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Exam 10: Making Capital Investment Decisions

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Question 111

Multiple Choice

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Tori just purchased some equipment that belongs in a 35% CCA class. The equipment cost $167,401. What will be the book value of the equipment at the end of year three?

A) $58,349
B) $61,203
C) $72,670
D) $94,730
E) $119,189

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

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Question 112

Multiple Choice

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One purpose of identifying all of the incremental cash flows related to a proposed project is to:

A) Isolate the total sunk costs so they can be evaluated to determine if the project will add value to the firm.
B) Eliminate any cost which has previously been incurred so that it can be omitted from the analysis of the project.
C) Make each project appear as profitable as possible for the firm.
D) Include both the proposed and the current operations of a firm in the analysis of the project.
E) Identify any and all changes in the cash flows of the firm for the past year so they can be included in the analysis.

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

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Question 113

Multiple Choice

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KN Jewelers purchased some land four years ago at a cost of $218,001. They spent $45,000 to raze the old building and clear the lot. Today, the lot is valued at $237,000 and produces an annual Income of $22,000 from its use as a parking lot. KN has drawn plans to construct a new retail store On this land. The lot preparation costs will be $28,000 and the building will cost $229,500. The Initial cost of this project is:

Assume project X requires additions to net working capital in each year of its life, all to be recovered at the end. In this case, the present value of the net working capital recovery will exceed the total dollar outlays on net working capital.

A project requires the purchase of machinery for $40,000. The machinery belongs in a 20% CCA class and will have a salvage value of $4,000 at the end of the 4 year project. It will require a net Working capital investment of $5,000 up-front. The firm has a tax rate of 34% and a required return Of 10%. The project generates after-tax operating income of $10,001. What is the project's NPV?

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

Given the following information and assuming straight-line depreciation to zero, what is the IRR of this project? Initial investment = $400,000; life = four years; cost savings = $125,000 per year; Salvage value = $20,000 in year 5; tax rate = 34%; discount rate = 12%.

When you set the project NPV equal to zero in calculating a bid price you are:

You will bid to supply three jets per year for each of the next three years to the Canadian Armed Forces. To get set up, you will need $10 million in equipment, which belongs in a 30% CCA class And will have no salvage value. Total fixed costs per year are $5 million, and variable costs are $7 Million per jet. Assuming a tax rate of 30% and a required return of 10%, what is the minimum price At which you should offer to supply the jets?

Which of the following describes the "bottom-up" approach to defining operating cash flow?

The managers of PonchoParts, Inc. plan to manufacture engine blocks for classic cars from the 1960s era. They expect to sell 250 blocks annually for the next five years. The necessary foundry And machining equipment will cost a total of $800,000 and belongs in a 30% CCA class for tax Purposes. The firm expects to be able to dispose of the manufacturing equipment for $150,000 at The end of the project. Labour and materials costs total $500 per engine block, fixed costs are $125,000 per year. Assume a 35% tax rate and a 12% discount rate. If auto restorers will pay $3,000 retail per engine block, what is the project profitability index?

Calculate the OCF and CCA tax shield given the following information: Sales $490,000; Costs $250,000; Depreciation $85,000. Tax rate is 30%.

A project will increase sales by $140,000 and cash expenses by $95,001. The project will cost $100,000 and belong in a 30% CCA class. The company has a marginal tax rate of 34%. What is the Value of the depreciation tax shield in the second year?

A company has sales of $80,000, costs of $48,000, depreciation of $20,000, and a 34% tax rate. Which one of the following is the correct method of computing the operating cash flow using the Tax shield approach?

The cash flows of a project should include the related changes in accounts payable.

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 current market value of the building should be included in that analysis.

Which of the following statements regarding cash flow is correct?

A pro forma statement for a proposed project which reflects no sales revenue and varying annual costs illustrates a:

Which of the following is true about net working capital?

The changes in the firm's future cash flows that are a direct consequence of accepting a project are called: