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Exam 6: Making Capital Investment Decisions

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Question 41

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Stu is working on a bid for a contract.Thus far,he has determined that he will need $218,000 for fixed assets and another $41,000 for net working capital at Time 0.He has also determined that he can recover $79,900 aftertax for the combined fixed assets and net working capital at the end of the 3-year project.What operating cash flow will be required each year for the project to return 14 percent in nominal terms?

A) $116,079.42
B) $97,487.79
C) $110,220.48
D) $88,330.01
E) $113,360.69

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

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Question 42

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Lew just purchased $67,600 of equipment that is classified as 5-year MACRS property.The MACRS rates are 20 percent,32 percent,19.2 percent,11.52 percent,11.52 percent,and 5.76 percent for Years 1 to 6,respectively.What will be the book value of this equipment at the end of four years if he ignores bonus depreciation?

A) $11,681.28
B) $18,280.20
C) $17,040.00
D) $19,468.80
E) $22,672.00

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

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Question 43

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You spent $500 last week fixing the transmission in your car.Now,the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model.In analyzing the brake situation,the $500 you spent fixing the transmission is a(n) ________ cost.

Interest rates or rates of return on investments that have been adjusted for the effects of inflation are called ________ rates.

Jackson & Sons uses packing machines to prepare its products for shipping.One machine costs $397,500 and lasts 5 years before it needs replaced.The machine will be worthless after the 5 years.The annual aftertax operating cost per machine is $38,400.What is the equivalent annual cost of one machine if the required rate of return is 16 percent?

Explain the use of real and nominal discount rates in discounting cash flows.Which is used more often and why?

The pretax salvage value of an asset is equal to the:

The Boat Works currently produces boat sails and is considering expanding its operations to include awnings.The expansion would require the use of land the firm purchased three years ago at a cost of $197,000 that is currently valued at $209,500.The expansion could use some equipment that is currently sitting idle if $7,500 of modifications were made to it.The equipment originally cost $387,500 five years ago,has a current book value of $132,700,and a current market value of $139,000.Other capital purchases costing $520,000 will also be required.What is the value of the opportunity costs that should be included in the initial cash outflow for the expansion project?

Bruno's is analyzing two machines to determine which one it should purchase.The company requires a rate of return of 14.6 percent and uses straight-line depreciation to a zero book value over a machine's life.Ignore bonus depreciation and taxes.Machine A has a cost of $318,000,annual operating costs of $8,700,and a life of 3 years.Machine B costs $247,000,has annual operating costs of $9,300,and a life of 2 years.Whichever machine is purchased will be replaced at the end of its useful life.Which machine should Bruno's purchase and why?

For a tax-paying firm,the net present value of a project will increase when:

Western Tech is considering a new project that will require $118,000 of fixed assets and net working capital of $16,000.The fixed assets will be depreciated on a straight-line basis to a zero salvage value over three years.Ignore bonus depreciation.This project is expected to produce an operating cash flow of $45,000 the first year with that amount decreasing by 5 percent annually for two years before the project is shut down.The fixed assets can be sold for $55,000 at the end of the project and all net working capital will be recovered.What is the net present value of this project at a discount rate of 11.5 percent and a tax rate of 23 percent?

A project is expected to create operating cash flows of $26,500 a year for four years.The fixed assets required for the project cost $62,000 and will be worthless at the end of the project.An additional $3,000 of net working capital will be required throughout the life of the project.What is the project's net present value if the required rate of return is 12 percent?

Jamestown Ltd.currently produces boat sails and is considering expanding its operations to include awnings.The expansion would require the use of land the firm purchased three years ago at a cost of $142,000 that is currently valued at $137,500.The expansion could use some equipment that is currently sitting idle if $6,700 of modifications were made to it.The equipment originally cost $139,500 six years ago,has a current book value of $24,700,and a current market value of $39,000.Other capital purchases costing $780,000 will also be required.What is the amount of the initial cash outflow for this expansion project?

A project will produce an operating cash flow of $7,300 a year for three years.The initial investment for fixed assets will be $11,600,which will be depreciated straight-line to zero over the asset's 4-year life.Ignore bonus depreciation.The project will require an initial $500 in net working capital plus an additional $500 every year with all net working capital levels restored to their original levels when the project ends.The fixed assets can be sold for an estimated $2,500 at the end of the project,the combined tax rate is 23 percent,and the required rate of return is 12 percent.What is the net present value of the project?

One purpose of identifying all the incremental cash flows related to a proposed project is to:

The salvage value of an asset creates an aftertax cash flow in an amount equal to the sales price:

The top-down approach to computing the operating cash flow:

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

Sue purchased a house for $89,000,spent $56,000 upgrading it,and currently had it appraised at $212,900.The house is being rented to a family for $1,200 a month,the maintenance expenses average $200 a month,and the property taxes are $4,800 a year.If she sells the house she will incur $20,000 in expenses.She is considering converting the house into professional office space.What opportunity cost,if any,should she assign to this property if she has been renting it for the past two years?

The net working capital of a firm will decrease if there is: