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Exam 9: Making Capital Investment Decisions

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Question 41

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The Blue Lagoon is considering a project with a five-year life.The project requires $32,000 of fixed assets that are classified as five-year property for MACRS.Variable costs equal 67 percent of sales,fixed costs are $12,600,and the tax rate is 34 ercent.What is the operating cash flow for Year 4 given the following sales estimates and MACRS depreciation allowance percentages? $\begin{array} { | l | r | r | r | r | r | } \hline \text { Year } & & { 2 } &{ 3 } &{ 4 } & { 5 } \\\hline \text { Sales } & \$ 32,000 & \$ 34,500 & \$ 35,600 & \$ 38,900 & \$ 42,000 \\\hline \text { MACRS rate } & 20.00 & 32.00 & 19.20 & 11.52 & 11.52 \\\hline\end{array}$

A) -$1,806.67
B) $640.89
C) $1,311.16
D) $1,409.80
E) -$2,276.60

F) None of the above
G) C) and D)

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Question 42

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A cost-cutting project will decrease costs by $37,400 a year.The annual depreciation on the project's fixed assets will be $4,700 and the tax rate is 34 percent.What is the amount of the change in the firm's operating cash flow resulting from this project?

A) $21,582
B) $26,791
C) $25,805
D) $23,610
E) $26,282

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

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Question 43

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Boyertown Industrial Tools is considering a three-year project to improve its production efficiency.Buying a new machine ress for $578,000 is estimated to result in $184,000 in annual pretax cost savings.The press falls in the MACRS five-year class,which has percentage rates starting with Year 1,of 20,32,19.20,11.52,11.52,and 5.76.The salvage value at the end of the project of $162,000.The press also requires an initial investment in spare parts inventory of $19,000,along with an additional $1,500 in inventory for each succeeding year of the project.The inventory will all be recovered when the project ends.If the tax rate is 35 percent and the discount rate is 12 percent,should the company buy and install the machine press? Why or why not?

.The Shoe Box is considering adding a new line of winter footwear to its product lineup.When analyzing the viability of this addition,the company should include all of the following in its analysis with the exception of:

Sensitivity analysis:

Scenario analysis:

The Sausage Hut is looking at a new sausage system with an installed cost of $187,400.This cost will be depreciated straight-line to zero over the project's four-year life,at the end of which the sausage system can be scrapped for $25,000.The sausage system will save the firm $69,000 per year in pretax operating costs,and the system requires an initial investment in net working capital of $9,000,which will be recouped at project end.If the tax rate is 34 percent and the discount rate is 12 ercent,what is the NPV of this project?

Nu Tek is comprised of four separate operating divisions.For this year,the firm has decided to allocate capital funds using a soft rationing approach.Which one of the following applies to this situation?

Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million.Last year,the government changed the emission requirements and this furnace cannot meet those standards.Thus,the company can no longer use the furnace,nor has it been able to locate anyone willing to purchase the furnace.Given the current situation,the furnace is best described as which type of cost?

When a firm faces hard rationing,:

Newton Industries is considering a project and has developed the following estimates: unit sales = 4,800,price per unit = 67,variable cost per unit = $42,annual fixed costs = $11,900.The depreciation is $14,700 a year and the tax rate is 34 percent.What effect would an increase of $1 in the selling price have on the operating cash flow?

A project has an initial requirement of $311,700 for fixed assets and $47,600 for net working capital.The fixed assets will be depreciated to a zero book value over the four-year life of the project and will be worthless at the end of the project.All of the net working capital will be recouped after four years.The expected annual operating cash flow is $108,315.What is the project's internal rate of return if the tax rate is 34 percent?

A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as a(n) :

Western Steer purchased some three-year MACRS property three years ago.What is the current book value of this quipment if the original cost was $94,250? The MACRS allowance percentages are as follows,commencing with Year 1: 33.33,44.45,14.81,and 7.41 percent.

.CrossTown Builders is considering remodeling an old building it currently owns.The building was purchased ten years ago for $1.2 million.Over the past ten years,the firm rented out the building and used the rent to pay off the mortgage.The building is now owned free and clear and has a current market value of $1.9 million.The company is considering remodeling the building into industrial-type apartments at an estimated cost of $1.6 million.The estimated present value of the future income from these apartments is $4.1 million.Which one of the following defines the opportunity cost of the remodeling project?

Industrial Services is analyzing a proposed investment that would initially require $489,000 of new equipment.This quipment would be depreciated on a straight-line basis to a zero balance over the four-year life of the project.The estimated salvage value is $135,000.The project requires $32,000 initially for net working capital,all of which will be recouped at the end of the project.The projected operating cash flow is $174,900 a year.What is the internal rate of return on this project if the relevant tax rate is 35 percent?

Rocky Top,Inc.,purchased some seven-year MACRS welding equipment six years ago at a cost of $73,000.Today,the company is selling this equipment for $25,000.The tax rate is 33 percent.What is the aftertax cash flow from this sale? The MACRS allowance percentages are as follows,commencing with Year 1: 14.29,24.49,17.49,12.49,8.93,8.92,8.93,and 4.46 percent.

Lee's currently sells 13,800 motor homes per year at $87,900 each,and 1,100 luxury motor coaches per year at $139,900 each.The company wants to introduce a low-range camper to fill out its product line; it hopes to sell 7,200 of these campers per year at $17,500 each.An independent consultant has determined that if the company introduces the new campers,it should boost the sales of its existing motor homes by 1,100 units per year,and reduce the sales of its luxury motor coaches by 610 units per year.What amount should be used as the annual sales figure when evaluating this project?

Bruce Moneybags owns several restaurants and hotels near a local interstate.One restaurant,Beef and More,originally cost $1.8 million,is currently fully paid for,but needs modernized.Bruce is trying to decide whether to accept an offer and sell Beef and More,as is,for the offer price of $1.1 million or renovate the restaurant himself.The projected renovation cost is $1.3 million.The restaurant would need to be shut down completely during the renovation which would cause an aftertax net loss of $90,000 in today's dollars.The estimated present value of the cash inflows from the renovated restaurant is $3.2 million.When analyzing the renovation project,what cost,ifany,should be included for the current restaurant?

Custom Tailored Shirts is a specialty retailer offering T-shirts,sweatshirts,and caps.Its most recent annual sales consisted of $21,000 of T-shirts,$18,000 of sweatshirts,and $2,900 of caps.The company is adding polo shirts to the lineup and projects that this addition will result in sales next year of $18,000 of T-shirts,$16,000 of sweatshirts,$11,500 of Polo shirts,and $2,100 of caps.What sales amount should be used when evaluating the Polo shirt project?