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Exam 9: Making Capital Investment Decisions

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Question 21

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What is the year two depreciation on equipment costing $164,000 if it is classified as 5-year property for MACRS purposes? The MACRS allowance percentages are as follows, commencing with year one: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.

A) $37,620
B) $38,200
C) $41,984
D) $47,815
E) $52,480

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Question 22

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Sensitivity analysis:

A) looks at the most reasonably optimistic and pessimistic results for a project.
B) helps identify the variable within a project that presents the greatest forecasting risk.
C) is used for projects that cannot be analyzed by scenario analysis because the cash flows are unconventional.
D) is generally conducted prior to scenario analysis just to determine if the range of potential outcomes is acceptable.
E) illustrates how an increase in operating cash flow caused by changing both the revenue and the costs simultaneously will change the net present value for a project.

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Question 23

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Which one of the following terms refers to the best option that was foregone when a particular investment is selected?

Aaron's Market is implementing a project that will initially increase accounts payable by $3,600, increase inventory by $4,800, and decrease accounts receivable by $800. All net working capital will be recouped when the project terminates. What is the cash flow related to the net working capital for the last year of the project?

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

A new project you are considering is expected to generate an operating cash flow of $48,210 and will initially free up $21,630 in net working capital. Purchases of fixed assets costing $67,800 will be required to start up the project. What is the total cash flow for this project at time zero?

Firm A uses straight-line depreciation. Firm B uses MACRS depreciation. Both firms bought $60,000 worth of equipment last year. Both firms are in the 35 percent tax bracket. The operating cash flows for each firm are identical except for the depreciation effects. Given this, you know the:

Fast Cars is considering a project that requires $138,000 of fixed assets that are classified as 5-year property for MACRS. What is the book value of these assets at the end of year 3? The MACRS allowance percentages are as follows, commencing with year one: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.

Western Wear purchased some 3-year MACRS property 3 years ago. What is the current book value of this equipment if the original cost was $48,000? The MACRS allowance percentages are as follows, commencing with year one: 33.33, 44.45, 14.81, and 7.41 percent.

Better Berries has a new project that requires $869,000 of equipment. What is the depreciation in year 6 of this project if the equipment is classified as 7-year property for MACRS purposes? The MACRS allowance percentages are as follows, commencing with year one: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent.

We are evaluating a project that costs $1.68 million, has a 5-year life, and has no salvage value. Assume depreciation is straight-line to zero over the life of the project. Sales are projected at 82,000 units per year. Price per unit is $43.29, variable cost per unit is $22.18, and fixed costs are $623,000 per year. The tax rate is 34 percent, and we require a 10 percent return on this project. What is the sensitivity of NPV to a 100 unit change in the sales figure?

Explain the difference between a sunk cost and an opportunity cost and give an example of each.

Metal Makers, Inc. purchased some welding equipment 6 years ago at a cost of $579,000. Today, the company is selling this equipment for $110,000. The tax rate is 34 percent. What is the aftertax cash flow from this sale? The MACRS allowance percentages are as follows, commencing with year one: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent.

Phil's Dinor purchased some new equipment 2 years ago for $89,500. Today, it is selling this equipment for $67,000. What is the aftertax cash flow from this sale if the tax rate is 35 percent? The MACRS allowance percentages are as follows, commencing with year one: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.

Your firm is contemplating the purchase of a new $674,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 6-year life. It will be worth $58,000 at that time. You will save $185,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $29,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. If the tax rate is 34 percent, what is the IRR for this project?

Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as which one of the following?

Lake City Plastics currently produces plastic plates and silverware. The company is considering expanding its product offerings to include plastic serving trays. Which of the following are cash flows relevant to the new product? I. molds needed to form the serving trays II) projected increase in plate and silverware sales if the trays are produced III) a portion of the production manager's current annual salary of $75,000 IV) raw materials used in the production of the serving trays

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

Isabella is considering three mutually exclusive options for the additional space she just added to her specialty women's store. The cost of the expansion was $127,000. She can use this additional space to add a fabric and quilting section, add an exclusive gifts department, or expand into imported decorator items for the home. She estimates the present value of these options at $114,000 for fabric and quilting, $163,000 for exclusive gifts, and $138,000 for decorator items. Which option(s) , if any, should Isabella accept?

Scenario analysis asks questions such as: