Fin325 Chp 9 and 10

Net working capital:

can create either an initial cash inflow or outflow.

Graphing the crossover point helps explain:

how decisions concerning mutually exclusive projects are derived.

The equivalent annual cost method is useful in determining:

which one of two machines should be purchased when the machines are mutually exclusive, have differing lives, and will be replaced at the end of their lives.

A company that utilizes the MACRS system of depreciation but does not use bonus depreciation:

will have a greater depreciation tax shield in Year 2 than in Year 1.

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

$1,200 paid to repair a machine last year

The Card Shoppe needs to maintain 21 percent of its sales in net working capital. Currently, the store is considering a four-year project that will increase sales from its current level of $349,000 to $408,000 the first year and to $414,000 a year for the following three years of the project. What amount should be included in the project analysis for net working capital in Year 4 of the project?

$13,650

You are working on a bid to build two city parks a year for the next three years. This project requires the purchase of $249,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the three-year project life. Ignore bonus depreciation. The equipment can be sold at the end of the project for $115,000. You will also need $18,000 in net working capital for the duration of the project. The fixed costs will be $37,000 a year and the variable costs will be $148,000 per park. Your required rate of return is 14 percent and your tax rate is 21 percent. What is the minimal amount you should bid per park? (Round your answer to the nearest $100)

$208,200

A project has an initial cash outflow of $42,600 and produces cash inflows of $17,680, $19,920, and $15,670 for Years 1 through 3, respectively. What is the NPV at a discount rate of 12 percent?

$219.41

The maintenance expenses on a rental house you own average $200 a month and property taxes are $4,800 annually. The house cost $238,500 when you purchased it four years ago. The house was recently appraised at $247,600. If you sell the house you will incur $12,900 in costs. What value should you place on this house should you opt to use it as your professional office?

$234,700

A new molding machine is expected to produce operating cash flows of $109,000 a year for 4 years. At the beginning of the project, inventory will decrease by $8,700, accounts receivables will increase by $9,500, and accounts payable will decrease by $5,200. All net working capital will be recovered at the end of the project. The initial cost of the molding machine is $319,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. No bonus depreciation will be taken. The equipment will be salvaged at the end of the project creating an aftertax cash inflow of $51,600. What is the net present value of this project given a required return of 14.2 percent?

$25,162.45

The Market Place is considering a new four-year expansion project that requires an initial fixed asset investment of $1.67 million. The fixed asset will be depreciated straight-line to zero over its four-year tax life, after which time it will have a market value of $435,000. No bonus depreciation will be taken. The project requires an initial investment in net working capital of $198,000, all of which will be recovered at the end of the project. The project is estimated to generate $1,850,000 in annual sales, with costs of $1,038,000. The tax rate is 21 percent and the required return for the project is 16.4 percent. What is the net present value?

$451,180.73

P.A. Petroleum just purchased some equipment at a cost of $67,000. The equipment is classified as MACRS five-year property. The MACRS rates are .2, .32, and .192 for Years 1 to 3, respectively. What is the proper methodology for computing the depreciation expense for Year 2 assuming the firm opts to forego any bonus depreciation?

$67,000(.32)

W&M paid $179,000, in cash, for equipment three years ago and spent $18,000 for equipment upgrades last year. The company no longer uses this equipment and has received a cash offer of $68,000 from a buyer. The current book value of the equipment, including all updates, is $54,500. What value, if any, should the company assign to this equipment should it decide to use the equipment for a new project?

$68,000

PGH Inc. is considering a new seven-year expansion project with an initial fixed asset investment of $3.87 million. The fixed asset will be depreciated straight-line to zero over its seven-year tax life, after which time it will be worthless. No bonus depreciation will be taken. The project is estimated to generate $2,103,000 in annual sales, with costs of $1,065,000. The tax rate is 21 percent and the required return is 14.6 percent. What is the net present value of this project?

$71,841.16

Jefferson & Sons is evaluating a project that will increase annual sales by $198,600 and annual cash costs by $94,500. The project will initially require $187,000 in fixed assets that will be depreciated straight-line to a zero book value over the four-year life of the project. No bonus depreciation will be taken. The applicable tax rate is 22 percent. What is the operating cash flow for this project?

$91,483

TL Lumber is evaluating a project with cash flows of −$12,800, $7,400, $11,600, and −$3,200 for Years 0 to 3, respectively. Given an interest rate of 8 percent, what is the MIRR using the discounted approach?

14.36 percent

An investment that provides annual cash flows of $20,100 for 8 years costs $87,500 today. At what rate would you be indifferent between accepting the investment and rejecting it?

15.93 percent

Assume a project has cash flows of −$54,300, $18,200, $37,300, and $14,300 for Years 0 to 3, respectively. What is the profitability index given a required return of 12.6 percent?

1.02

A firm evaluates all of its projects by applying the IRR rule. The current proposed project has cash flows of −$37,048, $16,850, $15,700, and $19,300 for Years 0 to 3, respectively. The required return is 18 percent. What is the project IRR? Should the project be accepted or rejected?

18.42 percent; accept

A project has cash flows of -$108,000, $52,800, $53,200, and $83,100 for Years 0 to 3, respectively. The required payback period is two years. Based on the payback period of _____ years for this project, you should _____ the project.

2.02; reject

It will cost $9,600 to acquire an ice cream cart that is expected to produce cash inflows of $3,600 a year for three years. After the three years, the cart is expected to be worthless. What is the payback period?

2.67 years

A project has an initial cost of $18,400 and expected cash inflows of $7,200, $8,900, and $7,500 over Years 1 to 3, respectively. What is the discounted payback period if the required rate of return is 11.2 percent?

2.87 years

An investment project provides cash flows of $1,562 per year for 10 years. If the initial cost is $8,720, what is the payback period?

5.58 years

Precision Dyes is analyzing two machines to determine which one it should purchase. The company requires a rate of return of 15 percent and uses straight-line depreciation to a zero book value over the life of its equipment. Ignore bonus depreciation. Machine A has a cost of $462,000, annual aftertax cash outflows of $46,200, and a four-year life. Machine B costs $898,000, has annual aftertax cash outflows of $16,500, and has a seven-year life. Whichever machine is purchased will be replaced at the end of its useful life. Which machine should the company purchase and how much less is that machine's EAC as compared to the other machine's?

A; $24,321.02

Which one of the following would make a mutually exclusive 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

Which one of the following methods of project analysis is defined as computing the value of a project based on the present value of the project's anticipated cash flows?

Discounted cash flow valuation

Which one of these statements related to discounted payback is correct?

Discounted payback is biased towards short-term projects.

Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs and 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

Crystal Industries is considering an expansion project with cash flows of −$287,500, $107,500, $196,100, $104,500, and −$92,700 for Years 0 through 4. Should the firm proceed with the expansion based on the discounting approach to the modified internal rate of return if the discount rate is 13.4 percent? Why or why not?

No; The MIRR is 9.13 percent.

Which two methods of project analysis are the most biased towards short-term projects?

Payback and discounted payback

Three years ago, Knox Glass purchased a machine for a three-year project. The machine is being depreciated straight-line to zero over a five-year period. Assume the firm decided to forego any bonus depreciation. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (TC represents the relevant tax rate)

Sale price + (Book value − Sale price)(TC)

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

Frank's is a furniture store that is considering adding appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances?

Selling furniture to appliance customers

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

Which one of the following statements related to the internal rate of return (IRR) is correct?

The IRR is equal to the required return when the net present value is equal to zero.

Why is payback often used as the sole method of analyzing a proposed small project?

The benefits of payback analysis usually outweigh the costs of the analysis.

You are considering a project with conventional cash flows, an IRR of 11.63 percent, a PI of 1.04, an NPV of $987, and a payback period of 2.98 years. Which one of the following statements is correct given this information?

The discount rate used in computing the net present value was less than 11.63 percent.

The bid price always assumes which one of the following?

The net present value of the project is zero.

Home & More is considering a project with cash flows of −$368,000, $133,500, −$35,600, $244,700, and $258,000 for Years 0 to 4, respectively. Should this project be accepted based on the combination approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 14.6 percent? Why or why not?

Yes; The MIRR is 16.96 percent.

Alicia is considering adding toys to her gift shop. She estimates the cost of new inventory will be $9,500 and remodeling expenses will be $850. Toy sales are expected to produce net cash inflows of $1,300, $4,900, $4,400, and $4,100 over the next four years, respectively. Should Alicia add toys to her store if she assigns a 3-year payback period to this project? Why or why not?

Yes; The payback period is 2.94 years.

A project's average net income divided by its average book value is referred to as the project's average:

accounting return.

You are comparing two mutually exclusive projects. The crossover point is 12.3 percent. You have determined that you should accept project A if the required return is 13.1 percent. This implies you should:

always accept Project A if the required return exceeds the crossover rate.

The depreciation tax shield is best defined as the:

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

A project has an initial cost of $31,800 and a market value of $29,600. What is the difference between these two values called?

net present value

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

profitability index

Applying the discounted payback decision rule to all projects may cause:

some positive net present value projects to be rejected.

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

sunk

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

the interest expense is equal to zero.

A project has a required return of 12.6 percent, an initial cash outflow of $42,100, and cash inflows of $16,500 in Year 1, $11,700 in Year 2, and $10,400 in Year 4. What is the net present value?

−$11,748.69