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 31

Multiple Choice

Review LaterAdd Note

Review Later

Net working capital:

A) Can be ignored in project analysis because any expenditure is normally recouped by the end of the project.
B) Requirements generally, but not always, create a cash inflow at the beginning of a project.
C) Expenditures commonly occur at the end of a project.
D) Is frequently affected by the additional sales generated by a new project.
E) Is the only expenditure where at least a partial recovery can be made at the end of a project.

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

Correct Answer

verified

Show Answer

Question 32

Multiple Choice

Review LaterAdd Note

Review Later

Office Furniture Makers, Inc. uses machines to produce high quality office chairs for other firms. The initial cost of one customized machine is $750,000. This machine costs $12,000 a year to operate. Each machine has a life of 3 years before it is replaced. What is the equivalent annual cost of this machine if the required return is 10%? (Round your answer to whole dollars)

A) -$259,947
B) -$285,942
C) -$301,586
D) -$313,586
E) -$326,947

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

Correct Answer

verified

Show Answer

Question 33

Multiple Choice

Review LaterAdd Note

The future rental income that could have been earned if a building had not been sold is called a(n) ______ cost.

You just purchased some equipment that belongs in a 25% CCA class. The equipment cost $67,601. What will the book value of this equipment be at the end of three years should you decide to resell the equipment at that point in time?

Big Joe's owns a manufacturing facility that is currently sitting idle. The facility is located on a piece of land that originally cost $129,001. The facility itself cost $650,000 to build. As of now, the book value of the land and the facility are $129,000 and $186,500, respectively. Big Joe's received an offer of $590,000 for the land and facility last week. They rejected this offer even though they were told that it is a reasonable offer in today's market. If Big Joe's were to consider using this land and facility in a new project, what cost, if any, should they include in the project analysis?

The proper formula of project cash flow is operating cash flow - additions to net working capital - capital spending.

Which one of the following would be considered a use of cash?

Great Enterprises is analyzing two machines to determine which one they should purchase. The company requires a 13% rate of return and uses straight-line depreciation to a zero book value. Machine A has a cost of $285,000, annual operating costs of $8,500, and a 3-year life. Machine B costs $210,000, has annual operating costs of $14,000, and has a 2-year life. Whichever machine is purchased will be replaced at the end of its useful life. Great Enterprises should select machine _____ because it will save the company about _____ a year in costs.

Le Place has sales of $439,000, depreciation of $32,000, and net working capital of $56,001. The firm has a tax rate of 34% and a profit margin of 6%. The firm has no interest expense. What is the amount of the operating cash flow?

The Frank Ernst Co. wants to add an additional production line. To do this, the company must spend $100,000 to expand its current building and purchase $1.2 million in new equipment. The building expansion has a salvage value of $80,000 and the equipment has a salvage value of $390,001. This new line is expected to produce 200,000 units with a projected sales price of $4.65 per unit and a variable cost of $2.90 a unit. Gross profit from existing products is expected to decline by $29,000 a year as a result of this addition. Fixed costs are $42,000 annually. The net working capital requirement is $36,001. The company uses straight-line depreciation over the life of the product and requires a 15% rate of return. Taxes are incurred at a rate of 34%. The life of the project is five years. What is the total cash flow in year 5?

If a firm wishes to recapture 100% of its net working capital investment in a project, the firm will have to sell all of the inventory related to the project at a price at least equal to the cost.

Give an example of a sunk cost and an opportunity cost.

ABC, Inc. is considering a project that requires $21,000 in net working capital and $121,000 in fixed assets, which belong in a 30% CCA class. The fixed assets have a salvage value of 28,500 at the end of the 3 year project. The after-tax operating income of the project is $61,300 per year. The tax rate is 35% and the required rate of return is 16%. What is the NPV of this project?

The Best Company is reviewing two options for replacing a piece of machinery. The first machine costs $86,500 and has a four-year life. The second machine costs $123,000 and has a six-year life. Neither machine will have a salvage value. The machines will be replaced at the end of their life. What method should be used to determine which machine to purchase?

Louie's Leisure Products is considering a project which will require the purchase of $1.4 million in new equipment. The equipment belongs in a 20% CCA class. Louie's expects to sell the equipment at the end of the project for 20% of its original cost. Annual sales from this project are estimated at $1.2 million. Net working capital equal to 20% of sales will be required to support the project. All of the net working capital will be recouped at the end of the project. The firm desires a minimal 14% rate of return on this project. The tax rate is 34%. What is the present value of the net working capital changes associated with the project? The project is expected to last 7 years.

A company is evaluating the replacement of the office copier. The balance due on the current lease, which will be payable even if the copier is returned should be considered in that evaluation.

Your firm needs a computerized line-boring machine which costs $80,000, and requires $20,000 in maintenance for each year of its three year life. After three years, the salvage value will be zero. The machine falls into the Class 10 equipment category (CCA rate 30%) . Assume a tax rate of 34% and a discount rate of 10%. Assume the machine can be sold for $10,000 at the end of year 1. Compute the present value of the pre-tax salvage value at the end of year 3.

Jamie's Motor Home Sales currently sells 1,000 Class A motor homes, 2,500 Class C motor homes, and 4,000 pop-up trailers each year. Jamie is considering adding a mid-range camper and expects that if she does so she can sell 1,500 of them. However, if the new camper is added, Jamie expects that her Class A sales will decline to 950 units while the Class C campers decline to 2,200. The sales of pop-ups will not be affected. Class A motor homes sell for an average of $125,000 each. Class C homes are priced at $39,500 and the pop-ups sell for $5,000 each. The new mid-range camper will sell for $47,901. What is the erosion cost?

The managers of PonchoParts, Inc. plan to manufacture engine blocks for classic cars from the 1960s era. They expect to sell 250 blocks annually for the next five years. The necessary foundry and machining equipment will cost a total of $800,000 and belongs in a 30% CCA class for tax purposes. The firm expects to be able to dispose of the manufacturing equipment for $150,000 at the end of the project. Labour and materials costs total $500 per engine block, fixed costs are $125,000 per year. Assume a 35% tax rate and a 12% discount rate. What is the present value of the CCA tax shield?

For a new project, a company plans to invest $15,000 in inventory, $8,000 in accounts receivable and $150,000 in fixed assets with a salvage value of $44,001. Accounts payable will increase by $13,000 when the project starts. Assets are depreciated straight line to zero over the 4-year life of the project. Taxes are 35%. Which one of the following statements is correct concerning the cash flow in year 4?