FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 10: Making Capital Investment Decisions

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 51

Multiple Choice

Review LaterAdd Note

Review Later

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) A) and D)
G) All of the above

Correct Answer

verified

Show Answer

Question 52

Multiple Choice

Review LaterAdd Note

Review Later

Hollister & Hollister is considering a new project.The project will require $522,000 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 34 percent and the required rate of return is 14 percent.What is the amount of the earnings before interest and taxes for the first year of this project?

A) $97,680
B) $130,000
C) $148,000
D) $217,320
E) $235,000

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

Correct Answer

verified

Show Answer

Question 53

Multiple Choice

Review LaterAdd Note

The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following?

Dog Up! Franks is looking at a new sausage system with an installed cost of $397,800.This cost will be depreciated straight-line to zero over the project's 7-year life,at the end of which the sausage system can be scrapped for $61,200.The sausage system will save the firm $122,400 per year in pretax operating costs,and the system requires an initial investment in net working capital of $28,560.All of the net working capital will be recovered at the end of the project.The tax rate is 33 percent and the discount rate is 9 percent.What is the net present value of this project?

The bid price always assumes which one of the following?

Gateway Communications is considering a project with an initial fixed asset cost of $2.46 million which will be depreciated straight-line to a zero book value over the 10-year life of the project.At the end of the project the equipment will be sold for an estimated $300,000.The project will not directly produce any sales but will reduce operating costs by $725,000 a year.The tax rate is 35 percent.The project will require $45,000 of inventory which will be recouped when the project ends.Should this project be implemented if the firm requires a 14 percent rate of return? Why or why not?

Consider the following income statement: $\begin{array} { l r } \text { Sales } & \$ 510,944 \\\text { Costs } & 332,416 \\\text { Depreciation } & 77,300 \\ \text { EBIT } & ? \\\text { Taxes } ( 32 \% ) & ? \\ \text { Net income } & ? \\\hline\end{array}$ What is the amount of the depreciation tax shield?

A company that utilizes the MACRS system of depreciation:

Chapman Machine Shop is considering a 4-year project to improve its production efficiency.Buying a new machine press for $576,000 is estimated to result in $192,000 in annual pretax cost savings.The press falls in the MACRS 5-year class,and it will have a salvage value at the end of the project of $84,000.The press also requires an initial investment in spare parts inventory of $24,000,along with an additional $3,600 in inventory for each succeeding year of the project.The inventory will return to its original level when the project ends.The shop's tax rate is 35 percent and its discount rate is 11 percent.Should the firm buy and install the machine press? Why or why not? $\text { MACRS Table } - 5 \text { years }$

Increasing which one of the following will increase the operating cash flow assuming that the bottom-up approach is used to compute the operating cash flow?

Hollister & Hollister is considering a new project.The project will require $522,000 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 34 percent and the required rate of return is 14 percent.What is the cash flow recovery from net working capital at the end of this project?

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?

Dexter Smith & Co.is replacing a machine simply because it has worn out.The new machine will not affect either sales or operating costs and will not have any salvage value at the end of its 5-year life.The firm has a 34 percent tax rate,uses straight-line depreciation over an asset's life,and has a positive net income.Given this,which one of the following statements is correct?

Kelly's Corner Bakery purchased a lot in Oil City 6 years ago at a cost of $302,000.Today,that lot has a market value of $340,000.At the time of the purchase,the company spent $15,000 to level the lot and another $20,000 to install storm drains.The company now wants to build a new facility on that site.The building cost is estimated at $1.51 million.What amount should be used as the initial cash flow for this project?

Eads Industrial Systems Company (EISC) is trying to decide between two different conveyor belt systems.System A costs $427,000,has a 6-year life,and requires $115,000 in pretax annual operating costs.System B costs $502,000,has an 8-year life,and requires $79,000 in pretax annual operating costs.Both systems are to be depreciated straight-line to zero over their lives and will have a zero salvage value.Whichever system is chosen,it will not be replaced when it wears out.The tax rate is 33 percent and the discount rate is 24 percent.Which system should the firm choose and why?

Danielle's is a furniture store that is considering adding appliances to its offerings.Which of the following should be considered incremental cash flows of this project? I.utilizing the credit offered by a supplier to purchase the appliance inventory II.benefiting from increased furniture sales to appliance customers III.borrowing money from a bank to fund the appliance project IV.purchasing parts for inventory to handle any appliance repairs that might be necessary

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?

Marie's Fashions is considering a project that will require $28,000 in net working capital and $87,000 in fixed assets.The project is expected to produce annual sales of $75,000 with associated cash costs of $57,000.The project has a 5-year life.The company uses straight-line depreciation to a zero book value over the life of the project.The tax rate is 30 percent.What is the operating cash flow for this project?

Home Furnishings Express is expanding its product offerings to reach a wider range of customers.The expansion project includes increasing the floor inventory by $430,000 and increasing its debt to suppliers by 70 percent of that amount.The company will also spend $450,000 for a building contractor to expand the size of its showroom.As part of the expansion plan,the company will be offering credit to its customers and thus expects accounts receivable to rise by $90,000.For the project analysis,what amount should be used as the initial cash flow for net working capital?

The operating cash flow for a project should exclude which one of the following?