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Exam 9: Making Capital Investment Decisions

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Question 21

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The Sausage Hut is looking at a new sausage system with an installed cost of $187,400.This cost will be depreciated straight-line to zero over the project's four-year life, at the end of which the sausage system can be scrapped for $25,000.The sausage system will save the firm $69,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $9,000, which will be recouped at project end.If the tax rate is 34 percent and the discount rate is 12 percent, what is the NPV of this project?

A) $6,508.54
B) -$320.81
C) $560.24
D) $1,410.10
E) $8,211.15

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

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Question 22

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Kite Flite is considering making and selling custom kites in two sizes.The small kites would be priced at $12 and the large kites would be $39.The variable cost per unit is $5 and $14, respectively.Jill, the owner, feels that she can sell 1,900 of the small kites and 1,400 of the large kites each year.The fixed costs would be only $1,890 a year and the tax rate is 34 percent.What is the annual operating cash flow if the annual depreciation expense is $380?

A) $26,064.12
B) $30,759.80
C) $29,848.20
D) $28,309.40
E) $30,630.60

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

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Question 23

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Scrapping Products is implementing a project that will initially increase accounts payable by $3,000, increase inventory by $1,800, and decrease accounts receivable by $1,200.All net working capital will be recouped when the project terminates.What is the cash flow related to the net working capital for the last year of the project?

The Blue Lagoon is considering a project with a five-year life.The project requires $32,000 of fixed assets that are classified as five-year property for MACRS.Variable costs equal 67 percent of sales, fixed costs are $12,600, and the tax rate is 34 percent.What is the operating cash flow for Year 4 given the following sales estimates and MACRS depreciation allowance percentages?

Scenario analysis:

The net working capital invested in a project is generally:

Jamie is analyzing the estimated net present value of a project under various conditions by revising the sales quantity, sales price, and the cost estimates.The type of analysis that Jamie is doing is best described as:

Which one of these has the least potential to increase the net present value of a proposed investment? Assume the project has a positive net present value in at least one set of circumstances.

Scenario analysis is best described as the determination of the:

An asset used in a three-year project falls in the three-year MACRS class for tax purposes.The MACRS percentage rates starting with Year 1 are: 33.33, 44.45, 14.81, and 7.41.The asset has an acquisition cost of $2.6 million and will be sold for $1.1 million at the end of the project.If the tax rate is 34 percent, what is the aftertax salvage value of the asset?

Ignoring the option to wait:

You are analyzing a project and have developed the following estimates.The depreciation is $1,020 a year and the tax rate is 35 percent.What is the worst-case operating cash flow?

Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as:

Northern Lighting purchased some three-year MACRS property three years ago.What is the current book value of this equipment if the original cost was $385,000? The MACRS allowance percentages are as follows, commencing with Year 1: 33.33, 44.45, 14.81, and 7.41 percent.

Jim's Hardware is adding a new product to its sales lineup.Initially, the firm will stock $36,000 of the new inventory, which will be purchased on 30 days' credit from a supplier.The firm will also invest $13,000 in accounts receivable and $11,000 in equipment.What amount should be included in the initial project costs for net working capital?

Global Water Treatment, Inc.is analyzing a proposed investment that would initially require $750,000 of new equipment.This equipment would be depreciated on a straight-line basis to a zero balance over the four-year life of the project.The estimated salvage value is $150,000.The project requires $50,000 initially for net working capital, all of which will be recouped at the end of the project.The projected operating cash flow is $ 265,000 a year.What is the internal rate of return on this project if the relevant tax rate is 21 percent?

Phil's Diner, a sole proprietorship purchased some new equipment two years ago for $32,600.Today, it is selling this equipment for $22,000.What is the aftertax cash flow from this sale if the tax rate is 35 percent? The applicable MACRS allowance percentages are as follows, commencing with Year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.

The Golf Range is considering adding an additional driving range to its facility.The range would cost $229,000, would be depreciated on a straight-line basis over its seven-year life, and would have a zero salvage value.The anticipated revenue from the project is $62,500 a year with $18,400 of that amount being variable cost.The fixed cost would be $15,700.The firm believes that it will earn an additional $22,500 a year from its current operations should the driving range be added.The project will require $3,000 of net working capital, which is recoverable at the end of the project.What is the internal rate of return on this project at a tax rate of 34 percent?

Cinram Machines has the following estimates for its new gear assembly project: price = $1,870 per unit; variable costs = $949 per unit; fixed costs = $1.4 million; quantity = 42,000 units.Suppose the company believes all of its estimates are accurate only to within ± 3 percent.What value should the company use for its total variable costs when performing its best-case scenario analysis?

Your local athletic center is planning a $1.2 million expansion to its current facility.This cost will be depreciated on a straight-line basis over a 20-year period.The expanded area is expected to generate $745,000in additional annual sales.Variable costs are 39* percent of sales, the annual fixed costs are $140,000, and the tax rate is 21percent.What is the operating cash flow for the first year of this project?