The new equipment will require an increase of $5,000 in inventory, $4,000 in accounts receivable, and $3,000 in accounts payable. What is the net investment for this project?
$102,000
Baker Company is considering an investment in a new metal lathe. If the new lathe is purchased, revenues will increase by $5,000 per year and cash operating costs will decline by $10,000 per year. The lathe will cost $60,000 and will be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. Baker's marginal tax rate is 40%. Determine the annual net cash flows generated by the lathe.
$11,400
Allen Company is considering an investment project that is expected to generate $100,000 in annual earnings before taxes. Annual depreciation will be $50,000. Allen's marginal tax rate is 40%. Determine the project's annual net cash flows.
$110,000
The Johnson Drum Company is planning to build a new factory. The purchase of the land, building the plant, and installation of equipment will take place over a two year period. The following are planned cash outflows: Year Cash Outflow 0 $3,500,000 1 $4,750,000 2 $6,100,000 Johnson Drum's cost of capital is 14%, and its marginal tax rate is 35%. What is the NINV measured in present value terms today?
$12,356,650
Basin Manufacturing (40% marginal tax rate) is considering a plant expansion project. The equipment will cost $100,000 and will require an additional $10,000 for delivery and installation. The expansion also will require Basin to increase immediately its net working capital by $25,000. The expansion is expected to generate revenues of $150,000 per year. Calculate the project's net investment.
$135,000
Adler is replacing its old packing line with a more efficient line. The old line was being depreciated on a straight-line basis at a rate of $20,000 per year. The old machine has a current book value of $100,000. The new line, which costs $910,000, will be depreciated on a 10-year MACRS schedule. The more efficient operation is expected to increase revenues by $50,000 per year and reduce annual operating costs by $80,000. Compute the net cash flows for Adler in year 2. Assume Adler has a marginal tax rate of 40%. Use the rounded MACRS schedule listed below: (10-Year Depreciation Schedule: 10%, 18%, 14%, 12%, 9%, 7%, 7%, 7%, 7%, 6%, 3%)
$135,520
Seduck has just replaced a set of hydraulic screens that had been in operation for 6 years with a newer screening system that cost $180,000 installed. The old system cost $140,000 and had been depreciated as a 10-year MACRS asset. Its salvage value is $10,000. What is the NINV for the new equipment? Assume a 40% tax rate. Use the rounded MACRS schedule listed below: (10-Year Depreciation Schedule: 10%, 18%, 14%, 12%, 9%, 7%, 7%, 7%, 7%, 6%, 3%)
$157,200
Felix Industries purchased a grinder 5 years ago for $15,000. It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of zero. It could be sold now for $6,000. The firm is considering selling it and purchasing a new one. The new grinder would cost $25,000 installed and would be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. The company's marginal tax rate is 40%. Determine the net investment if the old grinder is sold and the new one purchased.
$17,400
The management of Jasper Equipment Company is planning to purchase a new milling machine that will cost $160,000 installed. The old milling machine has been fully depreciated but can be sold for $15,000. The new machine will be depreciated on a straight line basis over it's 10 year economic life to an estimated salvage value of $10,000. If this milling machine will save Jasper $20,000 a year in production expenses, what are the annual net cash flows associated with the purchase of this machine? Assume a marginal tax rate of 40 percent.
$18,000
LISP Inc. is planning to purchase a new mixer for $50,000 that will qualify as MACRS 3-year property (first year depreciation rate = 33.33%). The new mixer should increase revenues by $20,000 per year with no increase in operating cost. If LISP's marginal tax rate is 40 percent, what is the net cash flow in the first year?
$18,666
Parker Chemicals purchased a hexene extractor 10 years ago for $120,000. It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of zero. It can be sold today for $10,000. Parker is considering purchasing a new more efficient extractor that would cost $270,000 installed and would be depreciated as a 10-year MACRS asset. (The depreciation rate for year one is 10 percent for this asset.) The company's marginal tax rate is 40%. If the new extractor is purchased, annual revenues will increase by $10,000 and annual operating expenses will decrease by $10,000. What is the net cash flow in year 1?
$19,600
Outback is purchasing a new machine that will cost $98,000. The machine will qualify as MACRS 5-year property but has an economic life of 8 years. The new machine is expected to increase revenues by $35,000 per year and operating costs are expected to increase by $15,000 per year. If the firm's marginal tax rate is 34 percent and the first year's depreciation rate is 20 percent, what is the net cash flow in the first year.
$19,864
Capital Foods purchased an oven 5 years ago for $45,000. The oven is being depreciated over its estimated 10-year life using the straight line method to a salvage value of $5,000. Capital is planning to replace the oven with a more automated one that will cost $150,000 installed. If the old oven can be sold for $30,000, what is the tax liability? Assume a marginal tax rate of 40 percent.
$2,000
Maritech purchased a pellet mill 4 years ago for $60,000. The mill is being depreciated over 7 years using MACRS. Maritech is planning to replace the mill with a higher volume unit that will cost $110,000 installed. If the old mill can be sold for $25,000, what is the tax liability? Assume a marginal tax rate of 40%. Use the rounded MACRS schedule listed below. (7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)
$2,560
Rough & Tumble Clothiers is considering the purchase of a new loom to replace a less efficient one. The new machine will cost $240,000 including installation. The machine being replaced was purchased 5 years ago for $150,000 and is being depreciated as a 7-year MACRS property. It can be sold for $40,000. Compute the NINV for this project if KC has a marginal tax rate of 40%. Use the rounded MACRS schedule listed below: (7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)
$202,614
Moon Pie Company is considering automated baking equipment that costs $500,000 installed and would replace the present hand-made production method. The present equipment has a zero book and salvage value. The new equipment will not increase revenues but will reduce operating costs from a current level of $600,000 to $300,000 per year. The depreciation of the new equipment will be $73,000 per year. What are the annual incremental net cash flows? Assume a marginal tax rate of 40 percent.
$209,200
Martin Tartans, Inc. is considering the purchase of a new argyle sock knitting machine to replace a less automated one. The new machine will cost $220,000 plus $30,000 for shipping and installation. The machine being replaced was purchased five years ago for $140,000 and depreciated as a 7-year MACRS property. It can be sold for $24,000. Boll Mills has a marginal tax rate of 35%. Compute the NINV for the project. Use the rounded MACRS schedule listed below: (7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)
$223,620
A Lotta Bread Corp. is replacing an entire baking line that was purchased for $420,000 and currently has a book value of $60,000. The new, more efficient line, will cost $940,000 installed and can be depreciated as a 7-year MACRS asset. With the increased efficiency, Lotta expects annual revenues to increase by $425,000, and operating expenses to increase by $170,000. The older machine, which was being depreciated at the straight-line rate of $20,000/year, will be sold for $30,000. What are the net cash flows for year 2? Assume the firm's marginal tax rate is 40% and that the year 2 depreciation rate is 24.49%.
$237,082
Consider a capital expenditure project with an expected 10-year economic life and forecasted revenues equal to $40,000 per year; cash expenses are estimated to be $29,000 per year. The cost of the project equipment is $23,000, and the equipment's estimated salvage value at the end of the project is $9000.The equipment's $23,000 cost will be depreciated using MACRS depreciation (7-year asset). The project requires a $7,000 working capital investment in year 0 and another $5,000 in year 5. The company's marginal tax rate is 40%. Calculate the expected net cash flow in year 10 of the project.
$24,000
Airstat is replacing an old stamping line that cost $80,000 five years ago, with a new, more efficient machine that will cost $225,000. Shipping and installation will cost an additional $20,000. The old machine has a book value of $15,000 but will be sold as scrap for $5,000. The new machine will be depreciated with a 7 year life under MACRS guidelines. With the increased production, inventories will increase $4,000, accounts receivable will increase $16,000, and accounts payable will increase $14,000. If Airstat has a marginal tax rate of 40 percent, what is the net investment?
$242,000
Parker Chemicals purchased a hexene extractor 10 years ago for $120,000. It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of zero. It can be sold today for $10,000. Parker is considering purchasing a new more efficient extractor that would cost $270,000 installed and would be depreciated as a 10-year MACRS asset. The company's marginal tax rate is 40%. Determine the NINV if the old extractor is sold and the new one is purchased.
$248,000
Jim Bo's currently has annual cash revenues of $240,000 and annual operating expenses of $185,000 including $35,000 in depreciation. The firm's marginal tax rate is 40 percent. A new cutting machine can be purchased for $120,000 will increase revenues by $50,000 per year while operating expenses would increase to $205,000, including $42,000 in depreciation. Compute Jim Bo's annual incremental after-tax net cash flows.
$25,000
A drill press costs $30,000 and is expected to have a 10 year life. The drill press will be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. This machine is expected to reduce the firm's cash operating costs by $4,500 per year. If the firm is in the 40 percent marginal tax bracket, determine the annual net cash flows generated by the drill press.
$3,900
What is the net investment required for a pitting machine that will cost $35,000 including installation? The machine replaces a machine that cost $5,000 when purchased five years ago. The old machine has been fully depreciated but has a market value of $6,000. Assume the marginal tax rate is 40 percent.
$31,400
Anderson Clayton will purchase a new pellet mill that replace an older, less efficient, mill. The new mill costs $360,000 and shipping costs are $10,000. Improving the steam lines to the new mill will cost an additional $22,000. The old mill has a book value of $25,000 and can be sold for $12,000. The installation of the new mill will cause inventories to increase by $8,000, accounts receivable will go up $20,000, and accounts payable will increase $10,000. If Anderson Clayton has a marginal tax rate of 40%, what is the NINV for the new mill?
$392,800
Ten years ago J-Bar Company purchased a lathe for $250,000. It was being depreciated on a straight-line basis to an estimated $25,000 salvage value over a 15 year period. The firm is considering selling the old lathe and purchasing a new one. The new lathe would cost $500,000. The firm's marginal tax rate 40 percent. Determine the net investment required to purchase the new lathe, if the old lathe is sold for $100,000.
$400,000
LISP Inc. is planning to purchase a new mixer/dubber for $50,000. The new equipment will replace an older mixer that has been fully depreciated but has a salvage value of $5,000. Compute the net investment required for this project. Assume a marginal tax rate of 40 percent.
$47,000
What is the net investment for an extruder that costs $42,000, if shipping costs are $1,500 and installation is $4,800? Assume this efficient machine is replacing an older extruder with a book and market value of zero. The replacement investment will reduce operating costs by $6,600 a year.
$48,300
Pixaire purchased a new mixer to replace an older system. The older system which cost $100,000 is 5 years old now and was being depreciated over a MACRS life at 7 years. The new mixer, which will cost $270,000, will also be depreciated as a 7 year asset for MACRS purposes. The new mixer is expected to increase revenues by $64,000 with no additional operating expenses. Determine the net operating cash flows in year 2 for the new mixer. Assume a 40% tax rate. Use the rounded MACRS schedule listed below: (7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)
$61,277
An investment project is expected to generate earnings before taxes (EBT) of $60,000 per year. Annual depreciation from the project is $30,000 and the firm's tax rate is 40 percent. Determine the project's annual net cash flows.
$66,000
Com-Cat is considering expanding their current production facility. This year Com-Cat had an operating income (EBIT) of $760,000, interest expenses of $120,000, depreciation expenses of $45,000, and capital expenditures of $160,000. Next year, after the expansion is completed, operating income is expected to be $880,000, interest expenses will remain at $120,000, but depreciation will increase to $61,000. To support the expansion, cash is to expected to increase by $5,000, accounts receivable by $12,000, inventories by $8,000, and accounts payable by $7,000. What is the change in Com-Cat's net operating cash flows attributable to this project, if the tax rate is 40%?
$70,000
The Weis Corp. purchased a new conveyor system to replace an older less automated system. The old system, which was 10 years old, was being depreciated on a straight line basis over its 20-year life at $25,000 per year. The new system will be depreciated as a 7-year asset for MACRS purposes. The more efficient machine, which costs $520,000 installed, will reduce operating costs by $74,000 per year. Compute the net cash flows in year 3 for the new system. Assume a 40% tax rate. Use the rounded MACRS schedule listed below: (7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)
$71,840
Ripstart is replacing an old, fully depreciated stamping line with a more efficient machine that will cost $245,000. The line will be depreciated as a 7-year MACRS asset. With the increased production, Ripstart expects revenues to increase by $55,000, and operating expenses to increase by $20,000. If Ripstart expects to sell the new machine at the end of year 5 for $40,000, compute the net cash flow in the fifth year. The MACRS depreciation rate during the fifth year is 8.93% and the accumulated MACRS depreciation after five years totals 77.69 percent of the cost of the asset. Assume the firm's marginal tax rate is 40 percent and that company does get to take the full benefit of year 5 depreciation.
$75,615
In Step Video is considering expanding its video rental library to 8,000 tapes. The purchase price of the additional videos will be $80,000 and the shipping cost is another $4,000. To house the tapes, the owner will have to spend another $10,000 for display shelves, increase net working capital by $5,000, and interest expenses will add another $8,000 to the operating cost. What is the net investment to In Step Video for this project?
$99,000
Shunt Technology will spend $800,000 on a piece of equipment that will manufacture fine wire for the electronics industries. The shipping and installation charges will be $240,000 and net working capital will increase $48,000.The equipment will replace an existing machine that has a salvage value of $75,000 and a book value of $125,000. If Shunt has a current marginal tax rate of 34 percent, what is the net investment?
$996,000
All of the following are reasons that capital investment analysis must be performed correctly EXCEPT:
Establish global markets.
____ is the term used when the initial cost of all acceptable capital budgeting projects is greater than the total funds the firm has available.
Funds constraint
Of the following, an example of a component of a firm's cost of capital is:
The return on common stock required by investors.
Determine if this project is profitable under the following circumstances: A company is undertaking a new project. The specialized equipment that needs to be bought has an expense of $28,000. In addition, permits and licenses are required which will cost $1500. Employee training will be an additional $46,000 expenditure. To produce the merchandise, raw materials are required that will cost $48,000 and this project will generate cash flows of $25,000 per year for 10 years. The cost of capital for this project is 12%.
Yes, the project is acceptable with a net present value equaling about $17,756.
The net investment calculation for an asset replacement decision normally includes any ____.
after-tax salvage value of the old asset and increase in net working capital
A firm's cost of capital is:
an important input in the capital budgeting process
Which of the following is not a major step in the capital budgeting process?
analyzing the effect of a project on the firm's financial ratios
The net investment calculation for an ____ project normally includes ____.
asset replacement; after-tax proceeds from the sale of the old asset
A (n) ____ is a cash outlay that is expected to generate a flow of future cash benefits lasting longer than 1 year.
capital expenditure
A term meaning that the firm has limited funds and must choose only those projects that will be profitable is:
capital rationing
Capital expenditure projects may be classified in all the following types except:
capital rationing
Which of the following is a basic principle when estimating a project's cash flows?
cash flows should be measured on an incremental basis
Which of the following is not a major difficulty in implementing the basic capital budgeting model?
choosing an appropriate criterion for selecting among various investment alternatives
A(n) ____ project is one whose acceptance is dependent on the adoption of one or more other projects.
contingent
When managers knowingly bias estimates of cash flows from investment projects in order to serve their personal objectives, they are ____.
departing from the shareholder wealth maximization goal
The net cash flows for any year during the life of capital expenditure project are equal to the change in ____ plus the change in ____.
earnings after taxes; depreciation
Cash flows for all investment projects should be projected over the ____ of the project.
economic life
The capital budgeting process is very important to the firm because it:
essentially plots the company's future direction
Determining the net investment (NINV) of a project includes explicit consideration of all of the following except:
estimated net cash flow
The ____ the amount of depreciation charged in a period, the ____ will be the firm's taxable income.
greater, lower
Most firms choose accelerated depreciation methods because
income taxes are deferred
Depreciation is based on the asset cost plus all of the following except
increase in inventory
The effect of a one dollar increase in depreciation expenses is to ____ the typical firm's net cash flows by ____ one dollar.
increase, less than
In terms of the capital budgeting process, net cash flows are
incremental changes in a firm's cash flow.
The determination of net cash flows (NCF) should never include
interest charges
The ____ is a schedule of projects arranged in ____ order according to their expected rates of return.
investment opportunity curve, descending
The difference between a capital expenditure and an operating expenditure is that a capital expenditure:
is expected to generate future cash benefits lasting longer than one year.
Depreciation
is not a cash outflow.
There is a capital gain on the sale of an asset for ____.
more than its original cost
When a firm sells an asset for ____, it realizes a capital gain and must pay income taxes on it.
more than its original cost
A contractor has a team of plumbers and assigns those plumbers to a new construction site. The fact that the plumbers are unavailable for any other job makes the construction site project a/an:
mutually exclusive project
Raider Productions has to decide whether to build its warehouse in Dallas or Houston. This decision falls into the class of:
mutually exclusive projects
The decision by the Municipal Transportation Authority to either refurbish existing buses, to buy new large buses, or to supplement the existing fleet with mini-buses is an example of:
mutually exclusive projects
____ have cash flow patterns with more than one sign change.
non-normal projects
The dollar amount of interest charges is:
normally not considered in the net cash flow calculation
The value of resources used in an investment project should be measured in terms of their
opportunity cost
Projects are often classified based on the type of capital expenditure. All of the following are project classifications EXCEPT:
projects generated to meet the needs of customers
Which of the following would not be classified as a capital expenditure for decision-making purposes?
purchase of 90-day Treasury Bills
Depreciation ____ reported profits and it ____ taxes paid by a firm.
reduces, reduces
The set of investment projects arranged in descending order according to their expected rates of return is known as the ____.
simplified capital budgeting model
In estimating the net investment, an outlay that has already been made is known as a (n) ____.
sunk cost
There is neither a gain or a loss on the sale of a depreciable asset for an amount exactly equal to its ____.
tax book value
When calculating the net cash flow in a project's expected final year,
the after-tax salvage value of any project equipment is considered
Which of the following items is not considered as a part of the net investment calculation?
the first year's net cash flow
If a firm sells an asset for less than its book value,
the loss may be used to offset operating income
Sale of an asset for less than book value creates an operating loss which effectively reduces the company's taxes by an amount equal to ____ times ____.
the loss, the company's marginal tax rate
A recent survey of Fortune 500 firms regarding their cash flow estimation procedures indicated that
the majority produced detailed cash flow projections
Which of the following are (is) generally considered problems associated with cash flow estimation?
uncertainty about the future cash flows and the introduction of bias into the estimation of cash flows
