Chapter 5 HW - Financial Management

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? A) $241,334.55 B) $302,208.15 C) $254,595.45 D) $358,576.22 E) $451,180.73

E

Cool Comfort currently sells 340 Class A spas, 465 Class C spas, and 125 deluxe model spas each year. The firm is considering adding a mid-class spa and expects that, if it does, it can sell 360 of them. However, if the new spa is added, Class A sales are expected to decline to 235 units while the Class C sales are expected to decline to 275 units. The sales of the deluxe model will not be affected. Class A spas sell for an average of $10,700 each. Class C spas are priced at $18,700 and the deluxe model sells for $27,000 each. The new mid-range spa will sell for $13,500. What is the value of the erosion effect? A) −$4,676,500 B) −$3,827,000 C) −$4,166,500 D) −$3,657,000 E) −$3,510,500

A

Honor Computing just purchased new equipment that cost $213,000. 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? A) $213,000(.32) B) $213,000(1 − .32) C) $213,000(1 − .20)(.32) D) $213,000(1.32) E) $213,000/(1 − .20 − .32)

A

The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following? A) Opportunity cost B) Terminal cost C) Erosion cost D) Salvage value E) Sunk cost

A

A furniture store is considering adding kitchen appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances? A) Using the store's billing system for appliance sales B) Selling furniture to appliance customers C) Moving furniture to provide floor space for the appliances D) Paying the rent for the store E) Having the current store manager also oversee appliance sales

B

A proposed three-year project will require $589,000 for fixed assets, $79,000 for inventory, and $43,000 for accounts receivable. Accounts payable are expected to increase by $47,000. The fixed assets will be depreciated straight-line to a zero book value over five years. No bonus depreciation will be taken. At the end of the project, the fixed assets can be sold for $225,000. The net working capital returns to its original level at the end of the project. The operating cash flow per year is $67,900. The tax rate is 21 percent and the discount rate is 12 percent. What is the total cash flow in the final year of the project? A) $369,770 B) $370,126 C) $378,970 D) $364,190 E) $361,000

B

Heer Enterprises needs someone to supply it with 130,000 cartons of machine screws per year to support its manufacturing needs over the next four years, and you've decided to bid on the contract. It will cost you $765,000 to install the equipment necessary to start production; you'll depreciate this cost straight-line to zero over the project's life. You estimate that in four years, this equipment can be salvaged for $375,000. Your fixed production costs will be $190,000 per year, and your variable production costs should be $8.20 per carton. You also need an initial investment in net working capital of $59,500, all of which will be recovered when the project ends. Your tax rate is 22 percent and you require a return of 14.5 percent. What bid price per carton should you submit? A) $10.56 B) $11.37 C) $11.03 D) $12.04 E) $11.81

B

The base-case values used in scenario analysis are the values considered to be the most: A) optimistic. B) likely to occur. C) desired by management. D) pessimistic. E) likely to create a positive net present value.

B

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? A) Salvage principle B) Stand-alone principle C) Equivalent cost principle D) Fundamental principle E) Underlying value principle

B

Uroda Coffee has computed its fixed costs to be $.27 for every cup of coffee it sells given annual sales of 739,000 cups. The sales price is $.99 per cup while the variable cost per cup is $.12. How many cups of coffee must it sell to break even on a cash basis? A) 146,472 B) 229,345 C) 184,806 D) 167,630 E) 251,910

B

A proposed project has fixed costs of $42,106 per year. The operating cash flow at 12,000 units is $56,900. Ignore taxes. What will be the new degree of operating leverage if the number of units sold rises to 12,600? A) 1.46 B) 1.57 C) 1.68 D) 1.74 E) 1.82

C

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 manufacturers and differing operating costs B) Differing required returns with no replacement at end of life C) Differing lives and planned replacement at end of life D) Differing costs with no replacement at end of life E) Differing lives with no replacement at end of life

C

Hatch Idea Labs purchased some equipment two years ago for $287,600. These assets are classified as five-year property for MACRS. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576, for Years 1 to 6, respectively. The company is currently replacing this equipment so the old equipment is being sold for $150,000. What is the aftertax salvage value from this sale if the tax rate is 21 percent and no bonus depreciation is claimed? A) $142,311.12 B) $154,183.20 C) $147,490.08 D) $149,000.00 E) $144,433.20

C

Matthews Manufacturing is trying to decide between two different conveyor belt systems. System A costs $438,000, has a six-year life, and requires $83,000 in pretax annual operating costs. System B costs $369,000, has a five-year life, and requires $92,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have a zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. The tax rate is 23 percent and the discount rate is 14.2 percent. Which system should the firm choose and why? A) B; The net present value is −$608,222. B) B: The net present value is −$490,696. C) B; The net present value is −$553,041. D) A; The net present value is −$398,516. E) A; The net present value is −$547,836.

C

Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project? A) Simulation B) Cash flow C) Sensitivity D) Scenario E) Break-even

C

You are the manager of a project that has a degree of operating leverage of 1.84 and a required return of 15 percent. Due to the current state of the economy, you expect unit sales to decrease by 3.5 percent next year. What change should you expect in the operating cash flows next year given your sales prediction? A) 6.44 percent increase B) 4.50 percent decrease C) 6.44 percent decrease D) 5.34 percent increase E) 5.34 percent decrease

C

Alcid Manufacturing is analyzing a project with anticipated sales of 8,400 units, ±2 percent. The variable cost per unit is $72, ±2 percent, and the expected fixed costs are $243,000, ±1 percent. The sales price is estimated at $119 per unit, ±3 percent. The depreciation expense is $34,200 and the tax rate is 21 percent. What is the earnings before interest and taxes under the base-case scenario? A) $151,800 B) $242,600 C) $216,400 D) $117,600 E) $394,800

D

Humberto is fairly cautious when analyzing a new project and thus he projects the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected. Which type of analysis is he using? A) Break-even analysis B) Sensitivity analysis C) Rationing analysis D) Scenario analysis E) Simulation testing

D

Myers Storage purchased a parcel of land four years ago at a cost of $112,600. Today, the land has a market value of $136,600. At the time of the purchase, the company spent $8,400 to grade the land and another $11,500 to install electrical access. The company now wants to build a new facility on the site at an estimated cost of $522,700. What amount should be used as the initial cash flow for this project? A) −$679,200 B) −$542,600 C) −$522,700 D) −$659,300 E) −$655,200

D

Which one of the following is a project cash inflow? Ignore any tax effects. A) Increase in accounts receivable B) Equipment acquisition C) Depreciation expense D) Decrease in inventory E) Decrease in accounts payable

D

Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage? A) Changing the proposed labor-intensive production method to a more capital intensive method B) Buying equipment rather than leasing it short-term C) Lowering the projected selling price per unit D) Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house E) Hiring additional employees rather than using temporary outside contractors

D

Character, Incorporated, is analyzing a proposed project that is expected to have sales of 2,450 units, ±8 percent. The expected variable cost per unit is $246 and the expected fixed costs are $309,000. Cost estimates are considered accurate within a ±3 percent range. The depreciation expense is $106,000. The sales price is estimated at $599 per unit, ±2 percent. What is the amount of the total costs per unit under the worst-case scenario? A) $366.67 B) $448.58 C) $404.16 D) $338.23 E) $394.58

E

Esther, the sales manager for Reynoso Products, wants to sponsor a one-week "Customer Appreciation Sale" during which the firm will sell additional units of a product at the lowest price possible without negatively affecting the firm's profits. Which one of the following represents the price that should be charged for the additional units during this sale? A) Average total cost B) Average total revenue C) Marginal revenue D) Average variable cost E) Marginal cost

E

Six years ago, Hendershot Stables paid $84,000 in cash for equipment. Last year, the company spent $7,600 on equipment upgrades. The company no longer uses this equipment and has received a cash offer of $39,600 from a buyer. The current book value of the equipment, including all updates, is $32,200. If the company decides to keep the equipment and use it for a new project, what value, if any, should the company assign to the equipment? A) $91,600 B) $0 C) $39,800 D) $84,000 E) $39,600

E

The CFO of Shelby & Muhammad receives frequent capital funding requests from the firm's division managers. These requests are seeking funding for positive net present value projects. The CFO continues to deny all funding requests due to the financial situation of the company. Apparently, the company is: A) operating with zero leverage. B) operating at maximum capacity. C) operating at the financial break-even point. D) operating at the accounting break-even point. E) facing hard rationing.

E

Alumak, Incorporated, uses high-tech equipment to produce specialized products. Each one of its machines costs $55,000 to purchase plus an additional $6,000 per year to operate. The machines have a four-year life after which they are worthless. What is the equivalent annual cost of one of these machines if the required return is 15 percent? A) −$18,032 B) −$19,750 C) −$25,265 D) −$19,265 E) −$37,870

C

A project has a unit sales price of $13.39, a variable cost per unit of $5.48, fixed costs of $3,000, and depreciation expense of $830. Ignore taxes. What is the accounting break-even quantity? A) 484 units B) 274 units C) 794 units D) 727 units E) 295 units

A

A project has an accounting break-even quantity of 28,700 units, a cash break-even quantity of 17,120 units, a life of 10 years, fixed costs of $178,000, variable costs of $18.40 per unit, and a required return of 14 percent. Depreciation is straight-line to zero over the project life. Ignoring taxes, what is the financial break-even quantity? A) 39,320 units B) 39,458 units C) 39,624 units D) 39,201 units E) 39,723 units

A