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 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 E)
G) A) and B)

Correct Answer

verified

Show Answer

Question 52

Multiple Choice

Review LaterAdd Note

Review Later

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

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

Correct Answer

verified

Show Answer

Question 53

Multiple Choice

Review LaterAdd Note

Which one of the following best describes pro forma financial statements?

The depreciation tax shield is best defined as the:

-Precision Tool is analyzing two machines to determine which one it should purchase.The company requires a 15 percent rate of return and uses straight-line depreciation to a zero book value over the life of its equipment.Machine A has a cost of $892,000,annual operating costs of $28,200,and a 4-year life.Machine B costs $1,118,000,has annual operating costs of $19,500,and has a 5-year life.Whichever machine is purchased will be replaced at the end of its useful life.Precision Tool should purchase Machine _____ because it lowers the firm's annual cost by approximately _______ as compared to the other machine.

You are considering the purchase of a new machine.Your analysis includes the evaluation of two machines which have differing initial and ongoing costs and differing lives.Whichever machine is purchased will be replaced at the end of its useful life.You should select the machine which has the:

Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets.The firm is currently considering making handmade wreaths as well.Which one of the following is the best example of an incremental operating cash flow related to the wreath project?

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

When using the equivalent annual cost as a basis for deciding which equipment should be purchased,the equipment under consideration must fit which two of the following criteria? I.differing productive lives II.differing manufacturers III.required replacement at end of economic life IV.differing initial cost

Changes in the net working capital requirements:

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?

-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?

Peterborough Trucking just purchased some fixed assets that are classified as 3-year property for MACRS.The assets cost $10,600.What is the amount of the depreciation expense in year 3?

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

Crafter's Supply purchased some fixed assets 2 years ago at a cost of $38,700.It no longer needs these assets so it is going to sell them today for $25,000.The assets are classified as 5-year property for MACRS.What is the net cash flow from this sale if the firm's tax rate is 30 percent?

The equivalent annual cost method is useful in determining:

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?

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

-You are working on a bid to build two apartment buildings a year for the next 5 years for a local college.This project requires the purchase of $750,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the project's life.The equipment can be sold at the end of the project for $325,000.You will also need $140,000 in net working capital over the life of the project.The fixed costs will be $628,000 a year and the variable costs will be $1,298,000 per building.Your required rate of return is 14.5 percent for this project and your tax rate is 35 percent.What is the minimal amount,rounded to the nearest $100,you should bid per building?

Keyser Mining is considering a project that will require the purchase of $980,000 in new equipment.The equipment will be depreciated straight-line to a zero book value over the 7-year life of the project.The equipment can be scraped at the end of the project for 5 percent of its original cost.Annual sales from this project are estimated at $420,000.Net working capital equal to 20 percent of sales will be required to support the project.All of the net working capital will be recouped.The required return is 16 percent and the tax rate is 35 percent.What is the amount of the aftertax salvage value of the equipment?