FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 8: Net Present Value and Capital Budgeting

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 21

Essay

Review LaterAdd Note

Review Later

Bruno's, Inc. is analyzing two machines to determine which one it should purchase. The company requires a 14% rate of return and uses straight-line depreciation to a zero book value. Machine A has a cost of $290,000, annual operating costs of $8,000, and a 3-year life. Machine B costs $180,000, has annual operating costs of $12,000, and has a 2-year life. Whichever machine is purchased will be replaced at the end of its useful life. Which machine should Bruno's purchase and why? (Round your answer to whole dollars.)

Correct Answer

verified

Machine B; because it will save the comp...

View Answer

Show Answer

Question 22

Multiple Choice

Review LaterAdd Note

Review Later

A decrease in a firm's current cash flows resulting from the implementation of a new project is referred to as:

A) salvage value expense.
B) net working capital expense.
C) sunk cost.
D) opportunity cost.
E) erosion cost.

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

Correct Answer

verified

Show Answer

Question 23

Essay

Review LaterAdd Note

RoadRollers Paving Company is considering buying a new asphalt laying machine. The machine costs $1,300,000 and can be depreciated to zero on a straight-line basis over its life of 10 years. The machine is expected to have no salvage value. Revenues are expected to be $600,000 per year, and cost are estimated at $220,000 per year. Operating cash flows are expected to rise with inflation, forecasted at 4% per year. The risk free rate of interest is 2% and the real interest rate is 4.0%, and given the expected inflation rate, the nominal rate is 8.16%. The firm is in the 34% tax bracket. Should the investment be undertaken? A._04,10 = $1,955,974.73 Depreciation tax shield = (8.1109) ($130,000) (.34) = $358,501.78 NPV = $2,314,476.51 - 1,300,000 = $1,014,476.51); Accept.

Peter's Boats has sales of $760,000 and a profit margin of 5%. The annual depreciation expense is $80,000. What is the amount of the operating cash flow if the company has no long-term debt?

The equivalent annual cost method is useful in determining:

A reduction in the sales of an existing product caused by the introduction of a new product is an example of a(n) :

The value of a previously purchased building used by a proposed project is an example of a(n) :

The incremental cash flow from projects for a company is computed as the:

You are considering replacing your current dado cutter with a new machine. The current machine is expected to last three more years but faces increasing repair costs of $2,500; $3,500; and $4,000 over the three years. You could salvage the machine now for $5,000; and then $3,000; $1,500; and 0 thereafter. The new dado cutter would cost $12,000 and require upkeep of $1,500 a year. The machine would last six years and be salvaged for $1,000. Should you replace the old machine now or wait one year? (Assume the tax rate is 0% and the cost of capital is 11%).

The cash flow in dollars received in year 3 is expected to be $12,372. The firm uses a real discount rate of 4% and the inflation rate is expected to be 2.5%. What is the present value of the year 3 cash flow?

A project will produce an operating cash flow of $7,300 a year for three years. The initial cash investment in the project will be $11,600. The net after-tax salvage value is estimated at $3,500 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 11%?

Cash revenues in a particular year are equal to sales less:

This chapter introduced three new methods for calculating project operating cash flow (OCF). Under what circumstances is each method appropriate?

The Expresso Roast Corporation is considering the purchase of a new bean roaster and grinder. The revenues are expected to be the same for Expresso Roast no matter which machine is acquired. The Quick-Roast machine has a cost of $75,000 and is expected to last 4 years with operating costs of $12,000 per year. The Mellow-Roast Co. machine has a cost of $50,000 and operating costs of $4,500 per year but will last for only 2 years. The discount rate is 8%. What is the present value of the costs? What is the EAC and which machine should be chosen?

Bluedo's has sales of $435,000, depreciation of $35,000, and net working capital of $56,000. The firm has a tax rate of 34% and a profit margin of 8%. The firm has no interest expense. What is the amount of the operating cash flow?

The bottom-up approach to computing the operating cash flow applies only when:

A project's operating cash flow will increase when:

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

Money that the firm has already spent or is committed to spend regardless of whether a project is taken is called a(n) :

A firm purchases a new truck for $30,000. It will be depreciated over 5 years at $6,000 per year. If the tax rate is 30% what is the time 0 cash flow?