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Exam 9: Making Capital Investment Decisions

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Question 1

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A project requires $336,000 of equipment that is classified as 7-year property. What is the depreciation expense in year 3 given the following MACRS depreciation allowances, starting with year one: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent?

A) $38,033
B) $41,267
C) $48,509
D) $58,766
E) $61,322

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

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Question 2

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Mark is analyzing a proposed project to determine how changes in the variable costs per unit would affect the project's net present value. What type of analysis is Mark conducting?

A) Sensitivity analysis
B) Erosion planning
C) Scenario analysis
D) Cost-benefit analysis
E) Opportunity cost analysis

F) B) and D)
G) None of the above

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Question 3

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Consider a 3-year project with the following information: initial fixed asset investment = $770,000; straight-line depreciation to zero over the 3-year life; zero salvage value; price = $34.99; variable costs = $23.16; fixed costs = $245,000; quantity sold = 94,500 units; tax rate = 35 percent. How sensitive is OCF to an increase of one unit in the quantity sold?

Lakeside Winery is considering expanding its wine-making operations. The expansion will require new equipment costing $649,000 that would be depreciated on a straight-line basis to a zero balance over the 4-year life of the project. The estimated salvage value is $187,000. The project requires $38,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $198,500 a year. What is the net present value of this project if the relevant discount rate is 14 percent and the tax rate is 35 percent?

A project has annual depreciation of $16,200, costs of $87,100, and sales of $123,000. The applicable tax rate is 34 percent. What is the operating cash flow according to the tax shield approach?

You are analyzing a project and have developed the following estimates. The depreciation is $52,000 a year and the tax rate is 34 percent. What is the worst case operating cash flow?

Ed's Hardware is adding a new product line to its sales lineup. Initially, the firm will stock $31,000 of the new inventory, which will be purchased on 30-days credit from a supplier. The firm will also invest $6,000 in accounts receivable and $4,000 in equipment. What amount should be included in the initial project costs for net working capital?

The Shoe Box is considering adding a new line of winter footwear to its product line-up. Which of the following are relevant cash flows for this project? I. decreased revenue from products currently being offered if this new footwear is added to the lineup II) revenue from the new line of footwear III) money spent to date looking for a new product line to add to the store's offerings IV) cost of new counters to display the new line of footwear

Industrial Machines has the following estimates for its new gear assembly project: price = $1,340 per unit; variable costs = $348 per unit; fixed costs = $5.1 million; quantity = 82,000 units. Suppose the company believes all of its estimates are accurate only to within +- 4 percent. What value should the company use for its total variable costs when performing its best-case scenario analysis?

The operating cash flows of a project:

Forecasting risk is best defined as:

Ignoring the option to wait:

Valley Forge and Metal purchased a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of eight years.

Which of the following should be included in the analysis of a proposed investment? I. erosion effects II) opportunity costs III) sunk costs IV) side effects

A project will reduce costs by $34,000 but increase depreciation by $16,500. What is the operating cash flow of this project based on the tax shield approach if the tax rate is 35 percent?

A cost-cutting project will decrease costs by $48,500 a year. The annual depreciation on the project's fixed assets will be $11,300 and the tax rate is 34 percent. What is the amount of the change in the firm's operating cash flow resulting from this project?

The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns. This lot was purchased four years ago at a cost of $299,000, which the firm paid in cash. To date, the firm has spent another $38,000 on land improvements, all of which was also paid in cash. Today, the lot has a market value of $329,000. What value should be included in the analysis of the expansion project for the cost of the land?

The Green Shingle purchased a parcel of land 6 years ago for $299,500. At that time, the firm invested $64,000 grading the site so that it would be usable. Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $28,000 a year. The Green Shingle is now considering building a hotel on the site as the rental lease is expiring. The current value of the land is $347,500. The firm has no loans or mortgages secured by the property. What value should be included in the initial cost of the hotel project for the use of this land?

The Tattler has a printing press sitting idly in its back room. The press has no market value to another printer because the machine utilizes old technology. The firm could get $125 for the press as scrap metal. The press is 6 years old and originally cost $148,000. The current book value is $2,370. The president of the firm is considering a new project and feels he can use this press for that project. What value, if any, should be assigned to the press as an initial cost of the new project?

Explain the concept of incremental cash flow analysis and its purpose.