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Question;79. Precision Tool is analyzing two machines to;determine which one it should purchase. The company requires a 15 percent rate;of return and uses straight-line depreciation to a zero book value over the;life of its equipment. Machine A has a cost of $892,000, annual operating costs;of $26,300, and a 4-year life. Machine B costs $1,127,000, has annual operating;costs of $19,500, and has a 5-year life. Whichever machine is purchased will be;replaced at the end of its useful life. Precision Tool should purchase Machine;because it lowers the firm's annual cost by approximately _______ as;compared to the other machine.;A. A, $16,965.;B. A, $17,404;C. B, $16,965;D. B, $17,404;E. B, $17,521;80. The Buck Store is considering a project that will;require additional inventory of $216,000 and will increase accounts payable by;$181,000. Accounts receivable are currently $525,000 and are expected to;increase by 9 percent if this project is accepted. What is the project's;initial cash flow for net working capital?;A. -$82,250;B. -$12,250;C. $12,250;D. $36,250;E. $44,250;81. The Card Shoppe needs to maintain 23 percent of;its sales in net working capital. Currently, the shoppe is considering a 6-year;project that will increase sales from its current level of $387,000 to $421,000;the first year and to $465,000 a year for the following 5 years of the project.;What amount should be included in the project analysis for net working capital;in year 6 of the project?;A. -$17,940;B. -$2,990;C. $0;D. $2,990;E. $17,940;82. Home Furnishings Express is expanding its product;offerings to reach a wider range of customers. The expansion project includes;increasing the floor inventory by $430,000 and increasing its debt to suppliers;by 70 percent of that amount. The company will also spend $450,000 for a;building contractor to expand the size of its showroom. As part of the;expansion plan, the company will be offering credit to its customers and thus;expects accounts receivable to rise by $90,000. For the project analysis, what;amount should be used as the initial cash flow for net working capital?;A. -$39,000;B. -$70,000;C. -$156,000;D. -$219,000;E. -$391,000;83. Hollister & Hollister is considering a new;project. The project will require $522,000 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 with costs of $640,000. The tax rate is 34;percent and the required rate of return is 14 percent. What is the project's;cash flow at time zero?;A. -$536,000;B. -$614,000;C. -$720,000;D. -$779,000;E. -$944,000;84. Hollister & Hollister is considering a new;project. The project will require $522,000 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 34;percent and the required rate of return is 14 percent. What is the amount of;the earnings before interest and taxes for the first year of this;project?;A. $97,680;B. $130,000;C. $148,000;D. $217,320;E. $235,000;85. Hollister & Hollister is considering a new;project. The project will require $522,000 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 34;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?;A. $35,496;B. $68,904;C. $104,400;D. $287,615;E. $344,520;86. Hollister & Hollister is considering a new;project. The project will require $522,000 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 34;percent and the required rate of return is 14 percent. What is the cash flow;recovery from net working capital at the end of this project?;A. $14,000;B. $75,000;C. $92,000;D. $344,000;E. $422,000;87. 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 value of the;depreciation tax shield in year 4 of the project?;A. $49,000;B. $52,200;C. $68,600;D. $71,400;E. $76,500;88. 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?;A. $17,150;B. $31,850;C. $118,800;D. $237,600;E. $343,000;89. 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 recovery;amount attributable to net working capital at the end of the project?;A. $21,000;B. $54,600;C. $84,000;D. $178,000;E. $196,000;Essay Questions;90. In a single sentence, explain how you can;determine which cash flows should be included in the analysis of a;project.;91. What is the formula for the tax-shield approach to;OCF? Explain the two key points the formula illustrates.;92. 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?;93. Assume a firm sets its bid price for a project at;the minimum level as computed using the discounted cash flow method. Given;this, what do you know about the net present value and the internal rate of;return on the project as bid?;94. Can the initial cash flow at time zero for a;project ever be a positive value? If yes, give an example. If no, explain why;not.;95. How can two firms arrive at two different bid;prices when bidding for the same job and given the same bid;specifications?;Multiple Choice Questions;96. Winnebagel Corp. currently sells 28,200 motor;homes per year at $42,300 each, and 11,280 luxury motor coaches per year at;$79,900 each. The company wants to introduce a new portable camper to fill out;its product line. It hopes to sell 19,740 of these campers per year at $11,280;each. An independent consultant has determined that if Winnebagel introduces;the new campers, it should boost the sales of its existing motor homes by 4,700;units per year, and reduce the sales of its motor coaches by 1,222 units per;year. What is the amount that should be used as the annual sales figure when;evaluating this project?;A. $297,613,400;B. $301,002,300;C. $314,141,800;D. $323,839,400;E. $327,289,500;97. Consider the following income statement;What is the amount of the depreciation tax shield?;A. $23,607;B. $24,192;C. $24,598;D. $26,211;E. $26,919;98. Consider an asset that costs $176,000 and is;depreciated straight-line to zero over its 11-year tax life. The asset is to be;used in a 7-year project, at the end of the project, the asset can be sold for;$22,000. The relevant tax rate is 30 percent. What is the aftertax cash flow;from the sale of this asset?;A. $31,800;B. $32,600;C. $33,300;D. $34,100;E. $34,600;99. Phone Home, Inc. is considering a new 6-year;expansion project that requires an initial fixed asset investment of $5.994;million. The fixed asset will be depreciated straight-line to zero over its;6-year tax life, after which time it will be worthless. The project is;estimated to generate $5,328,000 in annual sales, with costs of $2,131,200. The;tax rate is 31 percent. What is the operating cash flow for this project?;A. $1,894,318;B. $2,211,407;C. $2,515,482;D. $2,663,021;E. $2,848,315;100. Phone Home, Inc. is considering a new 5-year;expansion project that requires an initial fixed asset investment of $2.484;million. The fixed asset will be depreciated straight-line to zero over its;5-year tax life, after which time it will be worthless. The project is;estimated to generate $2,208,000 in annual sales, with costs of $883,200. The;tax rate is 32 percent and the required return on the project is 11 percent.;What is the net present value for this project?;A. $1,432,155;B. $1,433,059;C. $1,434,098;D. $1,434,217;E. $1,435,008;101. Phone Home, Inc. is considering a new 4-year;expansion project that requires an initial fixed asset investment of $3;million. The fixed asset will be depreciated straight-line to zero over its;4-year tax life, after which time it will have a market value of $231,000. The;project requires an initial investment in net working capital of $330,000, all;of which will be recovered at the end of the project. The project is estimated;to generate $2,640,000 in annual sales, with costs of $1,056,000. The tax rate;is 31 percent and the required return for the project is 15 percent. What is;the net present value for this project?;A. $714,056;B. $733,970;C. $741,335;D. $742,208;E. $744,595;102. Dog Up! Franks is looking at a new sausage system;with an installed cost of $397,800. This cost will be depreciated straight-line;to zero over the project's 7-year life, at the end of which the sausage system;can be scrapped for $61,200. The sausage system will save the firm $122,400 per;year in pretax operating costs, and the system requires an initial investment;in net working capital of $28,560. All of the net working capital will be;recovered at the end of the project. The tax rate is 33 percent and the;discount rate is 9 percent. What is the net present value of this;project?;A. -$41,311;B. -$7,820;C. $81,507;D. $98,441;E. $118,821;103. Your firm is contemplating the purchase of a new;$1,628,000 computer-based order entry system. The system will be depreciated;straight-line to zero over its 5-year life. It will be worth $158,400 at the;end of that time. You will save $633,600 before taxes per year in order;processing costs and you will be able to reduce working capital by $115,764;(this is a one-time reduction). The net working capital will return to its;original level when the project ends. The tax rate is 35 percent. What is the;internal rate of return for this project?;A. 11.78 percent;B. 13.49 percent;C. 18.21 percent;D. 21.65 percent;E. 23.58 percent;104. A 4-year project has an initial asset investment;of $306,600, and initial net working capital investment of $29,200, and an;annual operating cash flow of -$46,720. The fixed asset is fully depreciated;over the life of the project and has no salvage value. The net working capital;will be recovered when the project ends. The required return is 15 percent.;What is the project's equivalent annual cost, or EAC?;A. -$158,491;B. -$152,309;C. -$147,884;D. -$145,509;E. -$142,212

 

Paper#51103 | Written in 18-Jul-2015

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