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Exam 10: Making Capital Investment Decisions

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Question 21

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Your firm is contemplating the purchase of a new $1,628,000 computer-based order entry system.The system will be depreciated straight-line to zero over its 5-year life.It will be worth $156,300 at the end of that time.You will save $642,500 before taxes per year in order processing costs and you will be able to reduce working capital by $115,764 (this is a one-time reduction) .The net working capital will return to its original level when the project ends.The tax rate is 35 percent.What is the internal rate of return for this project?

A) 11.78 percent
B) 13.49 percent
C) 18.21 percent
D) 22.15 percent
E) 23.58 percent

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

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Question 22

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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? $\begin{array}{l}\text { MACRS 5-year property }\\\begin{array} { c c } \frac { \text { Year } } { 1 } & \frac { \text { Rate } } { 20.00 \% } \\2 & 32.00 \% \\3 & 19.20 \% \\4 & 11.52 \% \\5 & 11.52 \% \\6 & 5.76 \%\end{array}\end{array}$

A) $13,122.20
B) $18,576.00
C) $20,843.68
D) $23,072.80
E) $25,211.09

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

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Question 23

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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? $\begin{array}{l}\text { MACRS 5-year property }\\\begin{array} { c c } \frac { \text { Year } } { 1 } & \frac { \text { Rate } } { 20.00 \% } \\2 & 32.00 \% \\3 & 19.20 \% \\4 & 11.52 \% \\5 & 11.52 \% \\6 & 5.76 \%\end{array}\end{array}$

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? $\begin{array}{l}\text { MACRS 5-year property }\\\begin{array} { c c } \frac { \text { Year } } { 1 } & \frac { \text { Rate } } { 20.00 \% } \\2 & 32.00 \% \\3 & 19.20 \% \\4 & 11.52 \% \\5 & 11.52 \% \\6 & 5.76 \%\end{array}\end{array}$

Precision Tool is analyzing two machines to determine which one it should purchase.The company requires a 15 percent rate of return and uses straight-line depreciation to a zero book value over the life of its equipment.Machine A has a cost of $892,000,annual operating costs of $28,200,and a 4-year life.Machine B costs $1,118,000,has annual operating costs of $19,500,and has a 5-year life.Whichever machine is purchased will be replaced at the end of its useful life.Precision Tool should purchase Machine _____ because it lowers the firm's annual cost by approximately _______ as compared to the other machine.

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?

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

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?

Phone Home,Inc.is considering a new 5-year expansion project that requires an initial fixed asset investment of $2.484 million.The fixed asset will be depreciated straight-line to zero over its 5-year tax life,after which time it will be worthless.The project is estimated to generate $2,208,000 in annual sales,with costs of $883,200.The tax rate is 32 percent and the required return on the project is 11 percent.What is the net present value for this project?

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

The net book value of equipment will:

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?

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?

The Buck Store is considering a project that will require additional inventory of $216,000 and will increase accounts payable by $181,000.Accounts receivable are currently $525,000 and are expected to increase by 9 percent if this project is accepted.What is the project's initial cash flow for net working capital?

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?

Which one of the following will increase a bid price?

Phone Home,Inc.is considering a new 6-year expansion project that requires an initial fixed asset investment of $5.876 million.The fixed asset will be depreciated straight-line to zero over its 6-year tax life,after which time it will be worthless.The project is estimated to generate $5,328,000 in annual sales,with costs of $2,131,200.The tax rate is 32 percent.What is the annual operating cash flow for this project?

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

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

You are working on a bid to build two apartment buildings a year for the next 5 years for a local college.This project requires the purchase of $750,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the project's life.The equipment can be sold at the end of the project for $325,000.You will also need $140,000 in net working capital over the life of the project.The fixed costs will be $628,000 a year and the variable costs will be $1,298,000 per building.Your required rate of return is 14.5 percent for this project and your tax rate is 35 percent.What is the minimal amount,rounded to the nearest $100,you should bid per building?