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Exam 10: Project Analysis and Evaluation

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Question 31

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Kwik 'n Hot Dogs is considering the installation of a new computerized pressure cooker that will cut annual operating costs by $23,000.The system will cost $39,900 to purchase and install.This system is expected to have a 4-year life and will be depreciated to zero using straight-line depreciation.What is the amount of the earnings before interest and taxes for this project?

A) $10,525
B) $13,025
C) $15,525
D) $16,900
E) $19,400

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

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Question 32

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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?

A) $5,120
B) $13,160
C) $25,840
D) $32,560
E) $41,840

F) B) and C)
G) A) and E)

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Question 33

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Can the initial cash flow at time zero for a project ever be a positive value? If yes, give an example.If no, explain why not.

How can two firms arrive at two different bid prices when bidding for the same job and given the same bid specifications?

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?

The bid price always assumes which one of the following?

A company that utilizes the MACRS system of depreciation:

Winnebagel Corp.currently sells 28,200 motor homes per year at $42,300 each, and 11,280 luxury motor coaches per year at $79,900 each.The company wants to introduce a new portable camper to fill out its product line.It hopes to sell 19,740 of these campers per year at $11,280 each.An independent consultant has determined that if Winnebagel introduces the new campers, it should boost the sales of its existing motor homes by 4,700 units per year, and reduce the sales of its motor coaches by 1,222 units per year.What is the amount that should be used as the annual sales figure when evaluating this project?

Chapman Machine Shop is considering a 4-year project to improve its production efficiency.Buying a new machine press for $576,000 is estimated to result in $192,000 in annual pretax cost savings.The press falls in the MACRS 5-year class, and it will have a salvage value at the end of the project of $84,000.The press also requires an initial investment in spare parts inventory of $24,000, along with an additional $3,600 in inventory for each succeeding year of the project.The inventory will return to its original level when the project ends.The shop's tax rate is 35 percent and its discount rate is 11 percent.Should the firm buy and install the machine press? Why or why not?

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?

What is the primary purpose of computing the equivalent annual costs when comparing two machines? What is the assumption that is being made about each machine?

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?

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?

Consider an asset that costs $176,000 and is depreciated straight-line to zero over its 11-year tax life.The asset is to be used in a 7-year project; at the end of the project, the asset can be sold for $22,000.The relevant tax rate is 30 percent.What is the aftertax cash flow from the sale of this asset?

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?

Dog Up! Franks is looking at a new sausage system with an installed cost of $397,800.This cost will be depreciated straight-line to zero over the project's 7-year life, at the end of which the sausage system can be scrapped for $61,200.The sausage system will save the firm $122,400 per year in pretax operating costs, and the system requires an initial investment in net working capital of $28,560.All of the net working capital will be recovered at the end of the project.The tax rate is 33 percent and the discount rate is 9 percent.What is the net present value of this project?

Pro forma statements for a proposed project should: I.be compiled on a stand-alone basis. II.include all the incremental cash flows related to the project. III.generally exclude interest expense. IV.include all project-related fixed asset acquisitions and disposals.

A 4-year project has an initial asset investment of $306,600, and initial net working capital investment of $29,200, and an annual operating cash flow of -$46,720.The fixed asset is fully depreciated over the life of the project and has no salvage value.The net working capital will be recovered when the project ends.The required return is 15 percent.What is the project's equivalent annual cost, or EAC?

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?

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?