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Exam 9: Making Capital Investment Decisions

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Question 51

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A project has annual depreciation of $15,028,costs of $82,592,and sales of $138,765.The applicable tax rate is 34 ercent.What is the operating cash flow according to the tax shield approach?

A) $21,540.09
B) $27,666.67
C) $27,157.02
D) $42,183.70
E) $39,878.84

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

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Question 52

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A nine-year project is expected to generate annual revenues of $137,800,variable costs of $82,600,and fixed costs of $11,000.The annual depreciation is $23,500 and the tax rate is 34 percent.What is the annual operating cash flow?

A) $14,301
B) $13,662
C) $35,052
D) $36,506
E) $37,162

F) B) and E)
G) All of the above

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Question 53

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Flo is considering three mutually exclusive options for the additional space she plans to add to her specialty women's tore.The cost of the expansion will be $148,000.She can use this additional space to add children's clothing,an exclusive gifts department,or a home décor section.She estimates the present value of the cash inflows from these projects are $121,000 for children's clothing,$178,000 for exclusive gifts,and $145,000 fordecorator items.Which option(s) ,if any,should she accept?

You are analyzing a project and have developed the following estimates.The depreciation is $17,340 a year and the tax rate is 34 percent.What is the best-case operating cash flow? $\begin{array} { | l | r | r | r | } \hline & \text { Base-Case } & \text { Lower Bound } & \text { Upper Bound } \\\hline \text { Unit sales } & 5,200 & 4,500 & 5,900 \\\hline \text { Sales price per unit } & \$ 109 & \$ 99 & \$ 119 \\\hline \text { Variable cost per unit } & \$ 71 & \$ 69 & \$ 73 \\\hline \text { Fixed costs } & \$ 16,500 & \$ 16,000 & \$ 17,000 \\\hline\end{array}$

You are analyzing a project and have developed the following estimates: unit sales = 2,150,price per unit = $84,variable cost per unit = $57,fixed costs per year = $13,900.The depreciation is $8,300 a year and the tax rate is 35 percent.What effect would an increase of $1 in the selling price have on the 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:

The opportunities that a manager has to modify a project once the project has started are called:

A proposed project will increase a firm's accounts payables.This increase is generally:

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.

The pro forma income statements for a proposed investment should include all of the following except:

Mike's Fish Market is implementing a project that will initially increase accounts payable by $6,100,increase inventory by $2,800,and decrease accounts receivable by $1,300.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?

British Metals is reviewing its current accounts to determine how a proposed project might affect the account balances.The firm estimates the project will initially require $81,000 in additional current assets and $57,000 in additional current liabilities.The firm also estimates the project will require an additional $8,000 a year in current assets in each of the first three 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?

Outdoor Sports is considering adding a miniature golf course to its facility.The course would cost $138,000,would be epreciated on a straight-line basis over its five-year life,and would have a zero salvage value.The estimated income from the golfing fees would be $72,000 a year with $24,000 of that amount being variable cost.The fixed cost would be $11,600.In addition,the firm anticipates an additional $14,000 in revenue from its existing facilities if the golf course is added.The project will require $3,000 of net working capital,which is recoverable at the end of the project.What is the net present value of this project at a discount rate of 12 percent and a tax rate of 34 percent?

Green Woods sells specialty equipment for mountain climbers.Its sales for last year included $387,000 of tents and $718,000 of climbing gear.For next year,management has decided to sell specialty sleeping bags also.As a result of this change,sales projections for next year are $411,000 of tents,$806,000 of climbing gear,and $128,000 of sleeping bags.How much of next year's sales are derived from the side effects of adding the new product to its sales offerings?

A debt-free firm has net income of $107,400,taxes of $38,700,and depreciation of $19,300.What is the operating cash flow?

Scenario analysis is best described as the determination of the:

You are analyzing a project and have developed the following estimates.The depreciation is $13,600 a year and the tax rate is 34 percent.What is the base-case operating cash flow? $\begin{array} { | l | r | r | r | } \hline & \text { Base-Case } & \text { Lower Bound } & \text { Upper Bound } \\\hline \text { Unit sales } & 2,100 & 1,850 & 2,350 \\\hline \text { Sales price per unit } & \$ 55 & \$ 53 & \$ 57 \\\hline \text { Variable cost per unit } & \$ 37 & \$ 36 & \$ 38 \\\hline \text { Fixed costs } & \$ 14,800 & \$ 13,800 & \$ 15,800 \\\hline\end{array}$

Consider an asset that costs $311,000 and is depreciated straight-line to zero over its six-year tax life.The asset is to be used in a four-year project; at the end of the project,the asset can be sold for $58,000.If the relevant tax rate is 34 percent,hat is the aftertax cash flow from the sale of this asset?

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

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?