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Exam 10: Making Capital Investment Decisions

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Question 151

Multiple Choice

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Operating cash flow is defined as:

A) Earnings before interest and taxes minus depreciation plus taxes.
B) The change in net working capital plus depreciation minus taxes.
C) Earnings before interest and taxes plus depreciation minus taxes.
D) Sales minus costs minus depreciation plus taxes.
E) Sales minus variable costs minus fixed costs minus depreciation minus taxes.

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

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Question 152

Multiple Choice

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Superior Manufacturers is considering a 3-year project with an initial cost of $846,000. The project will not directly produce any sales but will reduce operating costs by $295,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $30,000. The tax rate is 34%. The project will require $31,000 in extra inventory for spare parts and accessories. Should this project be implemented if Superior Manufacturing requires an 8% rate of return? Why or why not?

A) No; The NPV is -$128,147.16.
B) No; The NPV is -$87,820.48.
C) No; The NPV is -$81,429.28.
D) Yes; The NPV is $33,769.37.
E) Yes; The NPV is $153,777.33.

F) All of the above
G) C) and E)

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Question 153

Multiple Choice

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LiCheng's Enterprises just purchased some fixed assets that belong in a 35% CCA class. The assets cost $1,901. What is the amount of the depreciation expense for year 2?

Define "sunk cost" and give an example.

Kay's Nautique is considering a project which will require additional inventory of $128,000 and will also increase accounts payable by $45,000 as suppliers are willing to finance part of these purchases. Accounts receivable are currently $80,000 and are expected to increase by 10% if this project is accepted. What is the initial project cash flow needed for net working capital?

The reduction in the sale of hamburgers when hot dogs are added to a menu is called the _____ cost.

The Triton Company just purchased a $132,650 piece of equipment that belongs in a 20% CCA class. The company has a marginal tax rate of 34% and a discount rate of 16%. What are the after-tax proceeds from the sale of this equipment if the company sells it after four years at a selling price of $61,125? (Assume that Triton has additional pieces of similar equipment.)

Aaron's Enterprises just purchased some fixed assets that belong in a 30% CCA class. The assets cost $436,001. What is the amount of the depreciation expense for the fourth year?

You purchase a machine for $22,000 which belongs in a 30% CCA class. What is the present value of the CCA tax shield on the machine if it is sold at the end of the third year for $6,000, your tax rate is 34%, and the appropriate discount rate is 15%?

A company owns a building that is totally paid for. This building has been sitting idle for the past three years. Now the company is trying to analyze a project that would include the use of this building. Therefore, the property taxes paid on the building over the past three years should be included in that analysis.

Judson Industries is considering a new project. The project will initially require $749,000 for new fixed assets, $238,000 for additional inventory, and $25,000 for additional accounts receivable. Accounts payable is expected to increase by $70,001. The fixed assets will belong in a 30% CCA class. At the end of the project, in four years' time, the fixed assets can be sold for 40% of their original cost. The net working capital will return to its original level at the end of the project. The project is expected to generate annual sales of $944,000 with related cash expenses of $620,001. The tax rate is 35% and the required rate of return is 14%. What is the amount of the present value of the CCA tax shield for this project?

Interest expense causes operating cash flow to differ from net income.

A firm purchases Class 8 equipment for $1,000,000 (CCA Rate 20%) for a 10 year project. What will be the CCA tax shield in year 3? The tax rate is 35%.

Which one of the following statements is correct concerning bid prices?

Given the following information and assuming a CCA rate of 20%, what is the NPV of this project? Initial investment = $400,000; life = five years; before-tax cost savings = $150,000 per year; salvage value = $30,000 in year 5; tax rate = 34%; discount rate = 14%.

You are considering investing in a piece of equipment to implement a cost-cutting proposal. The pre-tax cost reduction is expected to equal $41.67 for each of the three years of the project's life. The equipment has an initial cost of $125 and belongs in a 20% CCA class. Assume a 34% tax bracket, a discount rate of 15%, and a salvage value of zero. If the equipment is sold to another company at the end of year 3 for $20, what is the PI?

The correct formula for computing the operating cash flow of a project is EBIT + D + T.

Incremental costs should be included in the analysis of a project

The machinery required for a three year project costs $20,000, belongs in a 15% CCA class, and will require a net working capital investment of $5,000 up-front. The project generates after-tax operating income of $11,501. The fixed assets will be sold for $2,000 at the end of the project. If the firm has a tax rate of 34% and a required return of 10%, what is the project NPV?

A company is considering a new four-year project with an initial investment requirement of $72,001. The equipment belongs in a 30% CCA class and will be worthless at the end of the project. Sales are estimated at $136,800 with costs of $87,901. The tax rate is 34%. What is the project OCF in the second year?