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Exam 10: Making Capital Investment Decisions

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Question 61

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You just purchased some equipment that is classified as 5-year property for MACRS.The equipment cost $147,000.What will the book value of this equipment be at the end of 4 years should you decide to resell the equipment at that point in time? $\begin{array}{l}\text { MACRS 5-year property }\\\begin{array} { c c } \frac { \text { Year } } { 1 } & \frac { \text { Rate } } { 20.00 \% } \\2 & 32.00 \% \\3 & 19.20 \% \\4 & 11.52 \% \\5 & 11.52 \% \\6 & 5.76 \%\end{array}\end{array}$

A) $8,467.20
B) $25,401.60
C) $42,336.00
D) $121,598.40
E) $138,532.80

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

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Question 62

Multiple Choice

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The equivalent annual cost method is useful in determining:

A) which one of two machines to purchase if the machines are mutually exclusive, have differing lives, and are a one-time purchase.
B) the tax shield benefits of depreciation given the purchase of new assets for a project.
C) the operating cash flows of a cost-cutting project.
D) which one of two investments to accept when the investments have different required rates of return.
E) which one of two machines should be purchased when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.

F) C) and E)
G) None of the above

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Question 63

Multiple Choice

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Consider an asset that costs $176,000 and is depreciated straight-line to zero over its 11-year tax life.The asset is to be used in a 7-year project; at the end of the project,the asset can be sold for $22,000.The relevant tax rate is 30 percent.What is the aftertax cash flow from the sale of this asset?

Three years ago,Knox Glass purchased a machine for a 3-year project.The machine is being depreciated straight-line to zero over a 5-year period.Today,the project ended and the machine was sold.Which one of the following correctly defines the aftertax salvage value of that machine? (T represents the relevant tax rate)

Decreasing which one of the following will increase the acceptability of a project?

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?

What is the formula for the tax-shield approach to OCF? Explain the two key points the formula illustrates.

Nelson Mfg.owns a manufacturing facility that is currently sitting idle.The facility is located on a piece of land that originally cost $159,000.The facility itself cost $1,390,000 to build.As of now,the book value of the land and the facility are $159,000 and $458,000,respectively.The firm owes no debt on either the land or the facility at the present time.The firm received a bid of $1,700,000 for the land and facility last week.The firm's management rejected this bid even though they were told that it is a reasonable offer in today's market.If the firm was to consider using this land and facility in a new project,what cost,if any,should it include in the project analysis?