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Exam 9: Making Capital Investment Decisions

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Question 1

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Burke's Corner currently sells blue jeans and T-shirts.Management is considering adding fleece tops to its inventory.The tops would sell for $49 each with expected sales of 3,200 tops annually.By adding the fleece tops,management feels the company will sell an additional 150 pairs of jeans at $79 a pair and 220 fewer T-shirts at $18 each.The variable cost per unit is $36 on the jeans,$7 on the T-shirts,and $21 on the fleece tops.The project's depreciation expense is $23,000 a year and the fixed costs are $21,000 annually.The tax rate is 34 percent.What is the project's operating cash flow?

A) $47,935.80
B) $52,201.20
C) $55,755.80
D) $43,209.90
E) $38,419.70

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

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Question 2

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Which of the following create cash inflows from net working capital?

A) Decrease in accounts payable and increase in accounts receivable
B) Decrease in both accounts receivable and accounts payable
C) Increase in accounts payable and decrease in inventory
D) Increase in both accounts receivable and inventory
E) Increase in inventory and decrease in cash

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

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Question 3

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Which one of the following refers to a method of increasing the rate at which an asset is depreciated?

An all-equity firm has net income of $46,420,depreciation of $3,758,and taxes of $23,915.What is the firm's operating cash flow?

The ability to delay an investment:

Floral Shoppes has a new project in mind that will increase accounts receivable by $19,000,decrease accounts payable by $4,000,increase fixed assets by $27,000,and decrease inventory by $2,000.What is the amount the firm should use as the initial cash flow attributable to net working capital when it analyzes this project?

The operating cash flows of a project:

Thrill Rides is considering adding a new roller coaster to its amusement park.The addition is expected to increase its overall ticket sales.In particular,the company expects to sell more tickets for its current roller coaster and experience extremely high demand for its new coaster.Sales for its boat ride are expected to decline but food and beverage sales are expected to increase significantly.All of the following are side effects associated with the new roller coaster with the exception of the:

The tax shield approach to computing the operating cash flow,given a tax-paying firm:

Ignoring the option to wait:

You are analyzing a project and have developed the following estimates.The depreciation is $5,800 a year and the tax rate is 35 percent.What is the best-case operating cash flow? $\begin{array} { | l | r | r | r | } \hline & \text { Base-Case } & \text { Lower Bound } & \text { Upper Bound } \\\hline \text { Unit sales } & 800 & 750 & 850 \\\hline \text { Sales price per unit } & \$ 29 & \$ 28 & \$ 30 \\\hline \text { Variable cost per unit } & \$ 13 & \$ 11 & \$ 15 \\\hline \text { Fixed costs } & \$ 6,800 & \$ 6,000 & \$ 7,600 \\\hline\end{array}$

Assume an all-equity firm has positive net earnings.The operating cash flow of this firm:

You are analyzing a project and have developed the following estimates: unit sales = 2,600,price per unit = $109,variable cost per unit = $67,fixed costs per year = $38,000.The depreciation is $12,000 a year and the tax rate is 34 percent.What effect would the sale of one more unit have on the operating cash flow?

Three years ago,Stock Tek purchased some five-year MACRS property for $82,600.Today,it is selling this property for 31,500.How much tax will the company owe on this sale if the tax rate is 34 percent? The MACRS allowance percentages are as follows,commencing with Year 1:20.00,32.00,19.20,11.52,11.52,and 5.76 percent.

Northern Companies has three separate divisions.Each year,the company determines the amount it can afford to spend in total for capital expenditures and then allocates one-third of that amount to each division.This allocation process is called:

A project requires $428,000 of equipment that is classified as seven-year property.What is the depreciation expense in Year given the following MACRS depreciation allowances,starting with Year 1: 14.29,24.49,17.49,12.49,8.93,8.92,8.93,and 4.46 percent?

.Valley Forge and Metal purchased a truck five years ago for local deliveries.Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of five years.

The Golf Range is considering adding an additional driving range to its facility.The range would cost $229,000,would be depreciated on a straight-line basis over its seven-year life,and would have a zero salvage value.The anticipated revenue from the project is $62,500 a year with $18,400 of that amount being variable cost.The fixed cost would be $15,700.The firm believes that it will earn an additional $22,500 a year from its current operations should the driving range be added.The project will require $3,000 of net working capital,which is recoverable at the end of the project.What is the internal rate of return on this project at a tax rate of 34 percent?

Turner Industries started a new project three months ago.Sales arising from this project are significantly less than anticipated.Given this,which one of the following is management most apt to implement?

The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation: