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Exam 10: Making Capital Investment Decisions

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Question 31

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Which one of the following statements is correct concerning bid prices?

A) The bid price is the maximum price that a firm should bid.
B) A firm can submit a bid that is higher than the computed bid price and still break even.
C) A bid price ignores taxes.
D) A bid price should be computed based solely on the operating cash flows of the project.
E) A bid price should be computed based on a zero percent required rate of return.

F) None of the above
G) All of the above

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Question 32

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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?

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The primary purpose is to compute the an...

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Question 33

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When using the equivalent annual cost as a basis for deciding which equipment should be purchased,the equipment under consideration must fit which two of the following criteria? I.differing productive lives II.differing manufacturers III.required replacement at end of economic life IV.differing initial cost

The bid price is:

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

A proposed expansion project is expected to increase sales of JL Ticker's Store by $41,000 and increase cash expenses by $21,000.The project will cost $28,000 and be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project.The store has a marginal tax rate of 30 percent.What is the operating cash flow of the project using the tax shield approach?

The option that is foregone so that an asset can be utilized by a specific project is referred to as 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?

Keyser Mining is considering a project that will require the purchase of $980,000 in new equipment.The equipment will be depreciated straight-line to a zero book value over the 7-year life of the project.The equipment can be scraped at the end of the project for 5 percent of its original cost.Annual sales from this project are estimated at $420,000.Net working capital equal to 20 percent of sales will be required to support the project.All of the net working capital will be recouped.The required return is 16 percent and the tax rate is 35 percent.What is the amount of the aftertax salvage value of the equipment?

All of the following are related to a proposed project.Which of these should be included in the cash flow at time zero? I.purchase of $1,400 of parts inventory needed to support the project II.loan of $125,000 used to finance the project III.depreciation tax shield of $1,100 IV.$6,500 of equipment needed to commence the project

Colors and More is considering replacing the equipment it uses to produce crayons.The equipment would cost $1.37 million,have a 12-year life,and lower manufacturing costs by an estimated $310,000 a year.The equipment will be depreciated using straight-line depreciation to a book value of zero.The required rate of return is 15 percent and the tax rate is 35 percent.What is the net income from this proposed project?

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? $\begin{array}{l}\text { MACRS 5-year property }\\\begin{array} { c c } \frac { \text { Year } } { 1 } & \frac { \text { Rate } } { 20.00 \% } \\2 & 32.00 \% \\3 & 19.20 \% \\4 & 11.52 \% \\5 & 11.52 \% \\6 & 5.76 \%\end{array}\end{array}$

Kwik 'n Hot Dogs is considering the installation of a new computerized pressure cooker that will cut annual operating costs by $23,000.The system will cost $39,900 to purchase and install.This system is expected to have a 4-year life and will be depreciated to zero using straight-line depreciation.What is the amount of the earnings before interest and taxes for this project?

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

Hollister & Hollister is considering a new project.The project will require $535,000 for new fixed assets,$218,000 for additional inventory,and $39,000 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 and costs of $640,000.The tax rate is 31 percent and the required rate of return is 14 percent.What is the amount of the aftertax cash flow from the sale of the fixed assets at the end of this project?

The Fluffy Feather sells customized handbags.Currently,it sells 18,000 handbags annually at an average price of $89 each.It is considering adding a lower-priced line of handbags that sell for $59 each.The firm estimates it can sell 7,000 of the lower-priced handbags but will sell 3,000 less of the higher-priced handbags by doing so.What is the amount of the sales that should be used when evaluating the addition of the lower-priced handbags?

Consider a project to supply 60,800,000 postage stamps to the U.S.Postal Service for the next 5 years.You have an idle parcel of land available that cost $760,000 five years ago; if the land were sold today,it would net you $912,000,aftertax.The land can be sold for $1,500,000 after taxes in 5 years.You will need to install $2,356,000 in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project's 5-year life.The equipment can be sold for $456,000 at the end of the project.You will also need $469,000 in initial net working capital for the project,and an additional investment of $38,000 in every year thereafter.All net working capital will be recovered when the project ends.Your production costs are 0.38 cents per stamp,and you have fixed costs of $608,000 per year.Your tax rate is 31 percent and your required return on this project is 11 percent.What bid price per stamp should you submit?

The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's:

The depreciation tax shield is best defined as the:

Automated Manufacturers uses high-tech equipment to produce specialized aluminum products for its customers.Each one of these machines costs $1,480,000 to purchase plus an additional $52,000 a year to operate.The machines have a 6-year life after which they are worthless.What is the equivalent annual cost of one these machines if the required return is 16 percent?