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Exam 10: Making Capital Investment Decisions

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Question 31

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

A) Decrease in accounts payable
B) Increase in accounts receivable
C) Decrease in inventory
D) Depreciation expense
E) Equipment acquisition

F) B) and D)
G) A) and E)

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Question 32

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

A) both the depreciation expense and the interest expense are equal to zero.
B) the interest expense is equal to zero.
C) the project is a cost-cutting project.
D) no fixed assets are required for a project.
E) both taxes and the interest expense are equal to zero.

F) A) and C)
G) A) and D)

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Question 33

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Home Furnishings is expanding its product offerings to reach a wider range of customers. The expansion project includes increasing floor inventory by $486,000 and increasing its debt to suppliers by 90 percent of that amount. The company will also spend $947,000 to expand the size of its showroom. As part of the expansion plan, the company expects accounts receivable to rise by $205,000. For the project analysis, what amount should be used as the initial cash flow for net working capital?

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?

Mason Farms purchased a building for $689,000 and made repairs costing $136,000. The annual taxes on the property are $8,200. The building has a current market value of $730,000 and a current book value of $394,000. The building is mortgage-free. 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?

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?

Better Beverages purchased $139,700 of fixed assets that are classified as five-year MACRS property. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for Years 1 to 6, respectively. What will the accumulated depreciation be at the end of Year 4 if the tax rate is 21 percent and no bonus depreciation is taken?

Country Breads uses specialized ovens to bake its bread. One oven costs $249,000 and lasts about 15 years before it needs to be replaced. The annual operating cost per oven is $34,300. What is the equivalent annual cost of an oven if the required rate of return is 14 percent?

Pro forma financial statements can best be described as financial statements:

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?

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

The bid price is the:

Russell's is considering purchasing $697,400 of equipment for a four-year project. The equipment falls in the five-year MACRS class with annual percentages of .2, .32, .192, .1152, .1152, and .0576 for Years 1 to 6, respectively. At the end of the project the equipment can be sold for an estimated $135,000. The required return is 13.2 percent and the tax rate is 23 percent. What is the amount of the aftertax salvage value of the equipment assuming no bonus depreciation is taken?

Marie's Fashions is considering a project that will require $39,000 in net working capital and $68,000 in fixed assets. The project is expected to produce annual sales of $78,500 with associated cash costs of $41,000. The project has a four-year life. The company uses straight-line depreciation to a zero book value over the life of the project. Ignore bonus depreciation. The tax rate is 25 percent. What is the operating cash flow for this project?

All of the following are related to a proposed project. Which one of these should be included in the cash flow at Time 0?

Kwik Dogs is considering the installation of a new cooker that will cut annual operating costs by $11,900. The system will cost $38,900 and will be depreciated to zero using straight-line depreciation over its five-year life. What is the amount of the earnings before interest and taxes for this project? Ignore bonus depreciation.

The equivalent annual cost considers all of the following except the:

Eglon Mills has a new Year 2020 project with an initial equipment cost of $368,000 and a project life of 10 years. The firm generally uses straight-line depreciation to a zero book value over the project's life. If the firm opts instead to use the bonus depreciation method, what is the depreciation tax shield amount for Year 2020 at a tax rate of 21 percent?

Currently, GH Co. sells 42,600 handbags annually at an average price of $149 each. It is considering adding a lower-priced line of handbags that sell for $79 each. The firm estimates it can sell 21,000 of the lower-priced handbags but expects to sell 7,200 less of the higher-priced handbags by doing so. What is the amount of the annual sales that should be used when evaluating the addition of the lower-priced handbags?

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 tax rate of 22 percent, uses straight-line depreciation over an asset's life, ignores bonus depreciation options, and has a positive net income. Given this, which one of the following statements is correct?