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Exam 9: Making Capital Investment Decisions

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Question 31

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Scenario analysis asks questions such as:

A) How will changing the number of units sold affect the outcome of this project?
B) What is the best outcome that should reasonably be expected?
C) How much will a $1 increase in the variable cost per unit change the net present value?
D) Will the net present value increase or decrease if the quantity sold increases by 100 units?
E) How will the operating cash flow change if the depreciation method is changed?

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

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Question 32

Multiple Choice

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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?

A) The sum of the cash paid to date for both the lot and the improvements
B) The original purchase price only
C) The current market value of the land plus the cash paid for the improvements
D) The current market value of the land
E) Zero because the land and the improvements were previously purchased with cash

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

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Question 33

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A project has an annual operating cash flow of $52,620.Initially,this four-year project required $5,160 in net working capital,which is recoverable when the project ends.The firm also spent $39,700 on equipment to start the project.This equipment will have a book value of $17,014 at the end of Year 4.What is the cash flow for Year 4 of the project if the equipment can be sold or $15,900 and the tax rate is 35 percent?

The Book Store is considering a new four-year expansion project that requires an initial fixed asset investment of $2.1 illion.The fixed asset will be depreciated straight-line to zero over its four-year life,after which time it will be worthless.The project is estimated to generate $.98 million in annual sales,with costs of $.79 million.If the tax rate is 34 percent,what is the OCF for this project?

A project has an initial requirement of $318,000 for fixed assets and $29,500 for net working capital.The fixed assets will be depreciated to a zero book value over the four-year life of the project and have an estimated salvage value of $110,000.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 14 percent.What is the project's net present value if the tax rate is 34 percent?

The net working capital invested in a project is generally:

Six years ago,China Exporters paid cash for a new packaging machine that cost $347,000.Three years ago,the firm spent $14,300 on repairs and modifications to the machine.The machine is now fully depreciated and has just sat idly in a back corner of the shop for the past seven months.The estimated value of the machine today is $157,500.The firm is considering using this machine in a new project.If it does so,what value should be assigned to this machine and included in the initial costs of the new project?

The Green Tomato purchased a parcel of land six years ago for $389,900.At that time,the firm invested $128,000 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 $48,000 a year.The Green Tomato is now considering building a hotel on the site as the rental lease is expiring.The current value of the land is $415,000.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?

Firm A uses straight-line depreciation.Firm B uses MACRS depreciation.Both firms bought $75,000 worth of equipment last year that has a tax life of 5 years.The 5-year MACRS percentage rates,starting with Year 1,are: 20,32,19.2,11.52,11.52,and 5.76.Both firms have a marginal tax rate of 34 percent and identical operating cash flows except for the depreciation effects.Given this,you know the:

Rock Haven has a proposed project that will generate sales of 1,840 units annually at a selling price of $31 each.The fixed costs are $13,400 and the variable costs per unit are $7.47.The project requires $32,000 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the four-year life of the project.The salvage value of the fixed assets is $8,500 and the tax rate is 35 percent.What is the operating cash flow for Year 4?

Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows?

A project costs $2.43 million and has no salvage value.Depreciation is straight-line to zero over the five-year lifeof the project.Sales are projected at 64,000 units per year,price per unit is $73.29,variable cost per unit is $42.93,and fixed costs are $623,000 per year.The tax rate is 35 percent,and the required rate of return is 11percent.What is the sensitivity of NPV to a 100-unit increase in the sales figure?

Kate is analyzing a proposed project to determine how changes in the sales quantity would affect the project's net present value.What type of analysis is being conducted?

Better Chocolates has a new project that requires $838,000 of equipment.What is the depreciation in Year 6 of this project if the equipment is classified as seven-year property for MACRS purposes? The MACRS allowance percentages are as follows,commencing with year 1:14.29,24.49,17.49,12.49,8.93,8.92,8.93,and 4.46 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?

Lakeside Winery is considering expanding its winemaking operations.The expansion will require new equipment costing $708,000 that would be depreciated on a straight-line basis to a zero balance over the four-year life of the project.The quipment can be sold for $220,000 after the four years.The project requires $46,000 initially for net working capital,all of which will be recouped at the end of the project.The projected operating cash flow is $211,500 a year.What is the net present value of this project if the relevant discount rate is 13 percent and the tax rate is 34 percent?

Your local athletic center is planning a $1.08 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 $489,000 in additional annual sales.Variable costs are 46 percent of sales,the annual fixed costs are $129,400,and the tax rate is 34 percent.What is the operating cash flow for the first year of this project?

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 project will reduce costs by $62,750 but increase depreciation by $14,812.What is the operating cash flow of this project ased on the tax shield approach if the tax rate is 34 percent?

The Tattle Teller 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 $480 for the press as scrap metal.The press is six years old and riginally cost $174,000.The current book value is $3,570.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 assignedto the press as an initial cost of the new project?