Chap 010

Chapter 10 - Making Capital Investment Decisions
Chapter 10 Making Capital Investment Decisions

Multiple Choice Questions
1. The difference between a firm's f t re cash flows if it accepts a pro!ect and the firm's f t re cash flows if it does not accept the pro!ect is referred to as the pro!ect's" #. incremental cash flows. $. internal cash flows. C. e%ternal cash flows. D. erosion effects. &. financing cash flows.
'. The fact that a proposed pro!ect is anal()ed based on the pro!ect's incremental cash flows is the ass mption behind which one of the following principles* #. nderl(ing val e principle $. stand-alone principle C. e+ ivalent cost principle D. salvage principle &. f ndamental principle
,. -hich one of the following costs was inc rred in the past and cannot be reco ped* #. incremental $. side C. s nk D. opport nit( &. erosion
.. The option that is foregone so that an asset can be tili)ed b( a specific pro!ect is referred to as which one of the following* #. salvage val e $. wasted val e C. s nk cost D. opport nit( cost &. erosion
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/. -hich one of the following best describes the concept of erosion* #. e%penses that have alread( been inc rred and cannot be recovered $. change in net working capital related to implementing a new pro!ect C. the cash flows of a new pro!ect that come at the e%pense of a firm's e%isting cash flows D. the alternative that is forfeited when a fi%ed asset is tili)ed b( a pro!ect &. the differences in a firm's cash flows with and witho t a partic lar pro!ect
0. -hich one of the following best describes pro forma financial statements* #. financial statements e%pressed in a foreign c rrenc( $. financial statements where the assets are e%pressed as a percentage of total assets and costs are e%pressed as a percentage of sales C. financial statements showing pro!ected val es for f t re time periods D. financial statements e%pressed in real dollars1 given a stated base (ear &. financial statements where all acco nts are e%pressed as a percentage of last (ear's val es
2. -hich one of the following is the depreciation method which allows accelerated write-offs of propert( nder vario s lifetime classifications* #. I33 $. #C34 C. ##3 D. straight-line to )ero &. straight-line with salvage
5. The depreciation ta% shield is best defined as the" #. amo nt of ta% that is saved when an asset is p rchased. $. ta% that is avoided when an asset is sold as salvage. C. amo nt of ta% that is d e when an asset is sold. D. amo nt of ta% that is saved beca se of the depreciation e%pense. &. amo nt b( which the afterta% depreciation e%pense lowers net income.
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6. The ann al ann it( stream of pa(ments that has the same present val e as a pro!ect's costs is referred to as which one of the following* #. (earl( incremental costs $. s nk costs C. opport nit( costs D. erosion cost &. e+ ivalent ann al cost
10. 7elle('s $askets makes handmade baskets for distrib tion to pscale retail o tlets. The firm is c rrentl( considering making handmade wreaths as well. -hich one of the following is the best e%ample of an incremental operating cash flow related to the wreath pro!ect* #. storing s pplies in the same space c rrentl( sed for materials storage $. tili)ing the basket manager to oversee wreath prod ction C. hiring additional emplo(ees to handle the increased workload sho ld the firm accept the wreath pro!ect D. researching the market to determine if wreath sales might be profitable before deciding to proceed &. planning on lower interest e%pense b( ass ming the proceeds of the wreath sales will be sed to red ce the firm's c rrentl( o tstanding debt
11. Danielle's is a f rnit re store that is considering adding appliances to its offerings. -hich of the following sho ld be considered incremental cash flows of this pro!ect* I. tili)ing the credit offered b( a s pplier to p rchase the appliance inventor( II. benefiting from increased f rnit re sales to appliance c stomers III. borrowing mone( from a bank to f nd the appliance pro!ect I8. p rchasing parts for inventor( to handle an( appliance repairs that might be necessar( #. I and II onl( $. III and I8 onl( C. I1 II1 and I8 onl( D. II1 III1 and I8 onl( &. I1 II1 III1 and I8
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1'. The stand-alone principle advocates that pro!ect anal(sis sho ld be based solel( on which one of the following costs* #. s nk $. total C. variable D. incremental &. fi%ed
1,. -hich one of the following is an e%ample of a s nk cost* #. 911/00 of lost sales beca se an item was o t of stock $. 911'00 paid to repair a machine last (ear C. 9'01000 pro!ect that m st be forfeited if another pro!ect is accepted D. 9.1/00 red ction in c rrent shoe sales if a store commences selling sandals &. 911500 increase in comic book sales if a store commences selling p ))les
1.. : ; < =lastic Molders spent 911'00 last week repairing a machine. This week the compan( is tr(ing to decide if the machine co ld be better tili)ed if the( assigned it a proposed pro!ect. -hen anal()ing the proposed pro!ect1 the 911'00 sho ld be treated as which t(pe of cost* #. opport nit( $. fi%ed C. incremental D. erosion &. s nk
1/. -hich one of the following best ill strates erosion as it relates to a hot dog stand located on the beach* #. providing both ketch p and m stard for its c stomer's se $. repairing the roof of the hot dog stand beca se of water damage C. selling fewer hot dogs beca se hamb rgers were added to the men D. offering >rench fries b t not onion rings &. losing sales d e to bad weather
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10. -hich of the following sho ld be incl ded in the anal(sis of a new prod ct* I. mone( alread( spent for research and development of the new prod ct II. red ction in sales for a c rrent prod ct once the new prod ct is introd ced III. increase in acco nts receivable needed to finance sales of the new prod ct I8. market val e of a machine owned b( the firm which will be sed to prod ce the new prod ct #. I and III onl( $. II and I8 onl( C. I1 II1 and III onl( D. II1 III1 and I8 onl( &. I1 II1 III1 and I8
12. ?o are considering the p rchase of a new machine. ?o r anal(sis incl des the eval ation of two machines which have differing initial and ongoing costs and differing lives. -hichever machine is p rchased will be replaced at the end of its sef l life. ?o sho ld select the machine which has the" #. longest life. $. highest ann al operating cost. C. lowest ann al operating cost. D. highest e+ ivalent ann al cost. &. lowest e+ ivalent ann al cost.
15. The bid price is" #. an afterta% price. $. the afterta% contrib tion margin. C. the highest price (o sho ld charge if (o want the pro!ect. D. the onl( price (o can bid if the pro!ect is to be profitable. &. the minim m price (o sho ld charge if (o want to financiall( breakeven.
16. -hich one of the following will increase a bid price* #. a decrease in the fi%ed costs $. a red ction in the net working capital re+ irement C. a red ction in the firm's ta% rate D. an increase in the salvage val e &. an increase in the re+ ired rate of ret rn
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'0. #ll of the following are related to a proposed pro!ect. -hich of these sho ld be incl ded in the cash flow at time )ero* I. p rchase of 911.00 of parts inventor( needed to s pport the pro!ect II. loan of 91'/1000 sed to finance the pro!ect III. depreciation ta% shield of 911100 I8. 901/00 of e+ ipment needed to commence the pro!ect #. I and II onl( $. I and I8 onl( C. II and I8 onl( D. I1 II1 and I8 onl( &. I1 II1 III1 and I8
'1. Changes in the net working capital re+ irements" #. can affect the cash flows of a pro!ect ever( (ear of the pro!ect's life. $. onl( affect the initial cash flows of a pro!ect. C. onl( affect the cash flow at time )ero and the final (ear of a pro!ect. D. are generall( e%cl ded from pro!ect anal(sis d e to their irrelevance to the total pro!ect. &. reflect onl( the changes in the c rrent asset acco nts.
''. -hich one of the following is a pro!ect cash inflow* Ignore an( ta% effects. #. decrease in acco nts pa(able $. increase in inventor( C. decrease in acco nts receivable D. depreciation e%pense based on M#C34 &. e+ ipment ac+ isition
',. @et working capital" #. can be ignored in pro!ect anal(sis beca se an( e%pendit re is normall( reco ped at the end of the pro!ect. $. re+ irements1 s ch as an increase in acco nts receivable1 create a cash inflow at the beginning of a pro!ect. C. is rarel( affected when a new prod ct is introd ced. D. can create either a cash inflow or a cash o tflow at time )ero of a pro!ect. &. is the onl( e%pendit re where at least a partial recover( can be made at the end of a pro!ect.
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'.. The operating cash flow of a cost c tting pro!ect" #. is e+ al to the depreciation ta% shield. $. is e+ al to )ero beca se there is no incremental sales. C. can onl( be anal()ed b( pro!ecting the sales and costs for a firm's entire operations. D. incl des an( changes that occ r in the c rrent acco nts. &. can be positive even tho gh there are no sales.
'/. =ro forma statements for a proposed pro!ect sho ld" I. be compiled on a stand-alone basis. II. incl de all the incremental cash flows related to the pro!ect. III. generall( e%cl de interest e%pense. I8. incl de all pro!ect-related fi%ed asset ac+ isitions and disposals. #. I and II onl( $. II and III onl( C. I1 II1 and I8 onl( D. II1 III1 and I8 onl( &. I1 II1 III1 and I8
'0. -hich one of the following statements is correct* #. =ro!ect anal(sis sho ld onl( incl de the cash flows that affect the income statement. $. # pro!ect can create a positive operating cash flow witho t affecting sales. C. The depreciation ta% shield creates a cash o tflow for a pro!ect. D. Interest e%pense sho ld alwa(s be incl ded as a cash o tflow when anal()ing a pro!ect. &. The opport nit( cost of a compan(-owned b ilding that is going to be sed in a new pro!ect sho ld be incl ded as a cash inflow to the pro!ect.
'2. # compan( that tili)es the M#C34 s(stem of depreciation" #. will have e+ al depreciation costs each (ear of an asset's life. $. will have a greater ta% shield in (ear two of a pro!ect than it wo ld have if the firm had opted for straight-line depreciation1 given the same depreciation life. C. can depreciate the cost of land1 if it so desires. D. will e%pense less than the entire cost of an asset. &. cannot e%pense an( of the cost of a new asset d ring the first (ear of the asset's life.
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'5. Morris Motors ! st p rchased some M#C34 /-(ear propert( at a cost of 9'101000. -hich one of the following will correctl( give (o the book val e of this e+ ipment at the end of (ear '*
#. 9'101000AB1 C 0.'0 C 0.,'D $. 9'101000 B1 - 0.'0 - 0.,'D C. 9'101000 B0.'0 C 0.,'D D. E9'101000 B1 - 0.'0DF B1 - 0.,'D &. 9'101000AEB1 C 0.'0DB1 C 0.,'DF
'6. 7e(ser =etrole m ! st p rchased some e+ ipment at a cost of 9021000. -hat is the proper methodolog( for comp ting the depreciation e%pense for (ear ' if the e+ ipment is classified as /-(ear propert( for M#C34*
#. 9021000 B1 - 0.'0D 0.,' $. 9021000AB1 - 0.'0 - 0.,'D C. 9021000 B1 C 0.,'D D. 9021000 B1 - 0.,'D &. 9021000 0.,'
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,0. The c rrent book val e of a fi%ed asset that was p rchased two (ears ago is sed in the comp tation of which one of the following* #. depreciation ta% shield $. ta% d e on the salvage val e of that asset C. c rrent (ear's operating cash flow D. change in net working capital &. M#C34 depreciation for the c rrent (ear
,1. The net book val e of e+ ipment will" #. remain constant over the life of the e+ ipment. $. var( in response to changes in the market val e. C. decrease at a constant rate when M#C34 depreciation is sed. D. increase over the ta%able life of an asset. &. decrease slower nder straight-line depreciation than nder M#C34.
,'. Three (ears ago1 7no% :lass p rchased a machine for a ,-(ear pro!ect. The machine is being depreciated straight-line to )ero over a /-(ear period. Toda(1 the pro!ect ended and the machine was sold. -hich one of the following correctl( defines the afterta% salvage val e of that machine* BT represents the relevant ta% rateD #. 4ale price C B4ales price - $ook val eD T $. 4ale price C B4ales price - $ook val eD B1 - TD C. 4ale price C B$ook val e - 4ale priceD T D. 4ale price C B$ook val e - 4ale priceD B1 - TD &. 4ale price B1 - TD
,,. -hich one of the following is a correct method for comp ting the operating cash flow of a pro!ect ass ming that the interest e%pense is e+ al to )ero* #. &$IT C D $. &$IT - T C. @I C D D. B4ales - CostsD B1 - DD B1- TD &. B4ales - CostsD B1 - TD
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,.. The operating cash flow for a pro!ect sho ld e%cl de which one of the following* #. ta%es $. variable costs C. fi%ed costs D. interest e%pense &. depreciation ta% shield
,/. The bottom- p approach to comp ting the operating cash flow applies onl( when" #. both the depreciation e%pense and the interest e%pense are e+ al to )ero. $. the interest e%pense is e+ al to )ero. C. the pro!ect is a cost-c tting pro!ect. D. no fi%ed assets are re+ ired for a pro!ect. &. both ta%es and the interest e%pense are e+ al to )ero.
,0. The top-down approach to comp ting the operating cash flow" #. ignores noncash e%penses. $. applies onl( if a pro!ect increases sales. C. applies onl( to cost c tting pro!ects. D. is e+ al to sales - costs - ta%es C depreciation. &. is sed solel( to comp te a bid price.
,2. Increasing which one of the following will increase the operating cash flow ass ming that the bottom- p approach is sed to comp te the operating cash flow* #. erosion effects $. ta%es C. fi%ed e%penses D. salaries &. depreciation e%pense
,5. -hich one of the following statements is correct concerning bid prices* #. The bid price is the ma%im m price that a firm sho ld bid. $. # firm can s bmit a bid that is higher than the comp ted bid price and still break even. C. # bid price ignores ta%es. D. # bid price sho ld be comp ted based solel( on the operating cash flows of the pro!ect. &. # bid price sho ld be comp ted based on a )ero percent re+ ired rate of ret rn.
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,6. Dan is comparing three machines to determine which one to p rchase. The machines sell for differing prices1 have differing operating costs1 differing machine lives1 and will be replaced when worn o t. -hich one of the following comp tational methods sho ld Dan se as the basis for his decision* #. internal rate of ret rn $. operating cash flow C. e+ ivalent ann al cost D. depreciation ta% shield &. bottom- p operating cash flow
.0. The e+ ivalent ann al cost method is sef l in determining" #. which one of two machines to p rchase if the machines are m t all( e%cl sive1 have differing lives1 and are a one-time p rchase. $. the ta% shield benefits of depreciation given the p rchase of new assets for a pro!ect. C. the operating cash flows of a cost-c tting pro!ect. D. which one of two investments to accept when the investments have different re+ ired rates of ret rn. &. which one of two machines sho ld be p rchased when the machines are m t all( e%cl sive1 have different machine lives1 and will be replaced once the( are worn o t.
.1. -hen sing the e+ ivalent ann al cost as a basis for deciding which e+ ipment sho ld be p rchased1 the e+ ipment nder consideration m st fit which two of the following criteria* I. differing prod ctive lives II. differing man fact rers III. re+ ired replacement at end of economic life I8. differing initial cost #. I and II $. I and III C. I and I8 D. II and IIII &. II and I8
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.'. The e+ ivalent ann al cost considers which of the following* I. re+ ired rate of ret rn II. operating costs III. need for replacement I8. afterta% salvage val e #. I and II onl( $. II and I8 onl( C. II1 III1 and I8 onl( D. I1 II1 and I8 onl( &. I1 II1 III1 and I8
.,. The bid price alwa(s ass mes which one of the following* #. # pro!ect has a one-(ear life. $. The afterta% net income of the pro!ect is )ero. C. The net present val e of the pro!ect is )ero. D. #n( assets p rchased will have a positive salvage val e at the end of the pro!ect. &. #ssets will be depreciated based on M#C34.
... -hich one of the following wo ld make a pro!ect nacceptable* #. cash inflow for net working capital at time )ero $. re+ iring fi%ed assets that wo ld have no salvage val e C. an e+ ivalent ann al cost that e%ceeds that of an alternative pro!ect D. lack of reven e generation &. a depreciation ta% shield that e%ceeds the val e of the interest e%pense
./. Decreasing which one of the following will increase the acceptabilit( of a pro!ect* #. s nk costs $. salvage val e C. depreciation ta% shield D. e+ ivalent ann al cost &. acco nts pa(able re+ irement
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.0. De%ter 4mith ; Co. is replacing a machine simpl( beca se it has worn o t. The new machine will not affect either sales or operating costs and will not have an( salvage val e at the end of its /-(ear life. The firm has a ,. percent ta% rate1 ses straight-line depreciation over an asset's life1 and has a positive net income. :iven this1 which one of the following statements is correct* #. #s a pro!ect1 the new machine has a net present val e e+ al to min s one times the machine's p rchase price. $. The new machine will have a )ero rate of ret rn. C. The new machine will generate positive operating cash flows1 at least in the first few (ears of its life. D. The new machine will create a cash o tflow when the firm disposes of it at the end of its life. &. The new machine creates erosion effects.
.2. 7ell('s Corner $aker( p rchased a lot in Gil Cit( 0 (ears ago at a cost of 9'501000. Toda(1 that lot has a market val e of 9,.01000. #t the time of the p rchase1 the compan( spent 91/1000 to level the lot and another 9'01000 to install storm drains. The compan( now wants to b ild a new facilit( on that site. The b ilding cost is estimated at 91..2 million. -hat amo nt sho ld be sed as the initial cash flow for this pro!ect* #. -911.201000 $. -9115101000 C. -9115'/1000 D. -9115./1000 &. -9115001000
.5. 4ailcloth ; More c rrentl( prod ces boat sails and is considering e%panding its operations to incl de awnings for homes and travel trailers. The compan( owns land beside its c rrent man fact ring facilit( that co ld be sed for the e%pansion. The compan( bo ght this land / (ears ago at a cost of 9,161000. #t the time of p rchase1 the compan( paid 9'.1000 to level o t the land so it wo ld be s itable for f t re se. Toda(1 the land is val ed at 9'6/1000. The compan( c rrentl( has some n sed e+ ipment that it c rrentl( owns val ed at 9,51000. This e+ ipment co ld be sed for prod cing awnings if 91'1000 is spent for e+ ipment modifications. Gther e+ ipment costing 9.601000 will also be re+ ired. -hat is the amo nt of the initial cash flow for this e%pansion pro!ect* #. -925/1000 $. -95',1000 C. -95,/1000 D. -95/61000 &. -955,1000
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.6. -ebster ; Moore paid 91,610001 in cash1 for a piece of e+ ipment , (ears ago. #t the beginning of last (ear1 the compan( spent 9'11000 to pdate the e+ ipment with the latest technolog(. The compan( no longer ses this e+ ipment in its c rrent operations and has received an offer of 9561000 from a firm that wo ld like to p rchase it. -ebster ; Moore is debating whether to sell the e+ ipment or to e%pand its operations so that the e+ ipment can be sed. -hen eval ating the e%pansion option1 what val e1 if an(1 sho ld the firm assign to this e+ ipment as an initial cost of the pro!ect* #. 90 $. 9'11000 C. 9561000 D. 91101000 &. 91001000
/0. The >l ff( >eather sells c stomi)ed handbags. C rrentl(1 it sells 151000 handbags ann all( at an average price of 956 each. It is considering adding a lower-priced line of handbags that sell for 9/6 each. The firm estimates it can sell 21000 of the lower-priced handbags b t will sell ,1000 less of the higher-priced handbags b( doing so. -hat is the amo nt of the sales that sho ld be sed when eval ating the addition of the lower-priced handbags* #. 91.01000 $. 9'2/1000 C. 9.1,1000 D. 90',1000 &. 90501000
/1. Mason >arms p rchased a b ilding for 92'61000 eight (ears ago. 4i% (ears ago1 repairs were made to the b ilding which cost 91,01000. The ann al ta%es on the propert( are 9111000. The b ilding has a c rrent market val e of 95'/1000 and a c rrent book val e of 9.6.1000. The b ilding is totall( paid for and solel( owned b( the firm. If the compan( decides to se this b ilding for a new pro!ect1 what val e1 if an(1 sho ld be incl ded in the initial cash flow of the pro!ect for this b ilding* #. 9.6.1000 $. 9/5'1000 C. 95'/1000 D. 950/1000 &. 96/,1000
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/'. ?o own a ho se that (o rent for 911100 a month. The maintenance e%penses on the ho se average 9'00 a month. The ho se cost 9'161000 when (o p rchased it . (ears ago. # recent appraisal on the ho se val ed it at 9',61000. If (o sell the ho se (o will inc r 91.1000 in real estate fees. The ann al propert( ta%es are 9.1000. ?o are deciding whether to sell the ho se or convert it for (o r own se as a professional office. -hat val e sho ld (o place on this ho se when anal()ing the option of sing it as a professional office* #. 9'111500 $. 9''11000 C. 9''/1000 D. 9',/1000 &. 9',61000
/,. @elson Mfg. owns a man fact ring facilit( that is c rrentl( sitting idle. The facilit( is located on a piece of land that originall( cost 91/61000. The facilit( itself cost 911.001000 to b ild. #s of now1 the book val e of the land and the facilit( are 91/61000 and 9./510001 respectivel(. The firm owes no debt on either the land or the facilit( at the present time. The firm received a bid of 911/001000 for the land and facilit( last week. The firm's management re!ected this bid even tho gh the( were told that it is a reasonable offer in toda('s market. If the firm was to consider sing this land and facilit( in a new pro!ect1 what cost1 if an(1 sho ld it incl de in the pro!ect anal(sis* #. 90 $. 90121000 C. 911.001000 D. 911/001000 &. 9110161000
/.. Cool Comfort c rrentl( sells ,00 Class # spas1 ./0 Class C spas1 and '00 del %e model spas each (ear. The firm is considering adding a mid-class spa and e%pects that if it does it can sell ,2/ of them. However1 if the new spa is added1 Class # sales are e%pected to decline to ''/ nits while the Class C sales are e%pected to decline to '00. The sales of the del %e model will not be affected. Class # spas sell for an average of 91'1000 each. Class C spas are priced at 901000 and the del %e model sells for 9121000 each. The new mid-range spa will sell for 951000. -hat is the val e of the erosion* #. 90001000 $. 911'001000 C. 9115001000 D. 9'1.001000 &. 9,16001000
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//. Iefferson ; 4ons is eval ating a pro!ect that will increase ann al sales b( 91,51000 and ann al costs b( 96.1000. The pro!ect will initiall( re+ ire 91101000 in fi%ed assets that will be depreciated straight-line to a )ero book val e over the .-(ear life of the pro!ect. The applicable ta% rate is ,' percent. -hat is the operating cash flow for this pro!ect* #. 9111''0 $. 9'616'0 C. 9,512'0 D. 9.01.50 &. 9.010'0
/0. Marie's >ashions is considering a pro!ect that will re+ ire 9'51000 in net working capital and 9521000 in fi%ed assets. The pro!ect is e%pected to prod ce ann al sales of 92/1000 with associated costs of 9/21000. The pro!ect has a /-(ear life. The compan( ses straight-line depreciation to a )ero book val e over the life of the pro!ect. The ta% rate is ,0 percent. -hat is the operating cash flow for this pro!ect* #. -911/'0 $. -9/50 C. 9.'0 D. 91/1050 &. 91215'0
/2. The $each Ho se has sales of 925.1000 and a profit margin of 11 percent. The ann al depreciation e%pense is 91.1000. -hat is the amo nt of the operating cash flow if the compan( has no long-term debt* #. 9051200 $. 92'1'.0 C. 9501'.0 D. 91001'.0 &. 91011200
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/5. The =ancake Ho se has sales of 9110.'10001 depreciation of 9'210001 and net working capital of 9'151000. The firm has a ta% rate of ,/ percent and a profit margin of 0 percent. The firm has no interest e%pense. -hat is the amo nt of the operating cash flow* #. 9651/'0 $. 91'/1/'0 C. 91.21.50 D. 9'051.50 &. 9,.,1/'0
/6. @orthern 3ailwa( is considering a pro!ect which will prod ce ann al sales of 962/1000 and increase cash e%penses b( 95/61000. If the pro!ect is implemented1 ta%es will increase from 91.11000 to 91/.1000 and depreciation will increase from 916.1000 to 9'2'1000. The compan( is debt-free. -hat is the amo nt of the operating cash flow sing the top-down approach* #. 9'/1000 $. 910,1000 C. 91/21000 D. 91511000 &. 9'061000
00. $i-<o Traders is considering a pro!ect that will prod ce sales of 9'51000 and increase cash e%penses b( 9121/00. If the pro!ect is implemented1 ta%es will increase b( 9,1000. The additional depreciation e%pense will be 911000. #n initial cash o tla( of 911.00 is re+ ired for net working capital. -hat is the amo nt of the operating cash flow sing the top-down approach* #. 9.1/00 $. 9/1600 C. 901100 D. 921/00 &. 951600
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01. # proposed e%pansion pro!ect is e%pected to increase sales of I< Ticker's 4tore b( 9,/1000 and increase cash e%penses b( 9'11000. The pro!ect will cost 9'.1000 and be depreciated sing straight-line depreciation to a )ero book val e over the .-(ear life of the pro!ect. The store has a marginal ta% rate of ,0 percent. -hat is the operating cash flow of the pro!ect sing the ta% shield approach* #. 9/1000 $. 921500 C. 9111000 D. 91,1,00 &. 91.1000
0'. The < mber ?ard is considering adding a new prod ct line that is e%pected to increase ann al sales b( 9',51000 and cash e%penses b( 915.1000. The initial investment will re+ ire 9601000 in fi%ed assets that will be depreciated sing the straight-line method to a )ero book val e over the 0-(ear life of the pro!ect. The compan( has a marginal ta% rate of ,' percent. -hat is the ann al val e of the depreciation ta% shield* #. 9/11'0 $. 91,1100 C. 9'/15.0 D. 9,'1/00 &. 9.115.0
0,. $ernie's $everages p rchased some fi%ed assets classified as /-(ear propert( for M#C34. The assets cost 9521000. -hat will the acc m lated depreciation be at the end of (ear three*
#. 91,1/'0 $. 9'/10/0 C. 9,51'.1 D. 9.512/6 &. 90116..
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0.. ?o ! st p rchased some e+ ipment that is classified as /-(ear propert( for M#C34. The e+ ipment cost 91.21000. -hat will the book val e of this e+ ipment be at the end of . (ears sho ld (o decide to resell the e+ ipment at that point in time*
#. 951.02.'0 $. 9'/1.01.00 C. 9.'1,,0.00 D. 91'11/65..0 &. 91,51/,'.50
0/. =eterboro gh Tr cking ! st p rchased some fi%ed assets that are classified as ,-(ear propert( for M#C34. The assets cost 961500. -hat is the amo nt of the depreciation e%pense in (ear ,*
#. 9/,2./' $. 911,.2.12 C. 911./1.,5 D. 9116'6.11 &. 9'1122./0
10-16
00. Crafter's 4 ppl( p rchased some fi%ed assets ' (ears ago at a cost of 9,51200. It no longer needs these assets so it is going to sell them toda( for 9'/1000. The assets are classified as /(ear propert( for M#C34. -hat is the net cash flow from this sale if the firm's ta% rate is ,0 percent*
#. 91,11''.'0 $. 9151/20.00 C. 9'015.,.05 D. 9',102'.50 &. 9'/1'11.06
02. ?o own some e+ ipment that (o p rchased . (ears ago at a cost of 9'101000. The e+ ipment is /-(ear propert( for M#C34. ?o are considering selling the e+ ipment toda( for 92/1/00. -hich one of the following statements is correct if (o r ta% rate is ,/ percent*
#. The ta% d e on the sale is 9'01.'/. $. The book val e toda( is 9125102/.'0. C. The acc m lated depreciation to date is 9,21,'..50. D. The ta%able amo nt on the sale is 9,21,'..50. &. The afterta% salvage val e is 90'11,5.05.
10-'0
05. &dward's Man fact red Homes p rchased some machiner( ' (ears ago for 9,161000. These assets are classified as /-(ear propert( for M#C34. The compan( is replacing this machiner( toda( with newer machines that tili)e the latest in technolog(. The old machines are being sold for 91.01000 to a foreign firm for se in its prod ction facilit( in 4o th #merica. -hat is the afterta% salvage val e from this sale if the ta% rate is ,/ percent*
#. 91,/1.05 $. 91.01000 C. 91.'1,1' D. 91..1/6' &. 91.015'0
06. $r no's < nch Co nter is e%panding and e%pects operating cash flows of 9'01000 a (ear for . (ears as a res lt. This e%pansion re+ ires 9,61000 in new fi%ed assets. These assets will be worthless at the end of the pro!ect. In addition1 the pro!ect re+ ires 9,1000 of net working capital thro gho t the life of the pro!ect. -hat is the net present val e of this e%pansion pro!ect at a re+ ired rate of ret rn of 10 percent* #. 9151.22.'6 $. 9'110,,.,, C. 9'51'55.20 D. 9'61.10.05 &. 9,'1.06./2
10-'1
20. Iasper Metals is considering installing a new molding machine which is e%pected to prod ce operating cash flows of 92,1000 a (ear for 2 (ears. #t the beginning of the pro!ect1 inventor( will decrease b( 91010001 acco nts receivables will increase b( 9'110001 and acco nts pa(able will increase b( 91/1000. #ll net working capital will be recovered at the end of the pro!ect. The initial cost of the molding machine is 9'.61000. The e+ ipment will be depreciated straight-line to a )ero book val e over the life of the pro!ect. The e+ ipment will be salvaged at the end of the pro!ect creating a 9.51000 afterta% cash flow. #t the end of the pro!ect1 net working capital will ret rn to its normal level. -hat is the net present val e of this pro!ect given a re+ ired ret rn of 1../ percent* #. 9221'11.'0 $. 9261.15.50 C. 95'1,,0.01 D. 95.10.6.2. &. 95216'/./.
21. # pro!ect will prod ce an operating cash flow of 91.1000 a (ear for 5 (ears. The initial fi%ed asset investment in the pro!ect will be 9.51600. The net afterta% salvage val e is estimated at 9111000 and will be received d ring the last (ear of the pro!ect's life. -hat is the net present val e of the pro!ect if the re+ ired rate of ret rn is 1' percent* #. 9',10'2./. $. 9'51020.'0 C. 9,.10'2./. D. 9,61020.'0 &. 9.110.0.5,
2'. 7wik Jn Hot Dogs is considering the installation of a new comp teri)ed press re cooker that will c t ann al operating costs b( 9',1000. The s(stem will cost 9,61600 to p rchase and install. This s(stem is e%pected to have a .-(ear life and will be depreciated to )ero sing straight-line depreciation. -hat is the amo nt of the earnings before interest and ta%es for this pro!ect* #. 9101/'/ $. 91,10'/ C. 91/1/'/ D. 9101600 &. 9161.00
10-''
2,. Colors and More is considering replacing the e+ ipment it ses to prod ce cra(ons. The e+ ipment wo ld cost 91.,2 million1 have a 1'-(ear life1 and lower man fact ring costs b( an estimated 9,0.1000 a (ear. The e+ ipment will be depreciated sing straight-line depreciation to a book val e of )ero. The re+ ired rate of ret rn is 1/ percent and the ta% rate is ,/ percent. -hat is the net income from this proposed pro!ect* #. 9151/05.2/ $. 9.01'11.'. C. 9001..1.02 D. 91',1,61.02 &. 91,01206..5
2.. :atewa( Comm nications is considering a pro!ect with an initial fi%ed asset cost of 9'..0 million which will be depreciated straight-line to a )ero book val e over the 10-(ear life of the pro!ect. #t the end of the pro!ect the e+ ipment will be sold for an estimated 9,001000. The pro!ect will not directl( prod ce an( sales b t will red ce operating costs b( 92'/1000 a (ear. The ta% rate is ,/ percent. The pro!ect will re+ ire 9./1000 of inventor( which will be reco ped when the pro!ect ends. 4ho ld this pro!ect be implemented if the firm re+ ires a 1. percent rate of ret rn* -h( or wh( not* #. @oK The @=8 is -912'16,2..6. $. @oK The @=8 is -95215'0..5. C. ?esK The @=8 is 9'/11500.,. D. ?esK The @=8 is 9,521/10.02 &. ?esK The @=8 is 9.0016.0./2
2/. ?o are working on a bid to b ild two cit( parks a (ear for the ne%t three (ears. This pro!ect re+ ires the p rchase of 91501000 of e+ ipment that will be depreciated sing straightline depreciation to a )ero book val e over the ,-(ear pro!ect life. The e+ ipment can be sold at the end of the pro!ect for 9,.1000. ?o will also need 9'01000 in net working capital for the d ration of the pro!ect. The fi%ed costs will be 9101000 a (ear and the variable costs will be 91051000 per park. ?o r re+ ired rate of ret rn is 1/ percent and (o r ta% rate is ,. percent. -hat is the minimal amo nt (o sho ld bid per park* B3o nd (o r answer to the nearest 9100D #. 92'1/00 $. 91'51000 C. 91/.1,00 D. 91561100 &. 9'121000
10-',
20. ?o are working on a bid to b ild two apartment b ildings a (ear for the ne%t / (ears for a local college. This pro!ect re+ ires the p rchase of 92/01000 of e+ ipment that will be depreciated sing straight-line depreciation to a )ero book val e over the pro!ect's life. The e+ ipment can be sold at the end of the pro!ect for 9,'/1000. ?o will also need 91.01000 in net working capital over the life of the pro!ect. The fi%ed costs will be 90'51000 a (ear and the variable costs will be 911'651000 per b ilding. ?o r re+ ired rate of ret rn is 1../ percent for this pro!ect and (o r ta% rate is ,/ percent. -hat is the minimal amo nt1 ro nded to the nearest 91001 (o sho ld bid per b ilding* #. 911.',1200 $. 911.561/00 C. 9112,,1000 D. 9'12501000 &. 9,1.0/1600
22. # tomated Man fact rers ses high-tech e+ ipment to prod ce speciali)ed al min m prod cts for its c stomers. &ach one of these machines costs 911.501000 to p rchase pl s an additional 9.61000 a (ear to operate. The machines have a 0-(ear life after which the( are worthless. -hat is the e+ ivalent ann al cost of one these machines if the re+ ired ret rn is 10 percent* #. -9./010/2 $. -9.'21106 C. -9,011/50 D. -9'6/1002 &. -9'/016.2
25. Champion $akers ses speciali)ed ovens to bake its bread. Gne oven costs 90561000 and lasts abo t . (ears before it needs to be replaced. The ann al operating cost per over is 9.11000. -hat is the e+ ivalent ann al cost of an oven if the re+ ired rate of ret rn is 1, percent* #. -9'2'10,5 $. -9'.51,1, C. -9','1.02 D. -9'001/01 &. 91601'10
10-'.
26. =recision Tool is anal()ing two machines to determine which one it sho ld p rchase. The compan( re+ ires a 1/ percent rate of ret rn and ses straight-line depreciation to a )ero book val e over the life of its e+ ipment. Machine # has a cost of 956'10001 ann al operating costs of 9'01,001 and a .-(ear life. Machine $ costs 9111'210001 has ann al operating costs of 9161/001 and has a /-(ear life. -hichever machine is p rchased will be replaced at the end of its sef l life. =recision Tool sho ld p rchase Machine LLLLL beca se it lowers the firm's ann al cost b( appro%imatel( LLLLLLL as compared to the other machine. #. #K 910160/. $. #K 9121.0. C. $K 910160/ D. $K 9121.0. &. $K 9121/'1
50. The $ ck 4tore is considering a pro!ect that will re+ ire additional inventor( of 9'101000 and will increase acco nts pa(able b( 91511000. #cco nts receivable are c rrentl( 9/'/1000 and are e%pected to increase b( 6 percent if this pro!ect is accepted. -hat is the pro!ect's initial cash flow for net working capital* #. -95'1'/0 $. -91'1'/0 C. 91'1'/0 D. 9,01'/0 &. 9..1'/0
51. The Card 4hoppe needs to maintain ', percent of its sales in net working capital. C rrentl(1 the shoppe is considering a 0-(ear pro!ect that will increase sales from its c rrent level of 9,521000 to 9.'11000 the first (ear and to 9.0/1000 a (ear for the following / (ears of the pro!ect. -hat amo nt sho ld be incl ded in the pro!ect anal(sis for net working capital in (ear 0 of the pro!ect* #. -91216.0 $. -9'1660 C. 90 D. 9'1660 &. 91216.0
10-'/
5'. Home > rnishings &%press is e%panding its prod ct offerings to reach a wider range of c stomers. The e%pansion pro!ect incl des increasing the floor inventor( b( 9.,01000 and increasing its debt to s ppliers b( 20 percent of that amo nt. The compan( will also spend 9./01000 for a b ilding contractor to e%pand the si)e of its showroom. #s part of the e%pansion plan1 the compan( will be offering credit to its c stomers and th s e%pects acco nts receivable to rise b( 9601000. >or the pro!ect anal(sis1 what amo nt sho ld be sed as the initial cash flow for net working capital* #. -9,61000 $. -9201000 C. -91/01000 D. -9'161000 &. -9,611000
5,. Hollister ; Hollister is considering a new pro!ect. The pro!ect will re+ ire 9/''1000 for new fi%ed assets1 9'151000 for additional inventor(1 and 9,61000 for additional acco nts receivable. 4hort-term debt is e%pected to increase b( 910/1000. The pro!ect has a 0-(ear life. The fi%ed assets will be depreciated straight-line to a )ero book val e over the life of the pro!ect. #t the end of the pro!ect1 the fi%ed assets can be sold for '0 percent of their original cost. The net working capital ret rns to its original level at the end of the pro!ect. The pro!ect is e%pected to generate ann al sales of 952/1000 with costs of 90.01000. The ta% rate is ,. percent and the re+ ired rate of ret rn is 1. percent. -hat is the pro!ect's cash flow at time )ero* #. -9/,01000 $. -901.1000 C. -92'01000 D. -92261000 &. -96..1000
10-'0
5.. Hollister ; Hollister is considering a new pro!ect. The pro!ect will re+ ire 9/''1000 for new fi%ed assets1 9'151000 for additional inventor(1 and 9,61000 for additional acco nts receivable. 4hort-term debt is e%pected to increase b( 910/1000. The pro!ect has a 0-(ear life. The fi%ed assets will be depreciated straight-line to a )ero book val e over the life of the pro!ect. #t the end of the pro!ect1 the fi%ed assets can be sold for '0 percent of their original cost. The net working capital ret rns to its original level at the end of the pro!ect. The pro!ect is e%pected to generate ann al sales of 952/1000 and costs of 90.01000. The ta% rate is ,. percent and the re+ ired rate of ret rn is 1. percent. -hat is the amo nt of the earnings before interest and ta%es for the first (ear of this pro!ect* #. 9621050 $. 91,01000 C. 91.51000 D. 9'121,'0 &. 9',/1000
5/. Hollister ; Hollister is considering a new pro!ect. The pro!ect will re+ ire 9/''1000 for new fi%ed assets1 9'151000 for additional inventor(1 and 9,61000 for additional acco nts receivable. 4hort-term debt is e%pected to increase b( 910/1000. The pro!ect has a 0-(ear life. The fi%ed assets will be depreciated straight-line to a )ero book val e over the life of the pro!ect. #t the end of the pro!ect1 the fi%ed assets can be sold for '0 percent of their original cost. The net working capital ret rns to its original level at the end of the pro!ect. The pro!ect is e%pected to generate ann al sales of 952/1000 and costs of 90.01000. The ta% rate is ,. percent and the re+ ired rate of ret rn is 1. percent. -hat is the amo nt of the afterta% cash flow from the sale of the fi%ed assets at the end of this pro!ect* #. 9,/1.60 $. 905160. C. 910.1.00 D. 9'52101/ &. 9,..1/'0
10-'2
50. Hollister ; Hollister is considering a new pro!ect. The pro!ect will re+ ire 9/''1000 for new fi%ed assets1 9'151000 for additional inventor(1 and 9,61000 for additional acco nts receivable. 4hort-term debt is e%pected to increase b( 910/1000. The pro!ect has a 0-(ear life. The fi%ed assets will be depreciated straight-line to a )ero book val e over the life of the pro!ect. #t the end of the pro!ect1 the fi%ed assets can be sold for '0 percent of their original cost. The net working capital ret rns to its original level at the end of the pro!ect. The pro!ect is e%pected to generate ann al sales of 952/1000 and costs of 90.01000. The ta% rate is ,. percent and the re+ ired rate of ret rn is 1. percent. -hat is the cash flow recover( from net working capital at the end of this pro!ect* #. 91.1000 $. 92/1000 C. 96'1000 D. 9,..1000 &. 9.''1000
52. 7e(ser Mining is considering a pro!ect that will re+ ire the p rchase of 96501000 in new e+ ipment. The e+ ipment will be depreciated straight-line to a )ero book val e over the 2(ear life of the pro!ect. The e+ ipment can be scraped at the end of the pro!ect for / percent of its original cost. #nn al sales from this pro!ect are estimated at 9.'01000. @et working capital e+ al to '0 percent of sales will be re+ ired to s pport the pro!ect. #ll of the net working capital will be reco ped. The re+ ired ret rn is 10 percent and the ta% rate is ,/ percent. -hat is the val e of the depreciation ta% shield in (ear . of the pro!ect* #. 9.61000 $. 9/'1'00 C. 9051000 D. 9211.00 &. 9201/00
10-'5
55. 7e(ser Mining is considering a pro!ect that will re+ ire the p rchase of 96501000 in new e+ ipment. The e+ ipment will be depreciated straight-line to a )ero book val e over the 2(ear life of the pro!ect. The e+ ipment can be scraped at the end of the pro!ect for / percent of its original cost. #nn al sales from this pro!ect are estimated at 9.'01000. @et working capital e+ al to '0 percent of sales will be re+ ired to s pport the pro!ect. #ll of the net working capital will be reco ped. The re+ ired ret rn is 10 percent and the ta% rate is ,/ percent. -hat is the amo nt of the afterta% salvage val e of the e+ ipment* #. 91211/0 $. 9,115/0 C. 91151500 D. 9',21000 &. 9,.,1000
56. 7e(ser Mining is considering a pro!ect that will re+ ire the p rchase of 96501000 in new e+ ipment. The e+ ipment will be depreciated straight-line to a )ero book val e over the 2(ear life of the pro!ect. The e+ ipment can be scraped at the end of the pro!ect for / percent of its original cost. #nn al sales from this pro!ect are estimated at 9.'01000. @et working capital e+ al to '0 percent of sales will be re+ ired to s pport the pro!ect. #ll of the net working capital will be reco ped. The re+ ired ret rn is 10 percent and the ta% rate is ,/ percent. -hat is the recover( amo nt attrib table to net working capital at the end of the pro!ect* #. 9'11000 $. 9/.1000 C. 95.1000 D. 91251000 &. 91601000
Essay Questions
60. In a single sentence1 e%plain how (o can determine which cash flows sho ld be incl ded in the anal(sis of a pro!ect.
10-'6
61. -hat is the form la for the ta%-shield approach to GC>* &%plain the two ke( points the form la ill strates.
6'. -hat is the primar( p rpose of comp ting the e+ ivalent ann al costs when comparing two machines* -hat is the ass mption that is being made abo t each machine*
6,. #ss me a firm sets its bid price for a pro!ect at the minim m level as comp ted sing the disco nted cash flow method. :iven this1 what do (o know abo t the net present val e and the internal rate of ret rn on the pro!ect as bid*
6.. Can the initial cash flow at time )ero for a pro!ect ever be a positive val e* If (es1 give an e%ample. If no1 e%plain wh( not.
10-,0
6/. How can two firms arrive at two different bid prices when bidding for the same !ob and given the same bid specifications*
60. -innebagel Corp. c rrentl( sells '51'00 motor homes per (ear at 9.'1,00 each1 and 111'50 l % r( motor coaches per (ear at 9261600 each. The compan( wants to introd ce a new portable camper to fill o t its prod ct line. It hopes to sell 1612.0 of these campers per (ear at 9111'50 each. #n independent cons ltant has determined that if -innebagel introd ces the new campers1 it sho ld boost the sales of its e%isting motor homes b( .1200 nits per (ear1 and red ce the sales of its motor coaches b( 11''' nits per (ear. -hat is the amo nt that sho ld be sed as the ann al sales fig re when eval ating this pro!ect* #. 9'62101,1.00 $. 9,01100'1,00 C. 9,1.11.11500 D. 9,',15,61.00 &. 9,'21'561/00
10-,1
62. Consider the following income statement"
-hat is the amo nt of the depreciation ta% shield* #. 9',1002 $. 9'.116' C. 9'.1/65 D. 9'01'11 &. 9'01616
65. Consider an asset that costs 91201000 and is depreciated straight-line to )ero over its 11(ear ta% life. The asset is to be sed in a 2-(ear pro!ectK at the end of the pro!ect1 the asset can be sold for 9''1000. The relevant ta% rate is ,0 percent. -hat is the afterta% cash flow from the sale of this asset* #. 9,11500 $. 9,'1000 C. 9,,1,00 D. 9,.1100 &. 9,.1000
66. =hone Home1 Inc. is considering a new 0-(ear e%pansion pro!ect that re+ ires an initial fi%ed asset investment of 9/.66. million. The fi%ed asset will be depreciated straight-line to )ero over its 0-(ear ta% life1 after which time it will be worthless. The pro!ect is estimated to generate 9/1,'51000 in ann al sales1 with costs of 9'11,11'00. The ta% rate is ,1 percent. -hat is the operating cash flow for this pro!ect* #. 91156.1,15 $. 9'1'111.02 C. 9'1/1/1.5' D. 9'100,10'1 &. 9'15.51,1/
10-,'
100. =hone Home1 Inc. is considering a new /-(ear e%pansion pro!ect that re+ ires an initial fi%ed asset investment of 9'..5. million. The fi%ed asset will be depreciated straight-line to )ero over its /-(ear ta% life1 after which time it will be worthless. The pro!ect is estimated to generate 9'1'051000 in ann al sales1 with costs of 955,1'00. The ta% rate is ,' percent and the re+ ired ret rn on the pro!ect is 11 percent. -hat is the net present val e for this pro!ect* #. 911.,'11// $. 911.,,10/6 C. 911.,.1065 D. 911.,.1'12 &. 911.,/1005
101. =hone Home1 Inc. is considering a new .-(ear e%pansion pro!ect that re+ ires an initial fi%ed asset investment of 9, million. The fi%ed asset will be depreciated straight-line to )ero over its .-(ear ta% life1 after which time it will have a market val e of 9',11000. The pro!ect re+ ires an initial investment in net working capital of 9,,010001 all of which will be recovered at the end of the pro!ect. The pro!ect is estimated to generate 9'10.01000 in ann al sales1 with costs of 9110/01000. The ta% rate is ,1 percent and the re+ ired ret rn for the pro!ect is 1/ percent. -hat is the net present val e for this pro!ect* #. 921.10/0 $. 92,,1620 C. 92.11,,/ D. 92.'1'05 &. 92..1/6/
10'. Dog MpN >ranks is looking at a new sa sage s(stem with an installed cost of 9,621500. This cost will be depreciated straight-line to )ero over the pro!ect's 2-(ear life1 at the end of which the sa sage s(stem can be scrapped for 9011'00. The sa sage s(stem will save the firm 91''1.00 per (ear in preta% operating costs1 and the s(stem re+ ires an initial investment in net working capital of 9'51/00. #ll of the net working capital will be recovered at the end of the pro!ect. The ta% rate is ,, percent and the disco nt rate is 6 percent. -hat is the net present val e of this pro!ect* #. -9.11,11 $. -9215'0 C. 9511/02 D. 9651..1 &. 911515'1
10-,,
10,. ?o r firm is contemplating the p rchase of a new 9110'51000 comp ter-based order entr( s(stem. The s(stem will be depreciated straight-line to )ero over its /-(ear life. It will be worth 91/51.00 at the end of that time. ?o will save 90,,1000 before ta%es per (ear in order processing costs and (o will be able to red ce working capital b( 911/120. Bthis is a one-time red ctionD. The net working capital will ret rn to its original level when the pro!ect ends. The ta% rate is ,/ percent. -hat is the internal rate of ret rn for this pro!ect* #. 11.25 percent $. 1,..6 percent C. 15.'1 percent D. '1.0/ percent &. ',./5 percent
10.. # .-(ear pro!ect has an initial asset investment of 9,0010001 and initial net working capital investment of 9'61'001 and an ann al operating cash flow of -9.012'0. The fi%ed asset is f ll( depreciated over the life of the pro!ect and has no salvage val e. The net working capital will be recovered when the pro!ect ends. The re+ ired ret rn is 1/ percent. -hat is the pro!ect's e+ ivalent ann al cost1 or &#C* #. -91/51.61 $. -91/'1,06 C. -91.2155. D. -91./1/06 &. -91.'1'1'
10/. Heer &nterprises needs someone to s ppl( it with ''/1000 cartons of machine screws per (ear to s pport its man fact ring needs over the ne%t 2 (ears1 and (o 've decided to bid on the contract. It will cost (o 9111201000 to install the e+ ipment necessar( to start prod ctionK (o 'll depreciate this cost straight-line to )ero over the pro!ect's life. ?o estimate that in 2 (ears1 this e+ ipment can be salvaged for 92/1000. ?o r fi%ed prod ction costs will be 9,001000 per (ear1 and (o r variable prod ction costs sho ld be 91'.2/ per carton. ?o also need an initial investment in net working capital of 911'1/001 all of which will be recovered when the pro!ect ends. ?o r ta% rate is ,' percent and (o re+ ire a 1, percent ret rn on (o r investment. -hat bid price per carton sho ld (o s bmit* #. 912.0. $. 910./0 C. 91/.26 D. 91/.0, &. 91..51
10-,.
100. Chapman Machine 4hop is considering a .-(ear pro!ect to improve its prod ction efficienc(. $ (ing a new machine press for 9/201000 is estimated to res lt in 916'1000 in ann al preta% cost savings. The press falls in the M#C34 /-(ear class1 and it will have a salvage val e at the end of the pro!ect of 95.1000. The press also re+ ires an initial investment in spare parts inventor( of 9'.10001 along with an additional 9,1000 in inventor( for each s cceeding (ear of the pro!ect. The inventor( will ret rn to its original level when the pro!ect ends. The shop's ta% rate is ,/ percent and its disco nt rate is 11 percent. 4ho ld the firm b ( and install the machine press* -h( or wh( not*
#. noK The net present val e is -921.56. $. noK The net present val e is -9002. C. (esK The net present val e is 9'11. D. (esK The net present val e is 9.1,16. &. (esK The net present val e is 951,0..
102. &ads Ind strial 4(stems Compan( B&I4CD is tr(ing to decide between two different conve(or belt s(stems. 4(stem # costs 9.'210001 has a 0-(ear life1 and re+ ires 911'1000 in preta% ann al operating costs. 4(stem $ costs 9/1210001 has an 5-(ear life1 and re+ ires 9261000 in preta% ann al operating costs. $oth s(stems are to be depreciated straight-line to )ero over their lives and will have a )ero salvage val e. -hichever s(stem is chosen1 it will not be replaced when it wears o t. The ta% rate is ,, percent and the disco nt rate is '. percent. -hich s(stem sho ld the firm choose and wh(* #. #K The net present val e is 9'111/10. $. #K The net present val e is -9/5'12'0. C. #K The net present val e is -9,1.1'10. D. $K The net present val e is 9,051'''. &. $" The net present val e is -90'/11',.
10-,/
105. Consider a pro!ect to s ppl( 0015001000 postage stamps to the M.4. =ostal 4ervice for the ne%t / (ears. ?o have an idle parcel of land available that cost 92001000 five (ears agoK if the land were sold toda(1 it wo ld net (o 961'10001 afterta%. The land can be sold for 911/001000 after ta%es in / (ears. ?o will need to install 9'1,/01000 in new man fact ring plant and e+ ipment to act all( prod ce the stampsK this plant and e+ ipment will be depreciated straight-line to )ero over the pro!ect's /-(ear life. The e+ ipment can be sold for 9./01000 at the end of the pro!ect. ?o will also need 9.061000 in initial net working capital for the pro!ect1 and an additional investment of 9,51000 in ever( (ear thereafter. #ll net working capital will be recovered when the pro!ect ends. ?o r prod ction costs are 0.,5 cents per stamp1 and (o have fi%ed costs of 90051000 per (ear. ?o r ta% rate is ,1 percent and (o r re+ ired ret rn on this pro!ect is 11 percent. -hat bid price per stamp sho ld (o s bmit* #. 90.015 $. 90.0'0 C. 90.0', D. 90.0'0 &. 90.0'6
10-,0
Chapter 10 Making Capital Investment Decisions #nswer 7e(
1. The difference between a firm's f t re cash flows if it accepts a pro!ect and the firm's f t re cash flows if it does not accept the pro!ect is referred to as the pro!ect's" A. incremental cash flows. $. internal cash flows. C. e%ternal cash flows. D. erosion effects. &. financing cash flows. 3efer to section 10.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%" &o'ic: (ncremental cas) flows
'. The fact that a proposed pro!ect is anal()ed based on the pro!ect's incremental cash flows is the ass mption behind which one of the following principles* #. nderl(ing val e principle B. stand-alone principle C. e+ ivalent cost principle D. salvage principle &. f ndamental principle 3efer to section 10.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%" &o'ic: Stand$along 'rinci'le
10-,2
,. -hich one of the following costs was inc rred in the past and cannot be reco ped* #. incremental $. side C. s nk D. opport nit( &. erosion 3efer to section 10.'
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%* &o'ic: Sun+ cost
.. The option that is foregone so that an asset can be tili)ed b( a specific pro!ect is referred to as which one of the following* #. salvage val e $. wasted val e C. s nk cost D. opport nit( cost &. erosion 3efer to section 10.'
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%* &o'ic: O''ortunity cost
10-,5
/. -hich one of the following best describes the concept of erosion* #. e%penses that have alread( been inc rred and cannot be recovered $. change in net working capital related to implementing a new pro!ect C. the cash flows of a new pro!ect that come at the e%pense of a firm's e%isting cash flows D. the alternative that is forfeited when a fi%ed asset is tili)ed b( a pro!ect &. the differences in a firm's cash flows with and witho t a partic lar pro!ect 3efer to section 10.'
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%* &o'ic: ,rosion
0. -hich one of the following best describes pro forma financial statements* #. financial statements e%pressed in a foreign c rrenc( $. financial statements where the assets are e%pressed as a percentage of total assets and costs are e%pressed as a percentage of sales C. financial statements showing pro!ected val es for f t re time periods D. financial statements e%pressed in real dollars1 given a stated base (ear &. financial statements where all acco nts are e%pressed as a percentage of last (ear's val es 3efer to section 10.,
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%&o'ic: .ro forma financial statements
10-,6
2. -hich one of the following is the depreciation method which allows accelerated write-offs of propert( nder vario s lifetime classifications* #. I33 B. #C34 C. ##3 D. straight-line to )ero &. straight-line with salvage 3efer to section 10..
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%/ &o'ic: Accelerated cost reco!ery system
5. The depreciation ta% shield is best defined as the" #. amo nt of ta% that is saved when an asset is p rchased. $. ta% that is avoided when an asset is sold as salvage. C. amo nt of ta% that is d e when an asset is sold. D. amo nt of ta% that is saved beca se of the depreciation e%pense. &. amo nt b( which the afterta% depreciation e%pense lowers net income. 3efer to section 10./
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%0 &o'ic: De'reciation ta1 s)ield
10-.0
6. The ann al ann it( stream of pa(ments that has the same present val e as a pro!ect's costs is referred to as which one of the following* #. (earl( incremental costs $. s nk costs C. opport nit( costs D. erosion cost E. e+ ivalent ann al cost 3efer to section 10.0
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$/ Section: "#%2 &o'ic: ,3ui!alent annual cost
10. 7elle('s $askets makes handmade baskets for distrib tion to pscale retail o tlets. The firm is c rrentl( considering making handmade wreaths as well. -hich one of the following is the best e%ample of an incremental operating cash flow related to the wreath pro!ect* #. storing s pplies in the same space c rrentl( sed for materials storage $. tili)ing the basket manager to oversee wreath prod ction C. hiring additional emplo(ees to handle the increased workload sho ld the firm accept the wreath pro!ect D. researching the market to determine if wreath sales might be profitable before deciding to proceed &. planning on lower interest e%pense b( ass ming the proceeds of the wreath sales will be sed to red ce the firm's c rrentl( o tstanding debt 3efer to section 10.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%" &o'ic: 4ele!ant cas) flows
10-.1
11. Danielle's is a f rnit re store that is considering adding appliances to its offerings. -hich of the following sho ld be considered incremental cash flows of this pro!ect* I. tili)ing the credit offered b( a s pplier to p rchase the appliance inventor( II. benefiting from increased f rnit re sales to appliance c stomers III. borrowing mone( from a bank to f nd the appliance pro!ect I8. p rchasing parts for inventor( to handle an( appliance repairs that might be necessar( #. I and II onl( $. III and I8 onl( C. I1 II1 and I8 onl( D. II1 III1 and I8 onl( &. I1 II1 III1 and I8 3efer to sections 10.1 and 10.'
AACSB: N/A Bloom's: Com're)ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%" and "#%* &o'ic: 4ele!ant cas) flows
1'. The stand-alone principle advocates that pro!ect anal(sis sho ld be based solel( on which one of the following costs* #. s nk $. total C. variable D. incremental &. fi%ed 3efer to section 10.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%" &o'ic: (ncremental costs
10-.'
1,. -hich one of the following is an e%ample of a s nk cost* #. 911/00 of lost sales beca se an item was o t of stock B. 911'00 paid to repair a machine last (ear C. 9'01000 pro!ect that m st be forfeited if another pro!ect is accepted D. 9.1/00 red ction in c rrent shoe sales if a store commences selling sandals &. 911500 increase in comic book sales if a store commences selling p ))les 3efer to section 10.'
AACSB: N/A Bloom's: Com're)ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%* &o'ic: Sun+ cost
1.. : ; < =lastic Molders spent 911'00 last week repairing a machine. This week the compan( is tr(ing to decide if the machine co ld be better tili)ed if the( assigned it a proposed pro!ect. -hen anal()ing the proposed pro!ect1 the 911'00 sho ld be treated as which t(pe of cost* #. opport nit( $. fi%ed C. incremental D. erosion E. s nk 3efer to section 10.'
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%* &o'ic: Sun+ cost
10-.,
1/. -hich one of the following best ill strates erosion as it relates to a hot dog stand located on the beach* #. providing both ketch p and m stard for its c stomer's se $. repairing the roof of the hot dog stand beca se of water damage C. selling fewer hot dogs beca se hamb rgers were added to the men D. offering >rench fries b t not onion rings &. losing sales d e to bad weather 3efer to section 10.'
AACSB: N/A Bloom's: Com're)ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%* &o'ic: ,rosion
10. -hich of the following sho ld be incl ded in the anal(sis of a new prod ct* I. mone( alread( spent for research and development of the new prod ct II. red ction in sales for a c rrent prod ct once the new prod ct is introd ced III. increase in acco nts receivable needed to finance sales of the new prod ct I8. market val e of a machine owned b( the firm which will be sed to prod ce the new prod ct #. I and III onl( $. II and I8 onl( C. I1 II1 and III onl( D. II1 III1 and I8 onl( &. I1 II1 III1 and I8 3efer to section 10.'
AACSB: N/A Bloom's: Com're)ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%* &o'ic: (ncremental cas) flows
10-..
12. ?o are considering the p rchase of a new machine. ?o r anal(sis incl des the eval ation of two machines which have differing initial and ongoing costs and differing lives. -hichever machine is p rchased will be replaced at the end of its sef l life. ?o sho ld select the machine which has the" #. longest life. $. highest ann al operating cost. C. lowest ann al operating cost. D. highest e+ ivalent ann al cost. E. lowest e+ ivalent ann al cost. 3efer to section 10.0
15. The bid price is" #. an afterta% price. $. the afterta% contrib tion margin. C. the highest price (o sho ld charge if (o want the pro!ect. D. the onl( price (o can bid if the pro!ect is to be profitable. E. the minim m price (o sho ld charge if (o want to financiall( breakeven. 3efer to section 10.0
AACSB: N/A Bloom's: Com're)ension Difficulty: Basic Learning Ob ecti!e: "#$Section: "#%2 &o'ic: Bid 'rice
10-./
16. -hich one of the following will increase a bid price* #. a decrease in the fi%ed costs $. a red ction in the net working capital re+ irement C. a red ction in the firm's ta% rate D. an increase in the salvage val e E. an increase in the re+ ired rate of ret rn 3efer to section 10.0
AACSB: N/A Bloom's: Com're)ension Difficulty: (ntermediate Learning Ob ecti!e: "#$Section: "#%2 &o'ic: Bid 'rice
'0. #ll of the following are related to a proposed pro!ect. -hich of these sho ld be incl ded in the cash flow at time )ero* I. p rchase of 911.00 of parts inventor( needed to s pport the pro!ect II. loan of 91'/1000 sed to finance the pro!ect III. depreciation ta% shield of 911100 I8. 901/00 of e+ ipment needed to commence the pro!ect #. I and II onl( B. I and I8 onl( C. II and I8 onl( D. I1 II1 and I8 onl( &. I1 II1 III1 and I8 3efer to section 10..
AACSB: N/A Bloom's: Com're)ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%/ &o'ic: .ro ect cas) flows
10-.0
'1. Changes in the net working capital re+ irements" A. can affect the cash flows of a pro!ect ever( (ear of the pro!ect's life. $. onl( affect the initial cash flows of a pro!ect. C. onl( affect the cash flow at time )ero and the final (ear of a pro!ect. D. are generall( e%cl ded from pro!ect anal(sis d e to their irrelevance to the total pro!ect. &. reflect onl( the changes in the c rrent asset acco nts. 3efer to section 10..
AACSB: N/A Bloom's: Com're)ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%/ &o'ic: Net wor+ing ca'ital
''. -hich one of the following is a pro!ect cash inflow* Ignore an( ta% effects. #. decrease in acco nts pa(able $. increase in inventor( C. decrease in acco nts receivable D. depreciation e%pense based on M#C34 &. e+ ipment ac+ isition 3efer to section 10..
AACSB: N/A Bloom's: Com're)ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%/ &o'ic: .ro ect cas) flows
10-.2
',. @et working capital" #. can be ignored in pro!ect anal(sis beca se an( e%pendit re is normall( reco ped at the end of the pro!ect. $. re+ irements1 s ch as an increase in acco nts receivable1 create a cash inflow at the beginning of a pro!ect. C. is rarel( affected when a new prod ct is introd ced. D. can create either a cash inflow or a cash o tflow at time )ero of a pro!ect. &. is the onl( e%pendit re where at least a partial recover( can be made at the end of a pro!ect. 3efer to section 10..
AACSB: N/A Bloom's: Com're)ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%/ &o'ic: Net wor+ing ca'ital
'.. The operating cash flow of a cost c tting pro!ect" #. is e+ al to the depreciation ta% shield. $. is e+ al to )ero beca se there is no incremental sales. C. can onl( be anal()ed b( pro!ecting the sales and costs for a firm's entire operations. D. incl des an( changes that occ r in the c rrent acco nts. E. can be positive even tho gh there are no sales. 3efer to section 10.0
AACSB: N/A Bloom's: Com're)ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%2 &o'ic: Cost reduction 'ro ect
10-.5
'/. =ro forma statements for a proposed pro!ect sho ld" I. be compiled on a stand-alone basis. II. incl de all the incremental cash flows related to the pro!ect. III. generall( e%cl de interest e%pense. I8. incl de all pro!ect-related fi%ed asset ac+ isitions and disposals. #. I and II onl( $. II and III onl( C. I1 II1 and I8 onl( D. II1 III1 and I8 onl( E. I1 II1 III1 and I8 3efer to section 10.,
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%&o'ic: .ro forma statement
'0. -hich one of the following statements is correct* #. =ro!ect anal(sis sho ld onl( incl de the cash flows that affect the income statement. B. # pro!ect can create a positive operating cash flow witho t affecting sales. C. The depreciation ta% shield creates a cash o tflow for a pro!ect. D. Interest e%pense sho ld alwa(s be incl ded as a cash o tflow when anal()ing a pro!ect. &. The opport nit( cost of a compan(-owned b ilding that is going to be sed in a new pro!ect sho ld be incl ded as a cash inflow to the pro!ect. 3efer to section 10.0
AACSB: N/A Bloom's: Com're)ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%2 &o'ic: Cost cutting 'ro ect
10-.6
'2. # compan( that tili)es the M#C34 s(stem of depreciation" #. will have e+ al depreciation costs each (ear of an asset's life. B. will have a greater ta% shield in (ear two of a pro!ect than it wo ld have if the firm had opted for straight-line depreciation1 given the same depreciation life. C. can depreciate the cost of land1 if it so desires. D. will e%pense less than the entire cost of an asset. &. cannot e%pense an( of the cost of a new asset d ring the first (ear of the asset's life. 3efer to section 10..
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%/ &o'ic: 5AC4S de'reciation
10-/0
'5. Morris Motors ! st p rchased some M#C34 /-(ear propert( at a cost of 9'101000. -hich one of the following will correctl( give (o the book val e of this e+ ipment at the end of (ear '*
#. 9'101000AB1 C 0.'0 C 0.,'D B. 9'101000 B1 - 0.'0 - 0.,'D C. 9'101000 B0.'0 C 0.,'D D. E9'101000 B1 - 0.'0DF B1 - 0.,'D &. 9'101000AEB1 C 0.'0DB1 C 0.,'DF 3efer to section 10..
10-/1
'6. 7e(ser =etrole m ! st p rchased some e+ ipment at a cost of 9021000. -hat is the proper methodolog( for comp ting the depreciation e%pense for (ear ' if the e+ ipment is classified as /-(ear propert( for M#C34*
#. 9021000 B1 - 0.'0D 0.,' $. 9021000AB1 - 0.'0 - 0.,'D C. 9021000 B1 C 0.,'D D. 9021000 B1 - 0.,'D E. 9021000 0.,' 3efer to section 10..
10-/'
,0. The c rrent book val e of a fi%ed asset that was p rchased two (ears ago is sed in the comp tation of which one of the following* #. depreciation ta% shield B. ta% d e on the salvage val e of that asset C. c rrent (ear's operating cash flow D. change in net working capital &. M#C34 depreciation for the c rrent (ear 3efer to section 10..
AACSB: N/A Bloom's: Com're)ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%/ &o'ic: &a1 on sal!age !alue
10-/,
,1. The net book val e of e+ ipment will" #. remain constant over the life of the e+ ipment. $. var( in response to changes in the market val e. C. decrease at a constant rate when M#C34 depreciation is sed. D. increase over the ta%able life of an asset. E. decrease slower nder straight-line depreciation than nder M#C34. 3efer to section 10..
AACSB: N/A Bloom's: Com're)ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%/ &o'ic: Boo+ !alue
,'. Three (ears ago1 7no% :lass p rchased a machine for a ,-(ear pro!ect. The machine is being depreciated straight-line to )ero over a /-(ear period. Toda(1 the pro!ect ended and the machine was sold. -hich one of the following correctl( defines the afterta% salvage val e of that machine* BT represents the relevant ta% rateD #. 4ale price C B4ales price - $ook val eD T $. 4ale price C B4ales price - $ook val eD B1 - TD C. 4ale price C B$ook val e - 4ale priceD T D. 4ale price C B$ook val e - 4ale priceD B1 - TD &. 4ale price B1 - TD 3efer to section 10..
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%/ &o'ic: Afterta1 sal!age !alue
10-/.
,,. -hich one of the following is a correct method for comp ting the operating cash flow of a pro!ect ass ming that the interest e%pense is e+ al to )ero* #. &$IT C D $. &$IT - T C. @I C D D. B4ales - CostsD B1 - DD B1- TD &. B4ales - CostsD B1 - TD 3efer to section 10./
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%0 &o'ic: Bottom u' o'erating cas) flow
,.. The operating cash flow for a pro!ect sho ld e%cl de which one of the following* #. ta%es $. variable costs C. fi%ed costs D. interest e%pense &. depreciation ta% shield 3efer to section 10./
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%0 &o'ic: O'erating cas) flow
10-//
,/. The bottom- p approach to comp ting the operating cash flow applies onl( when" #. both the depreciation e%pense and the interest e%pense are e+ al to )ero. B. the interest e%pense is e+ al to )ero. C. the pro!ect is a cost-c tting pro!ect. D. no fi%ed assets are re+ ired for a pro!ect. &. both ta%es and the interest e%pense are e+ al to )ero. 3efer to section 10./
AACSB: N/A Bloom's: Com're)ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%0 &o'ic: Bottom$u' o'erating cas) flow
,0. The top-down approach to comp ting the operating cash flow" A. ignores noncash e%penses. $. applies onl( if a pro!ect increases sales. C. applies onl( to cost c tting pro!ects. D. is e+ al to sales - costs - ta%es C depreciation. &. is sed solel( to comp te a bid price. 3efer to section 10./
AACSB: N/A Bloom's: Com're)ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%0 &o'ic: &o'$down o'erating cas) flow
10-/0
,2. Increasing which one of the following will increase the operating cash flow ass ming that the bottom- p approach is sed to comp te the operating cash flow* #. erosion effects $. ta%es C. fi%ed e%penses D. salaries E. depreciation e%pense 3efer to section 10./
AACSB: N/A Bloom's: Com're)ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%0 &o'ic: Bottom$u' o'erating cas) flow
,5. -hich one of the following statements is correct concerning bid prices* #. The bid price is the ma%im m price that a firm sho ld bid. B. # firm can s bmit a bid that is higher than the comp ted bid price and still break even. C. # bid price ignores ta%es. D. # bid price sho ld be comp ted based solel( on the operating cash flows of the pro!ect. &. # bid price sho ld be comp ted based on a )ero percent re+ ired rate of ret rn. 3efer to section 10.0
10-/2
,6. Dan is comparing three machines to determine which one to p rchase. The machines sell for differing prices1 have differing operating costs1 differing machine lives1 and will be replaced when worn o t. -hich one of the following comp tational methods sho ld Dan se as the basis for his decision* #. internal rate of ret rn $. operating cash flow C. e+ ivalent ann al cost D. depreciation ta% shield &. bottom- p operating cash flow 3efer to section 10.0
.0. The e+ ivalent ann al cost method is sef l in determining" #. which one of two machines to p rchase if the machines are m t all( e%cl sive1 have differing lives1 and are a one-time p rchase. $. the ta% shield benefits of depreciation given the p rchase of new assets for a pro!ect. C. the operating cash flows of a cost-c tting pro!ect. D. which one of two investments to accept when the investments have different re+ ired rates of ret rn. E. which one of two machines sho ld be p rchased when the machines are m t all( e%cl sive1 have different machine lives1 and will be replaced once the( are worn o t. 3efer to section 10.0
10-/5
.1. -hen sing the e+ ivalent ann al cost as a basis for deciding which e+ ipment sho ld be p rchased1 the e+ ipment nder consideration m st fit which two of the following criteria* I. differing prod ctive lives II. differing man fact rers III. re+ ired replacement at end of economic life I8. differing initial cost #. I and II B. I and III C. I and I8 D. II and IIII &. II and I8 3efer to section 10.0
.'. The e+ ivalent ann al cost considers which of the following* I. re+ ired rate of ret rn II. operating costs III. need for replacement I8. afterta% salvage val e #. I and II onl( $. II and I8 onl( C. II1 III1 and I8 onl( D. I1 II1 and I8 onl( E. I1 II1 III1 and I8 3efer to section 10.0
10-/6
.,. The bid price alwa(s ass mes which one of the following* #. # pro!ect has a one-(ear life. $. The afterta% net income of the pro!ect is )ero. C. The net present val e of the pro!ect is )ero. D. #n( assets p rchased will have a positive salvage val e at the end of the pro!ect. &. #ssets will be depreciated based on M#C34. 3efer to section 10.0
... -hich one of the following wo ld make a pro!ect nacceptable* #. cash inflow for net working capital at time )ero $. re+ iring fi%ed assets that wo ld have no salvage val e C. an e+ ivalent ann al cost that e%ceeds that of an alternative pro!ect D. lack of reven e generation &. a depreciation ta% shield that e%ceeds the val e of the interest e%pense 3efer to section 10.0
10-00
./. Decreasing which one of the following will increase the acceptabilit( of a pro!ect* #. s nk costs $. salvage val e C. depreciation ta% shield D. e+ ivalent ann al cost &. acco nts pa(able re+ irement 3efer to section 10.0
.0. De%ter 4mith ; Co. is replacing a machine simpl( beca se it has worn o t. The new machine will not affect either sales or operating costs and will not have an( salvage val e at the end of its /-(ear life. The firm has a ,. percent ta% rate1 ses straight-line depreciation over an asset's life1 and has a positive net income. :iven this1 which one of the following statements is correct* #. #s a pro!ect1 the new machine has a net present val e e+ al to min s one times the machine's p rchase price. $. The new machine will have a )ero rate of ret rn. C. The new machine will generate positive operating cash flows1 at least in the first few (ears of its life. D. The new machine will create a cash o tflow when the firm disposes of it at the end of its life. &. The new machine creates erosion effects. 3efer to section 10./
AACSB: N/A Bloom's: Com're)ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%0 &o'ic: De'reciation ta1 s)ield
10-01
.2. 7ell('s Corner $aker( p rchased a lot in Gil Cit( 0 (ears ago at a cost of 9'501000. Toda(1 that lot has a market val e of 9,.01000. #t the time of the p rchase1 the compan( spent 91/1000 to level the lot and another 9'01000 to install storm drains. The compan( now wants to b ild a new facilit( on that site. The b ilding cost is estimated at 91..2 million. -hat amo nt sho ld be sed as the initial cash flow for this pro!ect* #. -911.201000 B. -9115101000 C. -9115'/1000 D. -9115./1000 &. -9115001000 C>0 O -9,.01000 - 911.201000 O -9115101000
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%* &o'ic: 4ele!ant cas) flows
.5. 4ailcloth ; More c rrentl( prod ces boat sails and is considering e%panding its operations to incl de awnings for homes and travel trailers. The compan( owns land beside its c rrent man fact ring facilit( that co ld be sed for the e%pansion. The compan( bo ght this land / (ears ago at a cost of 9,161000. #t the time of p rchase1 the compan( paid 9'.1000 to level o t the land so it wo ld be s itable for f t re se. Toda(1 the land is val ed at 9'6/1000. The compan( c rrentl( has some n sed e+ ipment that it c rrentl( owns val ed at 9,51000. This e+ ipment co ld be sed for prod cing awnings if 91'1000 is spent for e+ ipment modifications. Gther e+ ipment costing 9.601000 will also be re+ ired. -hat is the amo nt of the initial cash flow for this e%pansion pro!ect* #. -925/1000 $. -95',1000 C. -95,/1000 D. -95/61000 &. -955,1000 C>0 O -9'6/1000 - 9,51000 - 91'1000 - 9.601000 O -95,/1000
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%* &o'ic: 4ele!ant costs
10-0'
.6. -ebster ; Moore paid 91,610001 in cash1 for a piece of e+ ipment , (ears ago. #t the beginning of last (ear1 the compan( spent 9'11000 to pdate the e+ ipment with the latest technolog(. The compan( no longer ses this e+ ipment in its c rrent operations and has received an offer of 9561000 from a firm that wo ld like to p rchase it. -ebster ; Moore is debating whether to sell the e+ ipment or to e%pand its operations so that the e+ ipment can be sed. -hen eval ating the e%pansion option1 what val e1 if an(1 sho ld the firm assign to this e+ ipment as an initial cost of the pro!ect* #. 90 $. 9'11000 C. 9561000 D. 91101000 &. 91001000 3elevant val e O 9561000
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%* &o'ic: O''ortunity cost
/0. The >l ff( >eather sells c stomi)ed handbags. C rrentl(1 it sells 151000 handbags ann all( at an average price of 956 each. It is considering adding a lower-priced line of handbags that sell for 9/6 each. The firm estimates it can sell 21000 of the lower-priced handbags b t will sell ,1000 less of the higher-priced handbags b( doing so. -hat is the amo nt of the sales that sho ld be sed when eval ating the addition of the lower-priced handbags* A. 91.01000 $. 9'2/1000 C. 9.1,1000 D. 90',1000 &. 90501000 4ales O B21000 9/6D C B-,1000 956D O 91.01000
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%* &o'ic: ,rosion
10-0,
/1. Mason >arms p rchased a b ilding for 92'61000 eight (ears ago. 4i% (ears ago1 repairs were made to the b ilding which cost 91,01000. The ann al ta%es on the propert( are 9111000. The b ilding has a c rrent market val e of 95'/1000 and a c rrent book val e of 9.6.1000. The b ilding is totall( paid for and solel( owned b( the firm. If the compan( decides to se this b ilding for a new pro!ect1 what val e1 if an(1 sho ld be incl ded in the initial cash flow of the pro!ect for this b ilding* #. 9.6.1000 $. 9/5'1000 C. 95'/1000 D. 950/1000 &. 96/,1000 Gpport nit( cost O 95'/1000
/'. ?o own a ho se that (o rent for 911100 a month. The maintenance e%penses on the ho se average 9'00 a month. The ho se cost 9'161000 when (o p rchased it . (ears ago. # recent appraisal on the ho se val ed it at 9',61000. If (o sell the ho se (o will inc r 91.1000 in real estate fees. The ann al propert( ta%es are 9.1000. ?o are deciding whether to sell the ho se or convert it for (o r own se as a professional office. -hat val e sho ld (o place on this ho se when anal()ing the option of sing it as a professional office* #. 9'111500 $. 9''11000 C. 9''/1000 D. 9',/1000 &. 9',61000 Gpport nit( cost O 9',61000 - 91.1000 O 9''/1000
10-0.
/,. @elson Mfg. owns a man fact ring facilit( that is c rrentl( sitting idle. The facilit( is located on a piece of land that originall( cost 91/61000. The facilit( itself cost 911.001000 to b ild. #s of now1 the book val e of the land and the facilit( are 91/61000 and 9./510001 respectivel(. The firm owes no debt on either the land or the facilit( at the present time. The firm received a bid of 911/001000 for the land and facilit( last week. The firm's management re!ected this bid even tho gh the( were told that it is a reasonable offer in toda('s market. If the firm was to consider sing this land and facilit( in a new pro!ect1 what cost1 if an(1 sho ld it incl de in the pro!ect anal(sis* #. 90 $. 90121000 C. 911.001000 D. 911/001000 &. 9110161000 3elevant cost O 911/001000
/.. Cool Comfort c rrentl( sells ,00 Class # spas1 ./0 Class C spas1 and '00 del %e model spas each (ear. The firm is considering adding a mid-class spa and e%pects that if it does it can sell ,2/ of them. However1 if the new spa is added1 Class # sales are e%pected to decline to ''/ nits while the Class C sales are e%pected to decline to '00. The sales of the del %e model will not be affected. Class # spas sell for an average of 91'1000 each. Class C spas are priced at 901000 and the del %e model sells for 9121000 each. The new mid-range spa will sell for 951000. -hat is the val e of the erosion* #. 90001000 $. 911'001000 C. 9115001000 D. 9'1.001000 &. 9,16001000 &rosion O EB,00 - ''/D 91'1000F C EB./0 - '00D 901000F O 9'1.001000
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%* &o'ic: ,rosion
10-0/
//. Iefferson ; 4ons is eval ating a pro!ect that will increase ann al sales b( 91,51000 and ann al costs b( 96.1000. The pro!ect will initiall( re+ ire 91101000 in fi%ed assets that will be depreciated straight-line to a )ero book val e over the .-(ear life of the pro!ect. The applicable ta% rate is ,' percent. -hat is the operating cash flow for this pro!ect* #. 9111''0 $. 9'616'0 C. 9,512'0 D. 9.01.50 &. 9.010'0 GC> O B91,51000 - 96.1000DB1 - 0.,'D C B91101000A.DB0.,'D O 9,512'0
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%0 &o'ic: De'reciation ta1 s)ield OC6
/0. Marie's >ashions is considering a pro!ect that will re+ ire 9'51000 in net working capital and 9521000 in fi%ed assets. The pro!ect is e%pected to prod ce ann al sales of 92/1000 with associated costs of 9/21000. The pro!ect has a /-(ear life. The compan( ses straight-line depreciation to a )ero book val e over the life of the pro!ect. The ta% rate is ,0 percent. -hat is the operating cash flow for this pro!ect* #. -911/'0 $. -9/50 C. 9.'0 D. 91/1050 E. 91215'0 GC> O B92/1000 - 9/21000DB1 - 0.,0D C B9521000A/DB0.,0D O 91215'0
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%0 &o'ic: De'reciation ta1 s)ield OC6
10-00
/2. The $each Ho se has sales of 925.1000 and a profit margin of 11 percent. The ann al depreciation e%pense is 91.1000. -hat is the amo nt of the operating cash flow if the compan( has no long-term debt* #. 9051200 $. 92'1'.0 C. 9501'.0 D. 91001'.0 &. 91011200 GC> O B925.1000 0.11D C 91.1000 O 91001'.0
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%0 &o'ic: Bottom$u' OC6
/5. The =ancake Ho se has sales of 9110.'10001 depreciation of 9'210001 and net working capital of 9'151000. The firm has a ta% rate of ,/ percent and a profit margin of 0 percent. The firm has no interest e%pense. -hat is the amo nt of the operating cash flow* #. 9651/'0 B. 91'/1/'0 C. 91.21.50 D. 9'051.50 &. 9,.,1/'0 GC> O B9110.'1000 0.00D C 9'21000 O 91'/1/'0
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%0 &o'ic: Bottom$u' OC6
10-02
/6. @orthern 3ailwa( is considering a pro!ect which will prod ce ann al sales of 962/1000 and increase cash e%penses b( 95/61000. If the pro!ect is implemented1 ta%es will increase from 91.11000 to 91/.1000 and depreciation will increase from 916.1000 to 9'2'1000. The compan( is debt-free. -hat is the amo nt of the operating cash flow sing the top-down approach* #. 9'/1000 B. 910,1000 C. 91/21000 D. 91511000 &. 9'061000 GC> O 962/1000 - 95/61000 - B91/.1000 - 91.11000D O 910,1000
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%0 &o'ic: &o'$down OC6
00. $i-<o Traders is considering a pro!ect that will prod ce sales of 9'51000 and increase cash e%penses b( 9121/00. If the pro!ect is implemented1 ta%es will increase b( 9,1000. The additional depreciation e%pense will be 911000. #n initial cash o tla( of 911.00 is re+ ired for net working capital. -hat is the amo nt of the operating cash flow sing the top-down approach* #. 9.1/00 $. 9/1600 C. 901100 D. 921/00 &. 951600 GC> O 9'51000 - 9121/00 - 9,1000 O 921/00
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%0 &o'ic: &o'$down OC6
10-05
01. # proposed e%pansion pro!ect is e%pected to increase sales of I< Ticker's 4tore b( 9,/1000 and increase cash e%penses b( 9'11000. The pro!ect will cost 9'.1000 and be depreciated sing straight-line depreciation to a )ero book val e over the .-(ear life of the pro!ect. The store has a marginal ta% rate of ,0 percent. -hat is the operating cash flow of the pro!ect sing the ta% shield approach* #. 9/1000 $. 921500 C. 9111000 D. 91,1,00 &. 91.1000 GC> O B9,/1000 - 9'11000D B1 - 0.,0D C B9'.1000A.D B0.,0D O 9111000
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%0 &o'ic: &a1$s)ield OC6
0'. The < mber ?ard is considering adding a new prod ct line that is e%pected to increase ann al sales b( 9',51000 and cash e%penses b( 915.1000. The initial investment will re+ ire 9601000 in fi%ed assets that will be depreciated sing the straight-line method to a )ero book val e over the 0-(ear life of the pro!ect. The compan( has a marginal ta% rate of ,' percent. -hat is the ann al val e of the depreciation ta% shield* A. 9/11'0 $. 91,1100 C. 9'/15.0 D. 9,'1/00 &. 9.115.0 Depreciation ta% shield O B9601000A0D 0.,' O 9/11'0
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%0 &o'ic: De'reciation ta1 s)ield
10-06
0,. $ernie's $everages p rchased some fi%ed assets classified as /-(ear propert( for M#C34. The assets cost 9521000. -hat will the acc m lated depreciation be at the end of (ear three*
#. 91,1/'0 $. 9'/10/0 C. 9,51'.1 D. 9.512/6 E. 90116.. Depreciation O 9521000 B0.'0 C 0.,' C 0.16'D O 90116..
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%/ &o'ic: Accumulated 5AC4S de'reciation
10-20
0.. ?o ! st p rchased some e+ ipment that is classified as /-(ear propert( for M#C34. The e+ ipment cost 91.21000. -hat will the book val e of this e+ ipment be at the end of . (ears sho ld (o decide to resell the e+ ipment at that point in time*
#. 951.02.'0 B. 9'/1.01.00 C. 9.'1,,0.00 D. 91'11/65..0 &. 91,51/,'.50 $ook 8al e. O 91.21000 B0.11/' C 0.0/20D O 9'/1.01.00
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%/ &o'ic: Boo+ !alue
10-21
0/. =eterboro gh Tr cking ! st p rchased some fi%ed assets that are classified as ,-(ear propert( for M#C34. The assets cost 961500. -hat is the amo nt of the depreciation e%pense in (ear ,*
#. 9/,2./' $. 911,.2.12 C. 911./1.,5 D. 9116'6.11 &. 9'1122./0 Depreciation, O 961500 0.1.51 O 911./1.,5
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%/ &o'ic: 5AC4S de'reciation
10-2'
00. Crafter's 4 ppl( p rchased some fi%ed assets ' (ears ago at a cost of 9,51200. It no longer needs these assets so it is going to sell them toda( for 9'/1000. The assets are classified as /(ear propert( for M#C34. -hat is the net cash flow from this sale if the firm's ta% rate is ,0 percent*
#. 91,11''.'0 $. 9151/20.00 C. 9'015.,.05 D. 9',102'.50 &. 9'/1'11.06 $ook val e' O 9,51200 B1 - 0.'0 - 0.,'D O 9151/20 #fterta% salvage O 9'/1000 C EB9151/20 - 9'/1000D 0.,0F O 9',102'.50
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%/ &o'ic: Afterta1 sal!age
10-2,
02. ?o own some e+ ipment that (o p rchased . (ears ago at a cost of 9'101000. The e+ ipment is /-(ear propert( for M#C34. ?o are considering selling the e+ ipment toda( for 92/1/00. -hich one of the following statements is correct if (o r ta% rate is ,/ percent*
#. The ta% d e on the sale is 9'01.'/. $. The book val e toda( is 9125102/.'0. C. The acc m lated depreciation to date is 9,21,'..50. D. The ta%able amo nt on the sale is 9,21,'..50. E. The afterta% salvage val e is 90'11,5.05. #cc m lated depreciation. O 9'101000 B0.'0 C 0.,' C 0.16' C 0.11/'D O 9125102/.'0 $ook 8al e. O 9'101000 - 9125102/.'0 O 9,21,'..50 Ta%able gain on sale O 92/1/00 - 9,21,'..50 O 9,5112/.'0 Ta% d e O 9,5112/.'0 0.,/ O 91,1,01.,' #fterta% salvage val e O 92/1/00 - 91,1,01.,' O 90'11,5.05
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%/ &o'ic: Afterta1 sal!age !alue
10-2.
05. &dward's Man fact red Homes p rchased some machiner( ' (ears ago for 9,161000. These assets are classified as /-(ear propert( for M#C34. The compan( is replacing this machiner( toda( with newer machines that tili)e the latest in technolog(. The old machines are being sold for 91.01000 to a foreign firm for se in its prod ction facilit( in 4o th #merica. -hat is the afterta% salvage val e from this sale if the ta% rate is ,/ percent*
#. 91,/1.05 $. 91.01000 C. 91.'1,1' D. 91..1/6' &. 91.015'0 $ook val e' O 9,161000 B1 - 0.'0 - 0.,'D O 91/,11'0 Ta% on sale O B91.01000 - 91/,11'0D 0.,/ O -9.1/6' Bta% savingsD #fter-ta% cash flow O 91.01000 C 9.1/6' O 91..1/6'
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%/ &o'ic: Afterta1 sal!age !alue
10-2/
06. $r no's < nch Co nter is e%panding and e%pects operating cash flows of 9'01000 a (ear for . (ears as a res lt. This e%pansion re+ ires 9,61000 in new fi%ed assets. These assets will be worthless at the end of the pro!ect. In addition1 the pro!ect re+ ires 9,1000 of net working capital thro gho t the life of the pro!ect. -hat is the net present val e of this e%pansion pro!ect at a re+ ired rate of ret rn of 10 percent* #. 9151.22.'6 $. 9'110,,.,, C. 9'51'55.20 D. 9'61.10.05 E. 9,'1.06./2
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%&o'ic: Net 'resent !alue
10-20
20. Iasper Metals is considering installing a new molding machine which is e%pected to prod ce operating cash flows of 92,1000 a (ear for 2 (ears. #t the beginning of the pro!ect1 inventor( will decrease b( 91010001 acco nts receivables will increase b( 9'110001 and acco nts pa(able will increase b( 91/1000. #ll net working capital will be recovered at the end of the pro!ect. The initial cost of the molding machine is 9'.61000. The e+ ipment will be depreciated straight-line to a )ero book val e over the life of the pro!ect. The e+ ipment will be salvaged at the end of the pro!ect creating a 9.51000 afterta% cash flow. #t the end of the pro!ect1 net working capital will ret rn to its normal level. -hat is the net present val e of this pro!ect given a re+ ired ret rn of 1../ percent* #. 9221'11.'0 $. 9261.15.50 C. 95'1,,0.01 D. 95.10.6.2. &. 95216'/./. C>0 O -9'.61000 C 9101000 - 9'11000 C 91/1000 O -9',61000 C02 O 92,1000 C 9.51000 - 9101000 C 9'11000 - 91/1000 O 91111000
AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%&o'ic: Net 'resent !alue
10-22
21. # pro!ect will prod ce an operating cash flow of 91.1000 a (ear for 5 (ears. The initial fi%ed asset investment in the pro!ect will be 9.51600. The net afterta% salvage val e is estimated at 9111000 and will be received d ring the last (ear of the pro!ect's life. -hat is the net present val e of the pro!ect if the re+ ired rate of ret rn is 1' percent* #. 9',10'2./. B. 9'51020.'0 C. 9,.10'2./. D. 9,61020.'0 &. 9.110.0.5,
AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%&o'ic: Net 'resent !alue
2'. 7wik Jn Hot Dogs is considering the installation of a new comp teri)ed press re cooker that will c t ann al operating costs b( 9',1000. The s(stem will cost 9,61600 to p rchase and install. This s(stem is e%pected to have a .-(ear life and will be depreciated to )ero sing straight-line depreciation. -hat is the amo nt of the earnings before interest and ta%es for this pro!ect* #. 9101/'/ B. 91,10'/ C. 91/1/'/ D. 9101600 &. 9161.00 &arnings before interest and ta%es O 9',1000 - B9,61600A.D O 91,10'/
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%2 &o'ic: Cost$cutting ,B(&
10-25
2,. Colors and More is considering replacing the e+ ipment it ses to prod ce cra(ons. The e+ ipment wo ld cost 91.,2 million1 have a 1'-(ear life1 and lower man fact ring costs b( an estimated 9,0.1000 a (ear. The e+ ipment will be depreciated sing straight-line depreciation to a book val e of )ero. The re+ ired rate of ret rn is 1/ percent and the ta% rate is ,/ percent. -hat is the net income from this proposed pro!ect* #. 9151/05.2/ $. 9.01'11.'. C. 9001..1.02 D. 91',1,61.02 &. 91,01206..5 @et income O E9,0.1000 - B911,201000A1'DF E1 - 0.,/F O 91',1,61.02
AACSB: Analytic Bloom's: A''lication Difficulty: (ntermediate Learning Ob ecti!e: "#$" Section: "#%2 &o'ic: Cost$Cutting net income
10-26
2.. :atewa( Comm nications is considering a pro!ect with an initial fi%ed asset cost of 9'..0 million which will be depreciated straight-line to a )ero book val e over the 10-(ear life of the pro!ect. #t the end of the pro!ect the e+ ipment will be sold for an estimated 9,001000. The pro!ect will not directl( prod ce an( sales b t will red ce operating costs b( 92'/1000 a (ear. The ta% rate is ,/ percent. The pro!ect will re+ ire 9./1000 of inventor( which will be reco ped when the pro!ect ends. 4ho ld this pro!ect be implemented if the firm re+ ires a 1. percent rate of ret rn* -h( or wh( not* #. @oK The @=8 is -912'16,2..6. $. @oK The @=8 is -95215'0..5. C. ?esK The @=8 is 9'/11500.,. D. ?esK The @=8 is 9,521/10.02 E. ?esK The @=8 is 9.0016.0./2 Initial cash flow O -9'1.001000 - 9./1000 O -9'1/0/1000 GC> O 92'/1000B1 - 0.,/D C B9'1.001000A10DB0.,/D O 9//21,/0 >inal cash flow O 9./1000 C 9,001000 B1 - 0.,/D O 9'.01000
AACSB: Analytic Bloom's: Analysis Difficulty: (ntermediate Learning Ob ecti!e: "#$* Section: "#%- and "#%2 &o'ic: Cost$cutting N.7
10-50
2/. ?o are working on a bid to b ild two cit( parks a (ear for the ne%t three (ears. This pro!ect re+ ires the p rchase of 91501000 of e+ ipment that will be depreciated sing straightline depreciation to a )ero book val e over the ,-(ear pro!ect life. The e+ ipment can be sold at the end of the pro!ect for 9,.1000. ?o will also need 9'01000 in net working capital for the d ration of the pro!ect. The fi%ed costs will be 9101000 a (ear and the variable costs will be 91051000 per park. ?o r re+ ired rate of ret rn is 1/ percent and (o r ta% rate is ,. percent. -hat is the minimal amo nt (o sho ld bid per park* B3o nd (o r answer to the nearest 9100D #. 92'1/00 $. 91'51000 C. 91/.1,00 D. 91561100 E. 9'121000
@I O 92/1,2,.0/ - B91501000A,D O 91/1,2,.0/ &$T O 91/1,2,.0/AB1 - 0.,.D O 9',1'6,..1 4ales O 9',1'6,..1 C B91501000A,D C 9101000 C B91051000 'D O 9.,/1'6,..1 $id per park O 9.,/1'6,..1A' O 9'1210.0.21 -hen ro nded to the nearest 91001 the bid price is 9'121000.
AACSB: Analytic Bloom's: Analysis Difficulty: (ntermediate Learning Ob ecti!e: "#$Section: "#%2 &o'ic: Bid 'rice
10-51
20. ?o are working on a bid to b ild two apartment b ildings a (ear for the ne%t / (ears for a local college. This pro!ect re+ ires the p rchase of 92/01000 of e+ ipment that will be depreciated sing straight-line depreciation to a )ero book val e over the pro!ect's life. The e+ ipment can be sold at the end of the pro!ect for 9,'/1000. ?o will also need 91.01000 in net working capital over the life of the pro!ect. The fi%ed costs will be 90'51000 a (ear and the variable costs will be 911'651000 per b ilding. ?o r re+ ired rate of ret rn is 1../ percent for this pro!ect and (o r ta% rate is ,/ percent. -hat is the minimal amo nt1 ro nded to the nearest 91001 (o sho ld bid per b ilding* #. 911.',1200 $. 911.561/00 C. 9112,,1000 D. 9'12501000 &. 9,1.0/1600
@I O 9'0612/0.,0 - B92/01000A/D O 9/612/0.,0 &$T O 9/612/0.,0AB1 - 0.,/D O 96116',./. 4ales O 96116',./. C B92/01000A/D C 90'51000 C B911'651000 'D O 9,1.0/16',./. $id per b ilding O 9,1.0/16',./.A' O 9112,'1601.22 -hen ro nded to the nearest 91001 the bid price is 9112,,1000
AACSB: Analytic Bloom's: Analysis Difficulty: (ntermediate Learning Ob ecti!e: "#$Section: "#%2 &o'ic: Bid 'rice
10-5'
22. # tomated Man fact rers ses high-tech e+ ipment to prod ce speciali)ed al min m prod cts for its c stomers. &ach one of these machines costs 911.501000 to p rchase pl s an additional 9.61000 a (ear to operate. The machines have a 0-(ear life after which the( are worthless. -hat is the e+ ivalent ann al cost of one these machines if the re+ ired ret rn is 10 percent* A. -9./010/2 $. -9.'21106 C. -9,011/50 D. -9'6/1002 &. -9'/016.2
AACSB: Analytic Bloom's: Analysis Difficulty: (ntermediate Learning Ob ecti!e: "#$/ Section: "#%2 &o'ic: ,3ui!alent annual cost
10-5,
25. Champion $akers ses speciali)ed ovens to bake its bread. Gne oven costs 90561000 and lasts abo t . (ears before it needs to be replaced. The ann al operating cost per over is 9.11000. -hat is the e+ ivalent ann al cost of an oven if the re+ ired rate of ret rn is 1, percent* A. -9'2'10,5 $. -9'.51,1, C. -9','1.02 D. -9'001/01 &. 91601'10
10-5.
26. =recision Tool is anal()ing two machines to determine which one it sho ld p rchase. The compan( re+ ires a 1/ percent rate of ret rn and ses straight-line depreciation to a )ero book val e over the life of its e+ ipment. Machine # has a cost of 956'10001 ann al operating costs of 9'01,001 and a .-(ear life. Machine $ costs 9111'210001 has ann al operating costs of 9161/001 and has a /-(ear life. -hichever machine is p rchased will be replaced at the end of its sef l life. =recision Tool sho ld p rchase Machine LLLLL beca se it lowers the firm's ann al cost b( appro%imatel( LLLLLLL as compared to the other machine. A. #K 910160/. $. #K 9121.0. C. $K 910160/ D. $K 9121.0. &. $K 9121/'1
Difference in costs O -9,,512,0.06 - B-9,//1201.0,D O 910160..6. Machine # lowers the firm's ann al costs b( abo t 910160/.
10-5/
50. The $ ck 4tore is considering a pro!ect that will re+ ire additional inventor( of 9'101000 and will increase acco nts pa(able b( 91511000. #cco nts receivable are c rrentl( 9/'/1000 and are e%pected to increase b( 6 percent if this pro!ect is accepted. -hat is the pro!ect's initial cash flow for net working capital* A. -95'1'/0 $. -91'1'/0 C. 91'1'/0 D. 9,01'/0 &. 9..1'/0 @-C re+ irement O -9'101000 C 91511000 - B9/'/1000 0.06D O - 95'1'/0
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%/ &o'ic: Net wor+ing ca'ital
51. The Card 4hoppe needs to maintain ', percent of its sales in net working capital. C rrentl(1 the shoppe is considering a 0-(ear pro!ect that will increase sales from its c rrent level of 9,521000 to 9.'11000 the first (ear and to 9.0/1000 a (ear for the following / (ears of the pro!ect. -hat amo nt sho ld be incl ded in the pro!ect anal(sis for net working capital in (ear 0 of the pro!ect* #. -91216.0 $. -9'1660 C. 90 D. 9'1660 E. 91216.0 @-C recover( O B9.0/1000 - 9,521000D 0.', O 91216.0
10-50
5'. Home > rnishings &%press is e%panding its prod ct offerings to reach a wider range of c stomers. The e%pansion pro!ect incl des increasing the floor inventor( b( 9.,01000 and increasing its debt to s ppliers b( 20 percent of that amo nt. The compan( will also spend 9./01000 for a b ilding contractor to e%pand the si)e of its showroom. #s part of the e%pansion plan1 the compan( will be offering credit to its c stomers and th s e%pects acco nts receivable to rise b( 9601000. >or the pro!ect anal(sis1 what amo nt sho ld be sed as the initial cash flow for net working capital* #. -9,61000 $. -9201000 C. -91/01000 D. -9'161000 &. -9,611000 @-C re+ irement O -9.,01000 C B0.20 9.,01000D - 9601000 O -9'161000
10-52
5,. Hollister ; Hollister is considering a new pro!ect. The pro!ect will re+ ire 9/''1000 for new fi%ed assets1 9'151000 for additional inventor(1 and 9,61000 for additional acco nts receivable. 4hort-term debt is e%pected to increase b( 910/1000. The pro!ect has a 0-(ear life. The fi%ed assets will be depreciated straight-line to a )ero book val e over the life of the pro!ect. #t the end of the pro!ect1 the fi%ed assets can be sold for '0 percent of their original cost. The net working capital ret rns to its original level at the end of the pro!ect. The pro!ect is e%pected to generate ann al sales of 952/1000 with costs of 90.01000. The ta% rate is ,. percent and the re+ ired rate of ret rn is 1. percent. -hat is the pro!ect's cash flow at time )ero* #. -9/,01000 B. -901.1000 C. -92'01000 D. -92261000 &. -96..1000 Initial cash flow O -9/''1000 - 9'151000 - 9,61000 C 910/1000 O -901.1000
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%/ &o'ic: (nitial cas) flow
10-55
5.. Hollister ; Hollister is considering a new pro!ect. The pro!ect will re+ ire 9/''1000 for new fi%ed assets1 9'151000 for additional inventor(1 and 9,61000 for additional acco nts receivable. 4hort-term debt is e%pected to increase b( 910/1000. The pro!ect has a 0-(ear life. The fi%ed assets will be depreciated straight-line to a )ero book val e over the life of the pro!ect. #t the end of the pro!ect1 the fi%ed assets can be sold for '0 percent of their original cost. The net working capital ret rns to its original level at the end of the pro!ect. The pro!ect is e%pected to generate ann al sales of 952/1000 and costs of 90.01000. The ta% rate is ,. percent and the re+ ired rate of ret rn is 1. percent. -hat is the amo nt of the earnings before interest and ta%es for the first (ear of this pro!ect* #. 9621050 $. 91,01000 C. 91.51000 D. 9'121,'0 &. 9',/1000 &$IT O 952/1000 - 90.01000 - B9/''1000A0D O 91.51000
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%&o'ic: .ro ect earnings
10-56
5/. Hollister ; Hollister is considering a new pro!ect. The pro!ect will re+ ire 9/''1000 for new fi%ed assets1 9'151000 for additional inventor(1 and 9,61000 for additional acco nts receivable. 4hort-term debt is e%pected to increase b( 910/1000. The pro!ect has a 0-(ear life. The fi%ed assets will be depreciated straight-line to a )ero book val e over the life of the pro!ect. #t the end of the pro!ect1 the fi%ed assets can be sold for '0 percent of their original cost. The net working capital ret rns to its original level at the end of the pro!ect. The pro!ect is e%pected to generate ann al sales of 952/1000 and costs of 90.01000. The ta% rate is ,. percent and the re+ ired rate of ret rn is 1. percent. -hat is the amo nt of the afterta% cash flow from the sale of the fi%ed assets at the end of this pro!ect* #. 9,/1.60 B. 905160. C. 910.1.00 D. 9'52101/ &. 9,..1/'0 #fterta% salvage val e O 9/''1000 0.'0 B1 - 0.,.D O 905160.
10-60
50. Hollister ; Hollister is considering a new pro!ect. The pro!ect will re+ ire 9/''1000 for new fi%ed assets1 9'151000 for additional inventor(1 and 9,61000 for additional acco nts receivable. 4hort-term debt is e%pected to increase b( 910/1000. The pro!ect has a 0-(ear life. The fi%ed assets will be depreciated straight-line to a )ero book val e over the life of the pro!ect. #t the end of the pro!ect1 the fi%ed assets can be sold for '0 percent of their original cost. The net working capital ret rns to its original level at the end of the pro!ect. The pro!ect is e%pected to generate ann al sales of 952/1000 and costs of 90.01000. The ta% rate is ,. percent and the re+ ired rate of ret rn is 1. percent. -hat is the cash flow recover( from net working capital at the end of this pro!ect* #. 91.1000 $. 92/1000 C. 96'1000 D. 9,..1000 &. 9.''1000 @et working capital recover( O 9'151000 C 9,61000 - 910/1000 O 96'1000
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%/ &o'ic: Net wor+ing ca'ital reco!ery
10-61
52. 7e(ser Mining is considering a pro!ect that will re+ ire the p rchase of 96501000 in new e+ ipment. The e+ ipment will be depreciated straight-line to a )ero book val e over the 2(ear life of the pro!ect. The e+ ipment can be scraped at the end of the pro!ect for / percent of its original cost. #nn al sales from this pro!ect are estimated at 9.'01000. @et working capital e+ al to '0 percent of sales will be re+ ired to s pport the pro!ect. #ll of the net working capital will be reco ped. The re+ ired ret rn is 10 percent and the ta% rate is ,/ percent. -hat is the val e of the depreciation ta% shield in (ear . of the pro!ect* A. 9.61000 $. 9/'1'00 C. 9051000 D. 9211.00 &. 9201/00 Depreciation ta% shield O 96501000A2 0.,/ O 9.61000
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%/ &o'ic: De'reciation ta1 s)ield
55. 7e(ser Mining is considering a pro!ect that will re+ ire the p rchase of 96501000 in new e+ ipment. The e+ ipment will be depreciated straight-line to a )ero book val e over the 2(ear life of the pro!ect. The e+ ipment can be scraped at the end of the pro!ect for / percent of its original cost. #nn al sales from this pro!ect are estimated at 9.'01000. @et working capital e+ al to '0 percent of sales will be re+ ired to s pport the pro!ect. #ll of the net working capital will be reco ped. The re+ ired ret rn is 10 percent and the ta% rate is ,/ percent. -hat is the amo nt of the afterta% salvage val e of the e+ ipment* #. 91211/0 B. 9,115/0 C. 91151500 D. 9',21000 &. 9,.,1000 #fterta% salvage val e O 96501000 0.0/ B1 - 0.,/D O 9,115/0
10-6'
56. 7e(ser Mining is considering a pro!ect that will re+ ire the p rchase of 96501000 in new e+ ipment. The e+ ipment will be depreciated straight-line to a )ero book val e over the 2(ear life of the pro!ect. The e+ ipment can be scraped at the end of the pro!ect for / percent of its original cost. #nn al sales from this pro!ect are estimated at 9.'01000. @et working capital e+ al to '0 percent of sales will be re+ ired to s pport the pro!ect. #ll of the net working capital will be reco ped. The re+ ired ret rn is 10 percent and the ta% rate is ,/ percent. -hat is the recover( amo nt attrib table to net working capital at the end of the pro!ect* #. 9'11000 $. 9/.1000 C. 95.1000 D. 91251000 &. 91601000 @-C recapt re O 9.'01000 0.'0 O 95.1000
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%/ &o'ic: Net wor+ing ca'ital reco!ery
Essay Questions
60. In a single sentence1 e%plain how (o can determine which cash flows sho ld be incl ded in the anal(sis of a pro!ect. #n( changes in cash flows that will res lt from accepting a new pro!ect sho ld be incl ded in the anal(sis of that pro!ect. >eedback" 3efer to section 10.1
AACSB: 4eflecti!e t)in+ing Bloom's: Com're)ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%" &o'ic: 4ele!ant cas) flows
10-6,
61. -hat is the form la for the ta%-shield approach to GC>* &%plain the two ke( points the form la ill strates. GC> O B4ales - CostsD B1 - TD C Depreciation T The form la ill strates that cash income and e%penses affect GC> on an afterta% basis. The form la also ill strates that even tho gh depreciation is a non-cash e%pense it does affect GC> beca se of the ta% savings reali)ed from the depreciation e%pense. >eedback" 3efer to section 10./
AACSB: 4eflecti!e t)in+ing Bloom's: Com're)ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%0 &o'ic: &a1$s)ield OC6
6'. -hat is the primar( p rpose of comp ting the e+ ivalent ann al costs when comparing two machines* -hat is the ass mption that is being made abo t each machine* The primar( p rpose is to comp te the ann al cost of each machine on a comparable basis so that the least e%pensive machine can be identified given that the machines generall( have differing lives and costs. The ass mption is that whichever machine is ac+ ired1 it will be replaced at the end of its sef l life. >eedback" 3efer to section 10.0
AACSB: 4eflecti!e t)in+ing Bloom's: Com're)ension Difficulty: Basic Learning Ob ecti!e: "#$/ Section: "#%2 &o'ic: ,3ui!alent annual cost
10-6.
6,. #ss me a firm sets its bid price for a pro!ect at the minim m level as comp ted sing the disco nted cash flow method. :iven this1 what do (o know abo t the net present val e and the internal rate of ret rn on the pro!ect as bid* The disco nted cash flow approach to setting a bid price ass mes the net present val e of the pro!ect will be )ero which means the internal rate of ret rn m st e+ al the re+ ired rate. >eedback" 3efer to section 10.0
AACSB: 4eflecti!e t)in+ing Bloom's: Analysis Difficulty: (ntermediate Learning Ob ecti!e: "#$Section: "#%2 &o'ic: Bid 'rice and N.7
6.. Can the initial cash flow at time )ero for a pro!ect ever be a positive val e* If (es1 give an e%ample. If no1 e%plain wh( not. The initial cash flow can be a positive val e. >or e%ample1 if a pro!ect red ced net working capital b( an amo nt that e%ceeded the initial cost for fi%ed assets1 the initial cash flow wo ld be a positive amo nt. >eedback" 3efer to section 10.'
AACSB: 4eflecti!e t)in+ing Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#%* &o'ic: .ro ect cas) flows
10-6/
6/. How can two firms arrive at two different bid prices when bidding for the same !ob and given the same bid specifications* &ach bidding firm s all( arrives at a different calc lated bid price beca se the( se different ass mptions in the eval ation process1 s ch as the estimated time to complete the pro!ect1 the material costs1 and the estimated labor costs. In addition1 firms often times have differing re+ ired rates of ret rn and ta% rates. >eedback" 3efer to section 10.0
AACSB: 4eflecti!e t)in+ing Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#$Section: "#%2 &o'ic: Bid 'rice
60. -innebagel Corp. c rrentl( sells '51'00 motor homes per (ear at 9.'1,00 each1 and 111'50 l % r( motor coaches per (ear at 9261600 each. The compan( wants to introd ce a new portable camper to fill o t its prod ct line. It hopes to sell 1612.0 of these campers per (ear at 9111'50 each. #n independent cons ltant has determined that if -innebagel introd ces the new campers1 it sho ld boost the sales of its e%isting motor homes b( .1200 nits per (ear1 and red ce the sales of its motor coaches b( 11''' nits per (ear. -hat is the amo nt that sho ld be sed as the ann al sales fig re when eval ating this pro!ect* #. 9'62101,1.00 $. 9,01100'1,00 C. 9,1.11.11500 D. 9,',15,61.00 &. 9,'21'561/00 4ales O B1612.0 9111'50D C B.1200 9.'1,00D C B-11''' 9261600D O 9,',15,61.00
AACSB: Analytic Bloom's: Analysis Difficulty: Basic ,OC 8: "#$* Learning Ob ecti!e: "#$" Section: "#%" &o'ic: 4ele!ant cas) flows
10-60
62. Consider the following income statement"
-hat is the amo nt of the depreciation ta% shield* #. 9',1002 B. 9'.116' C. 9'.1/65 D. 9'01'11 &. 9'01616 Depreciation ta% shield O 92/1000 .,' O 9'.116'
AACSB: Analytic Bloom's: A''lication Difficulty: Basic ,OC 8: "#$/ Learning Ob ecti!e: "#$" Section: "#%0 &o'ic: De'reciation ta1 s)ield
10-62
65. Consider an asset that costs 91201000 and is depreciated straight-line to )ero over its 11(ear ta% life. The asset is to be sed in a 2-(ear pro!ectK at the end of the pro!ect1 the asset can be sold for 9''1000. The relevant ta% rate is ,0 percent. -hat is the afterta% cash flow from the sale of this asset* #. 9,11500 $. 9,'1000 C. 9,,1,00 D. 9,.1100 E. 9,.1000 $ook val e at end of (ear 2 O 91201000 .A11 O 90.1000 #fterta% salvage val e O 9''1000 C EB90.1000 - 9''1000D .,0F O 9,.1000
AACSB: Analytic Bloom's: A''lication Difficulty: Basic ,OC 8: "#$9 Learning Ob ecti!e: "#$" Section: "#%/ &o'ic: Sal!age !alue
66. =hone Home1 Inc. is considering a new 0-(ear e%pansion pro!ect that re+ ires an initial fi%ed asset investment of 9/.66. million. The fi%ed asset will be depreciated straight-line to )ero over its 0-(ear ta% life1 after which time it will be worthless. The pro!ect is estimated to generate 9/1,'51000 in ann al sales1 with costs of 9'11,11'00. The ta% rate is ,1 percent. -hat is the operating cash flow for this pro!ect* #. 91156.1,15 $. 9'1'111.02 C. 9'1/1/1.5' D. 9'100,10'1 &. 9'15.51,1/ GC> O B/1,'51000 - 9'11,11'00DB1 - 0.,1D C B9/166.1000A0DB0.,1D O 9'1/1/1.5'
AACSB: Analytic Bloom's: A''lication Difficulty: Basic ,OC 8: "#$: Learning Ob ecti!e: "#$" Section: "#%&o'ic: O'erating cas) flow
10-65
100. =hone Home1 Inc. is considering a new /-(ear e%pansion pro!ect that re+ ires an initial fi%ed asset investment of 9'..5. million. The fi%ed asset will be depreciated straight-line to )ero over its /-(ear ta% life1 after which time it will be worthless. The pro!ect is estimated to generate 9'1'051000 in ann al sales1 with costs of 955,1'00. The ta% rate is ,' percent and the re+ ired ret rn on the pro!ect is 11 percent. -hat is the net present val e for this pro!ect* #. 911.,'11// B. 911.,,10/6 C. 911.,.1065 D. 911.,.1'12 &. 911.,/1005 GC> O B9'1'051000 - 955,1'00DB1 - 0.,'D C B9'1.5.1000A/DB0.,'D O 9110/615.0
AACSB: Analytic Bloom's: A''lication Difficulty: Basic ,OC 8: "#$"# Learning Ob ecti!e: "#$" Section: "#%&o'ic: Net 'resent !alue
10-66
101. =hone Home1 Inc. is considering a new .-(ear e%pansion pro!ect that re+ ires an initial fi%ed asset investment of 9, million. The fi%ed asset will be depreciated straight-line to )ero over its .-(ear ta% life1 after which time it will have a market val e of 9',11000. The pro!ect re+ ires an initial investment in net working capital of 9,,010001 all of which will be recovered at the end of the pro!ect. The pro!ect is estimated to generate 9'10.01000 in ann al sales1 with costs of 9110/01000. The ta% rate is ,1 percent and the re+ ired ret rn for the pro!ect is 1/ percent. -hat is the net present val e for this pro!ect* #. 921.10/0 B. 92,,1620 C. 92.11,,/ D. 92.'1'05 &. 92..1/6/ GC> O B9'10.01000 - 9110/01000DB1 - 0.,1D C B9,10001000A.DB0.,1D O 911,'/1.00
AACSB: Analytic Bloom's: A''lication Difficulty: Basic ,OC 8: "#$"" Learning Ob ecti!e: "#$" Section: "#%&o'ic: Net 'resent !alue
10-100
10'. Dog MpN >ranks is looking at a new sa sage s(stem with an installed cost of 9,621500. This cost will be depreciated straight-line to )ero over the pro!ect's 2-(ear life1 at the end of which the sa sage s(stem can be scrapped for 9011'00. The sa sage s(stem will save the firm 91''1.00 per (ear in preta% operating costs1 and the s(stem re+ ires an initial investment in net working capital of 9'51/00. #ll of the net working capital will be recovered at the end of the pro!ect. The ta% rate is ,, percent and the disco nt rate is 6 percent. -hat is the net present val e of this pro!ect* #. -9.11,11 $. -9215'0 C. 9511/02 D. 9651..1 E. 911515'1 GC> O 91''1.00B1 - 0.,,D C B9,621500A2DB0.,,D O 91001201..,
AACSB: Analytic Bloom's: A''lication Difficulty: Basic ,OC 8: "#$"Learning Ob ecti!e: "#$" Section: "#%&o'ic: Net 'resent !alue
10-101
10,. ?o r firm is contemplating the p rchase of a new 9110'51000 comp ter-based order entr( s(stem. The s(stem will be depreciated straight-line to )ero over its /-(ear life. It will be worth 91/51.00 at the end of that time. ?o will save 90,,1000 before ta%es per (ear in order processing costs and (o will be able to red ce working capital b( 911/120. Bthis is a one-time red ctionD. The net working capital will ret rn to its original level when the pro!ect ends. The ta% rate is ,/ percent. -hat is the internal rate of ret rn for this pro!ect* #. 11.25 percent $. 1,..6 percent C. 15.'1 percent D. '1.0/ percent &. ',./5 percent GC> O 900,1000B1 - 0.,/D C B9110'51000A/DB0.,/D O 9/'/1500
AACSB: Analytic Bloom's: A''lication Difficulty: Basic ,OC 8: "#$"/ Learning Ob ecti!e: "#$" Section: "#%&o'ic: (nternal rate of return
10-10'
10.. # .-(ear pro!ect has an initial asset investment of 9,0010001 and initial net working capital investment of 9'61'001 and an ann al operating cash flow of -9.012'0. The fi%ed asset is f ll( depreciated over the life of the pro!ect and has no salvage val e. The net working capital will be recovered when the pro!ect ends. The re+ ired ret rn is 1/ percent. -hat is the pro!ect's e+ ivalent ann al cost1 or &#C* A. -91/51.61 $. -91/'1,06 C. -91.2155. D. -91./1/06 &. -91.'1'1'
AACSB: Analytic Bloom's: A''lication Difficulty: Basic ,OC 8: "#$"2 Learning Ob ecti!e: "#$/ Section: "#%2 &o'ic: ,3ui!alent annual cost
10-10,
10/. Heer &nterprises needs someone to s ppl( it with ''/1000 cartons of machine screws per (ear to s pport its man fact ring needs over the ne%t 2 (ears1 and (o 've decided to bid on the contract. It will cost (o 9111201000 to install the e+ ipment necessar( to start prod ctionK (o 'll depreciate this cost straight-line to )ero over the pro!ect's life. ?o estimate that in 2 (ears1 this e+ ipment can be salvaged for 92/1000. ?o r fi%ed prod ction costs will be 9,001000 per (ear1 and (o r variable prod ction costs sho ld be 91'.2/ per carton. ?o also need an initial investment in net working capital of 911'1/001 all of which will be recovered when the pro!ect ends. ?o r ta% rate is ,' percent and (o re+ ire a 1, percent ret rn on (o r investment. -hat bid price per carton sho ld (o s bmit* #. 912.0. $. 910./0 C. 91/.26 D. 91/.0, &. 91..51
9'2.1'2'.66 O EB= - 91'.2/DB''/1000D - 9,001000FE1 - 0.,'D C B9111201000A2DB0.,'D = O 91/.26
AACSB: Analytic Bloom's: Analysis Difficulty: Basic ,OC 8: "#$"; Learning Ob ecti!e: "#$Section: "#%2 &o'ic: Bid 'rice
10-10.
100. Chapman Machine 4hop is considering a .-(ear pro!ect to improve its prod ction efficienc(. $ (ing a new machine press for 9/201000 is estimated to res lt in 916'1000 in ann al preta% cost savings. The press falls in the M#C34 /-(ear class1 and it will have a salvage val e at the end of the pro!ect of 95.1000. The press also re+ ires an initial investment in spare parts inventor( of 9'.10001 along with an additional 9,1000 in inventor( for each s cceeding (ear of the pro!ect. The inventor( will ret rn to its original level when the pro!ect ends. The shop's ta% rate is ,/ percent and its disco nt rate is 11 percent. 4ho ld the firm b ( and install the machine press* -h( or wh( not*
A. noK The net present val e is -921.56. $. noK The net present val e is -9002. C. (esK The net present val e is 9'11. D. (esK The net present val e is 9.1,16. &. (esK The net present val e is 951,0.. Deprec1 O 9/201000 0.'0 O 911/1'00 Deprec' O 9/201000 0.,' O 915.1,'0 Deprec, O 9/201000 0.16'0 O 91101/6' Deprec. O 9/201000 0.11/' O 9001,//.'0 $ook val e. O 9/201000 - 911/1'00 - 915.1,'0 - 91101/6' - 9001,//.'0 O 9661/,'.50 #fterta% salvage val e O 95.1000 C B9661/,'.50 - 95.1000DB0.,/D O 9561.,0..5 GC>1 O 916'1000B1 - 0.,/D C 911/1'00B0.,/D O 910/11'0 GC>' O 916'1000B1 - 0.,/D C 915.1,'0B0.,/D O 91561,1' GC>, O 916'1000B1 - 0.,/D C 91101/6'B0.,/D O 910,1/02.'0 GC>. O 916'1000B1 - 0.,/D C 9001,//.'0B0.,/D O 91.510'..,'
The machine sho ld not be p rchased beca se the net present val e is negative.
10-10/
AACSB: Analytic Bloom's: Analysis Difficulty: (ntermediate ,OC 8: "#$": Learning Ob ecti!e: "#$* Section: "#%2 &o'ic: Costs$cutting 'ro'osal
102. &ads Ind strial 4(stems Compan( B&I4CD is tr(ing to decide between two different conve(or belt s(stems. 4(stem # costs 9.'210001 has a 0-(ear life1 and re+ ires 911'1000 in preta% ann al operating costs. 4(stem $ costs 9/1210001 has an 5-(ear life1 and re+ ires 9261000 in preta% ann al operating costs. $oth s(stems are to be depreciated straight-line to )ero over their lives and will have a )ero salvage val e. -hichever s(stem is chosen1 it will not be replaced when it wears o t. The ta% rate is ,, percent and the disco nt rate is '. percent. -hich s(stem sho ld the firm choose and wh(* #. #K The net present val e is 9'111/10. B. #K The net present val e is -9/5'12'0. C. #K The net present val e is -9,1.1'10. D. $K The net present val e is 9,051'''. &. $" The net present val e is -90'/11',.
4(stem # sho ld be chosen beca se it has the more positive Bsmaller negativeD net present val e.
AACSB: Analytic Bloom's: Analysis Difficulty: (ntermediate ,OC 8: "#$*# Learning Ob ecti!e: "#$" Section: "#%&o'ic: 5utually e1clusi!e 'ro ects
10-100
105. Consider a pro!ect to s ppl( 0015001000 postage stamps to the M.4. =ostal 4ervice for the ne%t / (ears. ?o have an idle parcel of land available that cost 92001000 five (ears agoK if the land were sold toda(1 it wo ld net (o 961'10001 afterta%. The land can be sold for 911/001000 after ta%es in / (ears. ?o will need to install 9'1,/01000 in new man fact ring plant and e+ ipment to act all( prod ce the stampsK this plant and e+ ipment will be depreciated straight-line to )ero over the pro!ect's /-(ear life. The e+ ipment can be sold for 9./01000 at the end of the pro!ect. ?o will also need 9.061000 in initial net working capital for the pro!ect1 and an additional investment of 9,51000 in ever( (ear thereafter. #ll net working capital will be recovered when the pro!ect ends. ?o r prod ction costs are 0.,5 cents per stamp1 and (o have fi%ed costs of 90051000 per (ear. ?o r ta% rate is ,1 percent and (o r re+ ired ret rn on this pro!ect is 11 percent. -hat bid price per stamp sho ld (o s bmit* #. 90.015 $. 90.0'0 C. 90.0', D. 90.0'0 &. 90.0'6
90/116'5.11 O EB=-90.00,5DB0015001000D - 90051000FE1 - 0.,1F C B9'1,/01000A/DB0.,1D = O 90.0'0
AACSB: Analytic Bloom's: A''lication Difficulty: (ntermediate ,OC 8: "#$** Learning Ob ecti!e: "#$Section: "#%2 &o'ic: Bid 'rice
10-102

Chap 010

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Chapter 10 - Making Capital Investment Decisions

Chapter 10 Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

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Chapter 10 - Making Capital Investment Decisions

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Chapter 10 - Making Capital Investment Decisions

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Chapter 10 - Making Capital Investment Decisions

#. 91,/1.05 $. 91.01000 C. 91.'1,1' D. 91..1/6' &. 91.015'0

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Multiple Choice Questions

Chapter 10 - Making Capital Investment Decisions

62. Consider the following income statement"

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 Making Capital Investment Decisions #nswer 7e(

Multiple Choice Questions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions

Chapter 10 - Making Capital Investment Decisions