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Exam 10: Making Capital Investment Decisions

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Question 61

Multiple Choice

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The operating cash flow of a cost cutting project:

A) is equal to the depreciation tax shield.
B) is equal to zero because there is no incremental sales.
C) can only be analyzed by projecting the sales and costs for a firm's entire operations.
D) includes any changes that occur in the current accounts.
E) can be positive even though there are no sales.

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

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Question 62

Multiple Choice

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Automated Manufacturers uses high-tech equipment to produce specialized aluminum products for its customers. Each one of these machines costs $1,480,000 to purchase plus an additional $49,000 a year to operate. The machines have a 6-year life after which they are worthless. What is the equivalent annual cost of one these machines if the required return is 16 percent?

A) -$450,657
B) -$427,109
C) -$301,586
D) -$295,667
E) -$256,947

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

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Question 63

Multiple Choice

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When using the equivalent annual cost as a basis for deciding which equipment should be purchased, the equipment under consideration must fit which two of the following criteria? I. differing productive lives II. differing manufacturers III. required replacement at end of economic life IV. differing initial cost

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.

You own some equipment that you purchased 4 years ago at a cost of $216,000. The equipment is 5-year property for MACRS. You are considering selling the equipment today for $75,500. Which one of the following statements is correct if your tax rate is 35 percent?

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?

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?

Bernie's Beverages purchased some fixed assets classified as 5-year property for MACRS. The assets cost $87,000. What will the accumulated depreciation be at the end of year three?