FIN 3403 Exam 3 ch 10

Which one of the following is an example of a sunk cost?

$1,200 paid to repair a machine last year

Peterborough Trucking just purchased some fixed assets that are classified as 3-year property for MACRS. The assets cost $10,600. What is the amount of the depreciation expense in year 3

$1,569.86

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

$1,700,000

Northern Railway is considering a project which will produce annual sales of $975,000 and increase cash expenses by $848,000. If the project is implemented, taxes will increase from $141,000 to $154,000 and depreciation will increase from $194,000 to $272,000. The company is debt-free. What is the amount of the operating cash flow using the top-down approach

$114,000

The Pancake House has sales of $1,642,000, depreciation of $27,000, and net working capital of $218,000. The firm has a tax rate of 35 percent and a profit margin of 6 percent. The firm has no interest expense. What is the amount of the operating cash flow

$125,520

Edward's Manufactured Homes purchased some machinery 2 years ago for $319,000. These assets are classified as 5-year property for MACRS. The company is replacing this machinery today with newer machines that utilize the latest in technology. The old machines are being sold for $140,000 to a foreign firm for use in its production facility in South America. What is the aftertax salvage value from this sale if the tax rate is 35 percent

$144,592

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

$146,000

A proposed expansion project is expected to increase sales of JL Ticker's Store by $41,000 and increase cash expenses by $21,000. The project will cost $28,000 and be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project. The store has a marginal tax rate of 30 percent. What is the operating cash flow of the project using the tax shield approach

$16,100

Marie's Fashions is considering a project that will require $28,000 in net working capital and $87,000 in fixed assets. The project is expected to produce annual sales of $75,000 with associated cash costs of $57,000. The project has a 5-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 30 percent. What is the operating cash flow for this project

$17,820

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?

$2,400,000

Morris Motors just purchased some MACRS 5-year property at a cost of $216,000. Which one of the following will correctly give you the book value of this equipment at the end of year 2?

$216,000 × (1 - 0.20 - 0.32)

You own a house that you rent for $1,100 a month. The maintenance expenses on the house average $200 a month. The house cost $219,000 when you purchased it 4 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?

$225,000

Crafter's Supply purchased some fixed assets 2 years ago at a cost of $38,700. It no longer needs these assets so it is going to sell them today for $25,000. The assets are classified as 5-year property for MACRS. What is the net cash flow from this sale if the firm's tax rate is 30 percent

$23,072.80

You just purchased some equipment that is classified as 5-year property for MACRS. The equipment cost $147,000. What will the book value of this equipment be at the end of 4 years should you decide to resell the equipment at that point in time

$25,401.60

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 4-year life of the project. The applicable tax rate is 32 percent. What is the operating cash flow for this project

$43,480

The Lumber Yard is considering adding a new product line that is expected to increase annual sales by $238,000 and cash expenses by $184,000. The initial investment will require $96,000 in fixed assets that will be depreciated using the straight-line method to a zero book value over the 6-year life of the project. The company has a marginal tax rate of 32 percent. What is the annual value of the depreciation tax shield

$5,120

Bernie's Beverages purchased some fixed assets classified as 5-year property for MACRS. The assets cost $94,000. What will the accumulated depreciation be at the end of year three

$66,928

Keyser Petroleum just purchased some equipment at a cost of $67,000. What is the proper methodology for computing the depreciation expense for year 2 if the equipment is classified as 5-year property for MACRS

$67,000 × 0.32

Bi-Lo Traders is considering a project that will produce sales of $28,000 and increase cash expenses by $17,500. If the project is implemented, taxes will increase by $3,000. The additional depreciation expense will be $1,600. An initial cash outlay of $1,400 is required for net working capital. What is the amount of the operating cash flow using the top-down approach

$7,500

The Beach House has sales of $784,000 and a profit margin of 8 percent. The annual depreciation expense is $14,000. What is the amount of the operating cash flow if the company has no long-term debt

$76,720

Mason Farms purchased a building for $689,000 eight years ago. Six years ago, repairs were made to the building which cost $136,000. 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

$840,000

Webster & Moore paid $148,000, in cash, for a piece of equipment 3 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. Webster & Moore is debating whether to sell the equipment or to expand its operations so that the equipment can be used. When evaluating the expansion option, what value, if any, should the firm assign to this equipment as an initial cost of the project

$96,000

Kelly's Corner Bakery purchased a lot in Oil City 6 years ago at a cost of $302,000. Today, that lot has a market value of $340,000. At the time of the purchase, the company spent $15,000 to level the lot and another $20,000 to install storm drains. The company now wants to build a new facility on that site. The building cost is estimated at $1.51 million. What amount should be used as the initial cash flow for this project

-$1,850,000

Sailcloth & More currently produces boat sails and is considering expanding its operations to include awnings for homes and travel trailers. The company owns land beside its current manufacturing facility that could be used for the expansion. The company bought this land 5 years ago at a cost of $319,000. At the time of purchase, the company paid $24,000 to level out the land so it would be suitable for future use. Today, the land is valued at $295,000. 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 $490,000 will also be required. What is the amount of the initial cash flow for this expansion project?

-$835,000

Which one of the following statements is correct concerning bid prices

A firm can submit a bid that is higher than the computed bid price and still break even

Which one of the following statements is correct

A project can create a positive operating cash flow without affecting sales

Which one of the following is the depreciation method which allows accelerated write-offs of property under various lifetime classifications?

ACRS

When using the equivalent annual cost as a basis for deciding which equipment should be purchased, the equipment under consideration must fit which two of the following criteria? I. differing productive lives II. differing manufacturers III. required replacement at end of economic life IV. differing initial cost

I and III

All of the following are related to a proposed project. Which of these should be included in the cash flow at time zero? I. purchase of $1,400 of parts inventory needed to support the project II. loan of $125,000 used to finance the project III. depreciation tax shield of $1,100 IV. $6,500 of equipment needed to commence the project

I and IV only

Pro forma statements for a proposed project should

I, II, III, and IV

The equivalent annual cost considers which of the following? I. required rate of return II. operating costs III. need for replacement IV. economic life

I, II, III, and IV

Danielle's is a furniture store that is considering adding appliances to its offerings. Which of the following should be considered incremental cash flows of this project? I. utilizing the credit offered by a supplier to purchase the appliance inventory II. benefiting from increased furniture sales to appliance customers III. borrowing money from a bank to fund the appliance project IV. purchasing parts for inventory to handle any appliance repairs that might be necessary

I, II, and IV only

Which of the following should be included in the analysis of a new product? I. money already spent for research and development of the new product II. reduction in sales for a current product once the new product is introduced III. increase in accounts receivable needed to finance sales of the new product IV. market value of a machine owned by the firm which will be used to produce the new product

II, III, and IV only

Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero?

NI + D

Three years ago, Knox Glass purchased a machine for a 3-year project. The machine is being depreciated straight-line to zero over a 5-year period. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (T represents the relevant tax rate)

Sale price + (Book value - Sale price) × T

You own some equipment that you purchased 4 years ago at a cost of $225,000. The equipment is 5-year property for MACRS. You are considering selling the equipment today for $87,000. Which one of the following statements is correct if your tax rate is 35 percent

The aftertax salvage value is $70,158

The bid price always assumes which one of the following

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 5-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

The new machine will generate positive operating cash flows, at least in the first few years of its life

The depreciation tax shield is best defined as the

amount of tax that is saved because of the depreciation expense.

Which one of the following would make a project unacceptable

an equivalent annual cost that exceeds that of an alternative project

Which one of the following will increase a bid price?

an increase in the required rate of return

Changes in the net working capital requirements

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

The operating cash flow of a cost cutting project

can be positive even though there are no sales

Net working capital

can create either a cash inflow or a cash outflow at time zero of a project

Which one of the following is a project cash inflow? Ignore any tax effects

decrease in accounts receivable

The net book value of equipment will

decrease slower under straight-line depreciation than under MACRS

Increasing which one of the following will increase the operating cash flow assuming that the bottom-up approach is used to compute the operating cash flow

depreciation expense

Dan is comparing three 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. Which one of the following computational methods should Dan use as the basis for his decision

equivalent annual cost

Decreasing which one of the following will increase the acceptability of a project

equivalent annual cost

The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following?

equivalent annual cost

Which one of the following best describes pro forma financial statements?

financial statements showing projected values for future time periods

Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets. The firm is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project?

hiring additional employees to handle the increased workload should the firm accept the wreath project

The top-down approach to computing the operating cash flow

ignores noncash expenses

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

incremental

The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's:

incremental cash flows

The operating cash flow for a project should exclude which one of the following

interest expense

You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines which have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine which has the:

lowest equivalent annual cost

The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following?

opportunity cost

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?

selling fewer hot dogs because hamburgers were added to the menu

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?

stand-alone principle

G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?

sunk

Which one of the following costs was incurred in the past and cannot be recouped?

sunk

The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following

tax due on the salvage value of that asset

Which one of the following best describes the concept of erosion?

the cash flows of a new project that come at the expense of a firm's existing cash flows

The bottom-up approach to computing the operating cash flow applies only when

the interest expense is equal to zero

The bid price is

the minimum price you should charge if you want to earn a target return on investment.

The equivalent annual cost method is useful in determining

which one of two machines should be purchased when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out

A company that utilizes the MACRS system of depreciation

will have a greater tax shield in year two of a project than it would have if the firm had opted for straight-line depreciation, given the same depreciation life.