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Exam 10: Making Capital Investment Decisions

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Question 41

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Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero?

A) EBIT + D
B) EBIT - T
C) NI + D
D) (Sales - Costs) × (1 - D) × (1- T)
E) (Sales - Costs) × (1 - T)

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

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Question 42

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Northern Railway is considering a project which will produce annual sales of $975,000 and increase cash expenses by $848,000.If the project is implemented,taxes will increase from $141,000 to $154,000 and depreciation will increase from $194,000 to $272,000.The company is debt-free.What is the amount of the operating cash flow using the top-down approach?

A) $25,000
B) $114,000
C) $157,000
D) $181,000
E) $209,000

F) B) and C)
G) A) and D)

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Question 43

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Morris Motors just purchased some MACRS 5-year property at a cost of $216,000.Which one of the following will correctly give you the book value of this equipment at the end of year 2?

A 4-year project has an initial asset investment of $306,600,and initial net working capital investment of $29,200,and an annual operating cash flow of -$46,720.The fixed asset is fully depreciated over the life of the project and has no salvage value.The net working capital will be recovered when the project ends.The required return is 15 percent.What is the project's equivalent annual cost,or EAC?

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

How can two firms arrive at two different bid prices when bidding for the same job and given the same bid specifications?

Hollister & Hollister is considering a new project.The project will require $543,000 for new fixed assets,$218,000 for additional inventory,and $42,000 for additional accounts receivable.Short-term debt is expected to increase by $165,000.The project has a 6-year life.The fixed assets will be depreciated straight-line to a zero book value over the life of the project.At the end of the project,the fixed assets can be sold for 20 percent of their original cost.The net working capital returns to its original level at the end of the project.The project is expected to generate annual sales of $875,000 with costs of $640,000.The tax rate is 34 percent and the required rate of return is 13 percent.What is the project's cash flow at time zero?

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

The Beach House has sales of $784,000 and a profit margin of 8 percent.The annual depreciation expense is $14,000.What is the amount of the operating cash flow if the company has no long-term debt?

Which one of the following is an example of a sunk cost?

Keyser Petroleum just purchased some equipment at a cost of $67,000.What is the proper methodology for computing the depreciation expense for year 2 if the equipment is classified as 5-year property for MACRS?

The bid price is:

G & L Plastic Molders spent $1,200 last week repairing a machine.This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project.When analyzing the proposed project,the $1,200 should be treated as which type of cost?

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

Bernie's Beverages purchased some fixed assets classified as 5-year property for MACRS.The assets cost $94,000.What will the accumulated depreciation be at the end of year three?

Phone Home,Inc.is considering a new 4-year expansion project that requires an initial fixed asset investment of $3 million.The fixed asset will be depreciated straight-line to zero over its 4-year tax life,after which time it will have a market value of $225,000.The project requires an initial investment in net working capital of $330,000,all of which will be recovered at the end of the project.The project is estimated to generate $2,640,000 in annual sales,with costs of $1,056,000.The tax rate is 33 percent and the required return for the project is 15 percent.What is the net present value for this project?

The bid price always assumes which one of the following?

Sailcloth & More currently produces boat sails and is considering expanding its operations to include awnings for homes and travel trailers.The company owns land beside its current manufacturing facility that could be used for the expansion.The company bought this land 5 years ago at a cost of $319,000.At the time of purchase,the company paid $24,000 to level out the land so it would be suitable for future use.Today,the land is valued at $295,000.The company has some unused equipment that it currently owns valued at $38,000.This equipment could be used for producing awnings if $12,000 is spent for equipment modifications.Other equipment costing $490,000 will also be required.What is the amount of the initial cash flow for this expansion project?

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

What is the primary purpose of computing the equivalent annual costs when comparing two machines? What is the assumption that is being made about each machine?