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Hollister & Hollister is considering a new project.The project will require $543,000 for new fixed assets, $218,000 for additional inventory, and $42,000 for additional accounts receivable.Short-term debt is expected to increase by $165,000.The project has a 6-year life.The fixed assets will be depreciated straight-line to a zero book value over the life of the project.At the end of the project, the fixed assets can be sold for 20 percent of their original cost.The net working capital returns to its original level at the end of the project.The project is expected to generate annual sales of $875,000 with costs of $640,000.The tax rate is 34 percent and the required rate of return is 13 percent.What is the project's cash flow at time zero?


A) -$536,000
B) -$638,000
C) -$720,000
D) -$779,000
E) -$944,000

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

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The Buck Store is considering a project that will require additional inventory of $216,000 and will increase accounts payable by $181,000.Accounts receivable are currently $525,000 and are expected to increase by 9 percent if this project is accepted.What is the project's initial cash flow for net working capital?


A) -$82,250
B) -$12,250
C) $12,250
D) $36,250
E) $44,250

F) B) and C)
G) C) and D)

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Cool Comfort currently sells 300 Class A spas, 450 Class C spas, and 200 deluxe model spas each year.The firm is considering adding a mid-class spa and expects that if it does it can sell 375 of them.However, if the new spa is added, Class A sales are expected to decline to 225 units while the Class C sales are expected to decline to 200.The sales of the deluxe model will not be affected.Class A spas sell for an average of $12,000 each.Class C spas are priced at $6,000 and the deluxe model sells for $17,000 each.The new mid-range spa will sell for $8,000.What is the value of the erosion?


A) $600,000
B) $1,200,000
C) $1,800,000
D) $2,400,000
E) $3,900,000

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

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The bottom-up approach to computing the operating cash flow applies only when:


A) both the depreciation expense and the interest expense are equal to zero.
B) the interest expense is equal to zero.
C) the project is a cost-cutting project.
D) no fixed assets are required for a project.
E) both taxes and the interest expense are equal to zero.

F) All of the above
G) None of the above

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Heer Enterprises needs someone to supply it with 225,000 cartons of machine screws per year to support its manufacturing needs over the next 7 years, and you've decided to bid on the contract.It will cost you $1,230,000 to install the equipment necessary to start production; you'll depreciate this cost straight-line to zero over the project's life.You estimate that in 7 years, this equipment can be salvaged for $75,000.Your fixed production costs will be $360,000 per year, and your variable production costs should be $13.20 per carton.You also need an initial investment in net working capital of $112,500, all of which will be recovered when the project ends.Your tax rate is 32 percent and you require a 13 percent return on your investment.What bid price per carton should you submit?


A) $17.04
B) $16.56
C) $16.31
D) $15.03
E) $14.81

F) C) and E)
G) A) and E)

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Hollister & Hollister is considering a new project.The project will require $535,000 for new fixed assets, $218,000 for additional inventory, and $39,000 for additional accounts receivable.Short-term debt is expected to increase by $165,000.The project has a 6-year life.The fixed assets will be depreciated straight-line to a zero book value over the life of the project.At the end of the project, the fixed assets can be sold for 20 percent of their original cost.The net working capital returns to its original level at the end of the project.The project is expected to generate annual sales of $875,000 and costs of $640,000.The tax rate is 31 percent and the required rate of return is 14 percent.What is the amount of the aftertax cash flow from the sale of the fixed assets at the end of this project?


A) $35,496
B) $73,830
C) $104,400
D) $287,615
E) $344,520

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

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Colors and More is considering replacing the equipment it uses to produce crayons.The equipment would cost $1.37 million, have a 12-year life, and lower manufacturing costs by an estimated $310,000 a year.The equipment will be depreciated using straight-line depreciation to a book value of zero.The required rate of return is 15 percent and the tax rate is 35 percent.What is the net income from this proposed project?


A) $18,508.75
B) $40,211.24
C) $66,441.67
D) $127,291.67
E) $136,709.48

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

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Dan is comparing three machines to determine which one to purchase.The machines sell for differing prices, have differing operating costs, differing machine lives, and will be replaced when worn out.Which one of the following computational methods should Dan use as the basis for his decision?


A) internal rate of return
B) operating cash flow
C) equivalent annual cost
D) depreciation tax shield
E) bottom-up operating cash flow

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

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The operating cash flow of a cost cutting project:


A) is equal to the depreciation tax shield.
B) is equal to zero because there is no incremental sales.
C) can only be analyzed by projecting the sales and costs for a firm's entire operations.
D) includes any changes that occur in the current accounts.
E) can be positive even though there are no sales.

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

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Changes in the net working capital requirements:


A) can affect the cash flows of a project every year of the project's life.
B) only affect the initial cash flows of a project.
C) only affect the cash flow at time zero and the final year of a project.
D) are generally excluded from project analysis due to their irrelevance to the total project.
E) reflect only the changes in the current asset accounts.

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

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The bid price is:


A) an aftertax price.
B) the aftertax contribution margin.
C) the highest price you should charge if you want the project.
D) the only price you can bid if the project is to be profitable.
E) the minimum price you should charge if you want to earn a target return on investment.

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

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Which one of the following would make a project unacceptable?


A) cash inflow for net working capital at time zero
B) requiring fixed assets that would have no salvage value
C) an equivalent annual cost that exceeds that of an alternative project
D) lack of revenue generation
E) a depreciation tax shield that exceeds the value of the interest expense

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

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Mason Farms purchased a building for $689,000 eight years ago.Six years ago, repairs were made to the building which cost $136,000.The annual taxes on the property are $11,000.The building has a current market value of $840,000 and a current book value of $494,000.The building is totally paid for and solely owned by the firm.If the company decides to use this building for a new project, what value, if any, should be included in the initial cash flow of the project for this building?


A) $494,000
B) $582,000
C) $840,000
D) $865,000
E) $953,000

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

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Keyser Petroleum just purchased some equipment at a cost of $67,000.What is the proper methodology for computing the depreciation expense for year 2 if the equipment is classified as 5-year property for MACRS? Keyser Petroleum just purchased some equipment at a cost of $67,000.What is the proper methodology for computing the depreciation expense for year 2 if the equipment is classified as 5-year property for MACRS? A) $67,000 × (1 - 0.20) × 0.32 B) $67,000/(1 - 0.20 - 0.32) C) $67,000 × (1 + 0.32) D) $67,000 × (1 - 0.32) E) $67,000 × 0.32


A) $67,000 × (1 - 0.20) × 0.32
B) $67,000/(1 - 0.20 - 0.32)
C) $67,000 × (1 + 0.32)
D) $67,000 × (1 - 0.32)
E) $67,000 × 0.32

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

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Consider the following income statement: Consider the following income statement: What is the amount of the depreciation tax shield? A) $23,607 B) $24,736 C) $24,598 D) $26,211 E) $26,919 What is the amount of the depreciation tax shield?


A) $23,607
B) $24,736
C) $24,598
D) $26,211
E) $26,919

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

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The Fluffy Feather sells customized handbags.Currently, it sells 18,000 handbags annually at an average price of $89 each.It is considering adding a lower-priced line of handbags that sell for $59 each.The firm estimates it can sell 7,000 of the lower-priced handbags but will sell 3,000 less of the higher-priced handbags by doing so.What is the amount of the sales that should be used when evaluating the addition of the lower-priced handbags?


A) $146,000
B) $275,000
C) $413,000
D) $623,000
E) $680,000

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

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The Beach House has sales of $784,000 and a profit margin of 8 percent.The annual depreciation expense is $14,000.What is the amount of the operating cash flow if the company has no long-term debt?


A) $68,760
B) $72,240
C) $74,240
D) $76,720
E) $81,760

F) None of the above
G) B) and D)

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The depreciation tax shield is best defined as the:


A) amount of tax that is saved when an asset is purchased.
B) tax that is avoided when an asset is sold as salvage.
C) amount of tax that is due when an asset is sold.
D) amount of tax that is saved because of the depreciation expense.
E) amount by which the aftertax depreciation expense lowers net income.

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

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Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?


A) providing both ketchup and mustard for its customer's use
B) repairing the roof of the hot dog stand because of water damage
C) selling fewer hot dogs because hamburgers were added to the menu
D) offering French fries but not onion rings
E) losing sales due to bad weather

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

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Bi-Lo Traders is considering a project that will produce sales of $28,000 and increase cash expenses by $17,500.If the project is implemented, taxes will increase by $3,000.The additional depreciation expense will be $1,600.An initial cash outlay of $1,400 is required for net working capital.What is the amount of the operating cash flow using the top-down approach?


A) $4,500
B) $5,900
C) $6,100
D) $7,500
E) $8,900

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

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