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Exam 9: Making Capital Investment Decisions

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Question 61

Multiple Choice

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Browning's Motor Works is reviewing its current accounts to determine how a proposed project might affect the account balances. The firm estimates the project will initially require $57,000 in additional current assets and $32,000 in additional current liabilities. The firm also estimates the project will require an additional $7,000 a year in current assets for each one of the four years of the project. How much net working capital will the firm recoup at the end of the project assuming that all net working capital can be recaptured?

A) -$85,000
B) $25,000
C) $53,000
D) $28,000
E) $85,000

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

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Question 62

Multiple Choice

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Contingency planning focuses on the:

A) opportunity costs involved with a project.
B) sunk costs related to a project.
C) economic effects on a project's profitability.
D) managerial options implicit in a project.
E) optional capital requirements of a project.

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

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Question 63

Multiple Choice

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A project has sales of $462,000, costs of $274,000, depreciation of $28,000, interest expense of $3,400, and a tax rate of 35 percent. What is the value of the depreciation tax shield?

Scenario analysis is best described as the determination of the:

A project has an initial requirement of $261,000 for fixed assets and $27,000 for net working capital. The fixed assets will be depreciated to a zero book value over the 4-year life of the project and have an estimated salvage value of $78,000. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $96,200 and the discount rate is 13 percent. What is the project's net present value if the tax rate is 35 percent?

Kyle Electric has three positive net present value opportunities. Unfortunately, the firm has not been able to find financing for any of these projects. Which one of the following terms best describes the firm's situation?

Which one of the following will increase the operating cash flow as computed using the tax shield approach?

The ability to delay an investment:

Identify three managerial options that relate to project analysis and explain how those options affect the net present value of a project.

Three years ago, Hi Tek purchased some 5-year MACRS property for $67,400. Today, it is selling this property for $28,000. How much tax will the firm owe on this sale if the tax rate is 34 percent? The MACRS allowance percentages are as follows, commencing with year one: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.

Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project?