Chap 010

Chapter 10 - Making Capital Investment D ecisions

5. Hollister ; Hollister is considering a new pro!ect. The pro!ect will re+ire 9/000 for new fi%ed assets 915000 for additional inventor( and 9,6000 for additional acconts receivable. 4hort-term debt is e%pected to increase b( 91/000. The pro!ect has a -(ear life. The fi%ed assets will be depreciated straight-line to a )ero book vale over the life of the pro!ect. #t the end of the pro!ect the fi%ed assets can be sold for 0 percent of their original cost. The net working capital retrns to its original level at the end of the pro!ect. The pro!ect is e%pected to generate annal sales of 952/000 and costs of 90000. The ta% rate is , percent and the re+ired rate of retrn is 1 percent. hat is the cash flow recover( from net working capital at the end of this pro!ect* #. 91000 $. 92/000 C. 96000 D. 9,000 &. 9000

52. 7e(ser Mining is considering a pro!ect that will re+ire the prchase of 9650000 in new e+ipment. The e+ipment will be depreciated straight-line to a )ero book vale over the 2(ear life of the pro!ect. The e+ipment can be scraped at the end of the pro!ect for / percent of its original cost. #nnal sales from this pro!ect are estimated at 90000. @et working capital e+al to 0 percent of sales will be re+ired to spport the pro!ect. #ll of the net working capital will be recoped. The re+ired retrn is 1 percent and the ta% rate is ,/ percent. hat is the vale of the depreciation ta% shield in (ear  of the pro!ect* #. 96000 $. 9/00 C. 9500 D. 92100 &. 92/00

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55. 7e(ser Mining is considering a pro!ect that will re+ire the prchase of 9650000 in new e+ipment. The e+ipment will be depreciated straight-line to a )ero book vale over the 2(ear life of the pro!ect. The e+ipment can be scraped at the end of the pro!ect for / percent of its original cost. #nnal sales from this pro!ect are estimated at 90000. @et working capital e+al to 0 percent of sales will be re+ired to spport the pro!ect. #ll of the net working capital will be recoped. The re+ired retrn is 1 percent and the ta% rate is ,/ percent. hat is the amont of the afterta% salvage vale of the e+ipment* #. 9121/0 $. 9,15/0 C. 9115500 D. 9,200 &. 9,,000

56. 7e(ser Mining is considering a pro!ect that will re+ire the prchase of 9650000 in new e+ipment. The e+ipment will be depreciated straight-line to a )ero book vale over the 2(ear life of the pro!ect. The e+ipment can be scraped at the end of the pro!ect for / percent of its original cost. #nnal sales from this pro!ect are estimated at 90000. @et working capital e+al to 0 percent of sales will be re+ired to spport the pro!ect. #ll of the net working capital will be recoped. The re+ired retrn is 1 percent and the ta% rate is ,/ percent. hat is the recover( amont attribtable to net working capital at the end of the pro!ect* #. 91000 $. 9/00 C. 95000 D. 9125000 &. 916000

Essay Questions

60. In a single sentence e%plain how (o can determine which cash flows shold be inclded in the anal(sis of a pro!ect.

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61. hat is the formla for the ta%-shield approach to GC>* &%plain the two ke( points the formla illstrates.

6. hat is the primar( prpose of compting the e+ivalent annal costs when comparing two machines* hat is the assmption that is being made abot each machine*

6,. #ssme a firm sets its bid price for a pro!ect at the minimm level as compted sing the disconted cash flow method. :iven this what do (o know abot the net present vale and the internal rate of retrn on the pro!ect as bid*

6. Can the initial cash flow at time )ero for a pro!ect ever be a positive vale* If (es give an e%ample. If no e%plain wh( not.

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6/. How can two firms arrive at two different bid prices when bidding for the same !ob and given the same bid specifications*

Multiple Choice Questions

6. innebagel Corp. crrentl( sells 500 motor homes per (ear at 9,00 each and 1150 l%r( motor coaches per (ear at 926600 each. The compan( wants to introdce a new portable camper to fill ot its prodct line. It hopes to sell 1620 of these campers per (ear at 91150 each. #n independent consltant has determined that if innebagel introdces the new campers it shold boost the sales of its e%isting motor homes b( 200 nits per (ear and redce the sales of its motor coaches b( 1 nits per (ear. hat is the amont that shold be sed as the annal sales figre when evalating this pro!ect* #. 9621,00 $. 9,0100,00 C. 9,111500 D. 9,,5,600 &. 9,256/00

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62. Consider the following income statement"

hat is the amont of the depreciation ta% shield* #. 9,02 $. 916 C. 9/65 D. 911 &. 9616

65. Consider an asset that costs 912000 and is depreciated straight-line to )ero over its 11(ear ta% life. The asset is to be sed in a 2-(ear pro!ectK at the end of the pro!ect the asset can be sold for 9000. The relevant ta% rate is ,0 percent. hat is the afterta% cash flow from the sale of this asset* #. 9,1500 $. 9,00 C. 9,,,00 D. 9,100 &. 9,00

66. =hone Home Inc. is considering a new -(ear e%pansion pro!ect that re+ires an initial fi%ed asset investment of 9/.66 million. The fi%ed asset will be depreciated straight-line to )ero over its -(ear ta% life after which time it will be worthless. The pro!ect is estimated to generate 9/,5000 in annal sales with costs of 91,100. The ta% rate is ,1 percent. hat is the operating cash flow for this pro!ect* #. 9156,15 $. 91102 C. 9/1/5 D. 9,01 &. 955,1/

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100. =hone Home Inc. is considering a new /-(ear e%pansion pro!ect that re+ires an initial fi%ed asset investment of 9.5 million. The fi%ed asset will be depreciated straight-line to )ero over its /-(ear ta% life after which time it will be worthless. The pro!ect is estimated to generate 905000 in annal sales with costs of 955,00. The ta% rate is , percent and the re+ired retrn on the pro!ect is 11 percent. hat is the net present vale for this pro!ect* #. 91,1// $. 91,,0/6 C. 91,065 D. 91,12 &. 91,/005

101. =hone Home Inc. is considering a new -(ear e%pansion pro!ect that re+ires an initial fi%ed asset investment of 9, million. The fi%ed asset will be d epreciated straight-line to )ero over its -(ear ta% life after which time it will have a market vale of 9,1000. The pro!ect re+ires an initial investment in net working capital of 9,, 0000 all of which will be recovered at the end of the pro!ect. The pro!ect is estimated to generate 90000 in annal sales with costs of 910/000. The ta% rate is ,1 percent and the re+ired retrn for the pro!ect is 1/ percent. hat is the net present vale for this pro!ect* #. 9210/ $. 92,,620 C. 921,,/ D. 9205 &. 92/6/

10. Dog pN >ranks is looking at a new sasage s(stem with an installed cost of 9,62500. This cost will be depreciated straight-line to )ero over the pro!ect's 2-(ear life at the end of which the sasage s(stem can be scrapped for 9100. The sasage s(stem will save the firm 9100 per (ear in preta% operating costs and the s(stem re+ires an initial investment in net working capital of 95/0. #ll of the net working capital will be recovered at the end of the pro!ect. The ta% rate is ,, percent and the discont rate is 6 percent. hat is the net present vale of this pro!ect* #. -91,11 $. -9250 C. 951/02 D. 9651 &. 911551

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10,. ?or firm is contemplating the prchase of a new 915000 compter-based order entr( s(stem. The s(stem will be depreciated straight-line to )ero over its /-(ear life. It will be worth 91/500 at the end of that time. ?o will save 9,,00 before ta%es per (ear in order processing costs and (o will be able to redce working capital b( 911/2 Bthis is a one-time redction. The net working capital will retrn to its o riginal level when the pro!ect ends. The ta% rate is ,/ percent. hat is the internal rate of retrn for this pro!ect* #. 11.25 percent $. 1,.6 percent C. 15.1 percent D. 1./ percent &. ,./5 percent

10. # -(ear pro!ect has an initial asset investment of 9,000 and initial net working capital investment of 9600 and an annal operating cash flow of -920. The fi%ed asset is fll( depreciated over the life of the pro!ect and has no salvage vale. The net working capital will be recovered when the pro!ect ends. The re+ired retrn is 1/ percent. hat is the pro!ect's e+ivalent annal cost or &#C* #. -91/561 $. -91/,06 C. -91255 D. -91//06 &. -911

10/. Heer &nterprises needs someone to sppl( it with /000 cartons of machine screws per (ear to spport its manfactring needs over the ne%t 2 (ears and (o've decided to bid on the contract. It will cost (o 91120000 to install the e+ipment necessar( to start prodctionK (o'll depreciate this cost straight-line to )ero over the p ro!ect's life. ?o estimate that in 2 (ears this e+ipment can be salvaged for 92/000. ?or fi%ed prodction costs will be 9,0000 per (ear and (or variable prodction costs shold be 91.2/ per carton. ?o also need an initial investment in net working capital of 911/00 all of which will be recovered when the pro!ect ends. ?or ta% rate is , percent and (o re+ire a 1, percent retrn on (or investment. hat bid price per carton shold (o sbmit* #. 912.0 $. 91./ C. 91/.26 D. 91/.0, &. 91.51

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10. Chapman Machine 4hop is considering a -(ear pro!ect to improve its prodction efficienc(. $(ing a new machine press for 9/2000 is estimated to reslt in 916000 in annal preta% cost savings. The press falls in the M#C34 /-(ear class and it will have a salvage vale at the end of the pro!ect of 95000. The press also re+ires an initial investment in spare parts inventor( of 9000 along with an additional 9,00 in inventor( for each scceeding (ear of the pro!ect. The inventor( will retrn to its original level wh en the pro!ect ends. The shop's ta% rate is ,/ percent and its discont rate is 11 percent. 4hold the firm b( and install the machine press* h( or wh( not*

#. noK The net present vale is -9256. $. noK The net present vale is -92. C. (esK The net present vale is 911. D. (esK The net present vale is 9,16. &. (esK The net present vale is 95,.

102. &ads Indstrial 4(stems Compan( B&I4C is tr(ing to decide between two different conve(or belt s(stems. 4(stem # costs 92000 has a -(ear life and re+ires 911000 in preta% annal operating costs. 4(stem $ costs 9/12000 has an 5-(ear life and re+ires 926000 in preta% annal operating costs. $oth s(stems are to be depreciated straight-line to )ero over their lives and will have a )ero salvage vale. hichever s(stem is chosen it will not be replaced when it wears ot. The ta% rate is ,, percent and the discont rate is  percent. hich s(stem shold the firm choose and wh(* #. #K The net present vale is 911/1. $. #K The net present vale is -9/520. C. #K The net present vale is -9,11. D. $K The net present vale is 9,05. &. $" The net present vale is -9/1,.

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105. Consider a pro!ect to sppl( 0500000 postage stamps to the .4. =ostal 4ervice for the ne%t / (ears. ?o have an idle parcel of land available that cost 920000 five (ears agoK if the land were sold toda( it wold net (o 961000 afterta%. The land can be sold for 91/00000 after ta%es in / (ears. ?o will need to install 9,/000 in new manfactring plant and e+ipment to actall( prodce the stampsK this plant and e+ipment will be depreciated straight-line to )ero over the pro!ect's /-(ear life. The e+ipment can be sold for 9/000 at the end of the pro!ect. ?o will also need 96000 in initial net working capital for the pro!ect and an additional investment of 9,5000 in ever( (ear thereafter. #ll net working capital will be recovered when the pro!ect ends. ?or prodction costs are 0.,5 cents per stamp and (o have fi%ed costs of 905000 per (ear. ?or ta% rate is ,1 percent and (or re+ired retrn on this pro!ect is 11 percent. hat bid price per stamp shold (o sbmit* #. 90.015 $. 90.00 C. 90.0, D. 90.0 &. 90.06

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Chapter 10 Making Capital Investment Decisions #nswer 7e(


1. The difference between a firm's ftre cash flows if it accepts a pro!ect and the firm's ftre cash flows if it does not accept the pro!ect is referred to as the pro!ect's" A. incremental cash flows. $. internal cash flows. C. e%ternal cash flows. D. erosion effects. &. financing cash flows. 3efer to section 10.1

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%" &oic: (ncremental cas) flows

. The fact that a proposed pro!ect is anal()ed based on the pro!ect's incremental cash flows is the assmption behind which one of the following principles* #. nderl(ing vale principle B. stand-alone principle C. e+ivalent cost principle D. salvage principle &. fndamental principle 3efer to section 10.1

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%" &oic: Stand$along rincile

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,. hich one of the following costs was incrred in the past and cannot be recoped* #. incremental $. side C. snk D. opportnit( &. erosion 3efer to section 10.

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: Sun+ cost

. The option that is foregone so that an asset can be tili)ed b( a specific pro!ect is referred to as which one of the following* #. salvage vale $. wasted vale C. snk cost D. opportnit( cost &. erosion 3efer to section 10.

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: Oortunity cost

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/. hich one of the following best describes the concept of erosion* #. e%penses that have alread( been incrred and cannot be recovered $. change in net working capital related to implementing a new pro!ect C. the cash flows of a new pro!ect that come at the e%pense of a firm's e%isting cash flows D. the alternative that is forfeited when a fi%ed asset is tili)ed b( a pro!ect &. the differences in a firm's cash flows with and withot a particlar pro!ect 3efer to section 10.

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: ,rosion

. hich one of the following best describes pro forma financial statements* #. financial statements e%pressed in a foreign crrenc( $. financial statements where the assets are e%pressed as a percentage of total assets and costs are e%pressed as a percentage of sales C. financial statements showing pro!ected vales for ftre time periods D. financial statements e%pressed in real dollars given a stated base (ear &. financial statements where all acconts are e%pressed as a percentage of last (ear's vales 3efer to section 10.,

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%&oic: .ro forma financial statements

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2. hich one of the following is the depreciation method which allows accelerated write-offs of propert( nder varios lifetime classifications* #. I33 B. #C34 C. ##3 D. straight-line to )ero &. straight-line with salvage 3efer to section 10.

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Accelerated cost reco!ery system

5. The depreciation ta% shield is best defined as the" #. amont of ta% that is saved when an asset is prchased. $. ta% that is avoided when an asset is sold as salvage. C. amont of ta% that is de when an asset is sold. D. amont of ta% that is saved becase of the depreciation e%pense. &. amont b( which the afterta% depreciation e%pense lowers net income. 3efer to section 10./

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: Dereciation ta1 s)ield

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6. The annal annit( stream of pa(ments that has the same present vale as a pro!ect's costs is referred to as which one of the following* #. (earl( incremental costs $. snk costs C. opportnit( costs D. erosion cost E. e+ivalent annal cost 3efer to section 10.

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$ Section: "#%2 &oic: ,3ui!alent annual cost

10. 7elle('s $askets makes handmade baskets for distribtion to pscale retail otlets. The firm is crrentl( considering making handmade wreaths as well. hich o ne of the following is the best e%ample of an incremental operating cash flow related to the wreath pro!ect* #. storing spplies in the same space crrentl( sed for materials storage $. tili)ing the basket manager to oversee wreath prodction C. hiring additional emplo(ees to handle the increased workload shold the firm accept the wreath pro!ect D. researching the market to determine if wreath sales might be profitable before deciding to proceed &. planning on lower interest e%pense b( assming the proceeds of the wreath sales will be sed to redce the firm's crrentl( otstanding debt 3efer to section 10.1

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%" &oic: 4ele!ant cas) flows

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11. Danielle's is a frnitre store that is considering adding ap pliances to its offerings. hich of the following shold be considered incremental cash flows of this pro!ect* I. tili)ing the credit offered b( a spplier to prchase the appliance inventor( II. benefiting from increased frnitre sales to appliance cstomers III. borrowing mone( from a bank to fnd the appliance pro!ect I8. prchasing parts for inventor( to handle an( appliance repairs that might be necessar( #. I and II onl( $. III and I8 onl( C. I II and I8 onl( D. II III and I8 onl( &. I II III and I8 3efer to sections 10.1 and 10.

AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%" and "#%* &oic: 4ele!ant cas) flows

1. The stand-alone principle advocates that pro!ect anal(sis shold be based solel( on which one of the following costs* #. snk $. total C. variable D. incremental &. fi%ed 3efer to section 10.1

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%" &oic: (ncremental costs

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1,. hich one of the following is an e%ample of a snk cost* #. 91/00 of lost sales becase an item was ot of stock B. 9100 paid to repair a machine last (ear C. 90000 pro!ect that mst be forfeited if another pro!ect is accepted D. 9/00 redction in crrent shoe sales if a store commences selling sandals &. 91500 increase in comic book sales if a store commences selling p))les 3efer to section 10.

AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: Sun+ cost

1. : ; < =lastic Molders spent 9100 last week repairing a machine. This week the compan( is tr(ing to decide if the machine cold be better tili)ed if the( assigned it a proposed pro!ect. hen anal()ing the proposed pro!ect the 9100 shold be treated as which t(pe of cost* #. opportnit( $. fi%ed C. incremental D. erosion E. snk 3efer to section 10.

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: Sun+ cost

10-,


1/. hich one of the following best illstrates erosion as it relates to a hot dog stand located on the beach* #. providing both ketchp and mstard for its cstomer's se $. repairing the roof of the hot dog stand becase of water damage C. selling fewer hot dogs becase hambrgers were added to the men D. offering >rench fries bt not onion rings &. losing sales de to bad weather 3efer to section 10.

AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: ,rosion

1. hich of the following shold be inclded in the anal(sis of a new prodct* I. mone( alread( spent for research and development of the new prodct II. redction in sales for a crrent prodct once the new prodct is introdced III. increase in acconts receivable needed to finance sales of the new prodct I8. market vale of a machine owned b( the firm which will be sed to prodce the new prodct #. I and III onl( $. II and I8 onl( C. I II and III onl( D. II III and I8 onl( &. I II III and I8 3efer to section 10.

AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: (ncremental cas) flows

10-


12. ?o are considering the prchase of a new machine. ?or anal(sis incldes the evalation of two machines which have differing initial and ongoing costs and differing lives. hichever machine is prchased will be replaced at the end of its sefl life. ?o shold select the machine which has the" #. longest life. $. highest annal operating cost. C. lowest annal operating cost. D. highest e+ivalent annal cost. E. lowest e+ivalent annal cost. 3efer to section 10.


15. The bid price is" #. an afterta% price. $. the afterta% contribtion margin. C. the highest price (o shold charge if (o want the pro!ect. D. the onl( price (o can bid if the pro!ect is to be profitable. E. the minimm price (o shold charge if (o want to financiall( breakeven. 3efer to section 10.

AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$Section: "#%2 &oic: Bid rice

10-/


16. hich one of the following will increase a bid price* #. a decrease in the fi%ed costs $. a redction in the net working capital re+irement C. a redction in the firm's ta% rate D. an increase in the salvage vale E. an increase in the re+ired rate of retrn 3efer to section 10.

AACSB: N/A Bloom's: Comre)ension Difficulty: (ntermediate Learning Obecti!e: "#$Section: "#%2 &oic: Bid rice

0. #ll of the following are related to a proposed pro!ect. hich of these shold be inclded in the cash flow at time )ero* I. prchase of 9100 of parts inventor( needed to spport the pro!ect II. loan of 91/000 sed to finance the pro!ect III. depreciation ta% shield of 91100 I8. 9/00 of e+ipment needed to commence the pro!ect #. I and II onl( B. I and I8 onl( C. II and I8 onl( D. I II and I8 onl( &. I II III and I8 3efer to section 10.

AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: .roect cas) flows

10-


1. Changes in the net working capital re+irements" A. can affect the cash flows of a pro!ect ever( (ear of the pro!ect's life. $. onl( affect the initial cash flows of a pro!ect. C. onl( affect the cash flow at time )ero and the final (ear of a pro!ect. D. are generall( e%clded from pro!ect anal(sis de to their irrelevance to the total pro!ect. &. reflect onl( the changes in the crrent asset acconts. 3efer to section 10.

AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Net wor+ing caital

. hich one of the following is a pro!ect cash inflow* Ignore an( ta% effects. #. decrease in acconts pa(able $. increase in inventor( C. decrease in acconts receivable D. depreciation e%pense based on M#C34 &. e+ipment ac+isition 3efer to section 10.

AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: .roect cas) flows

10-2


,. @et working capital" #. can be ignored in pro!ect anal(sis becase an( e%penditre is normall( recoped at the end of the pro!ect. $. re+irements sch as an increase in acconts receivable create a cash inflow at the beginning of a pro!ect. C. is rarel( affected when a new prodct is introdced. D. can create either a cash inflow or a cash otflow at time )ero of a pro!ect. &. is the onl( e%penditre where at least a partial recover( can be made at the end of a pro!ect. 3efer to section 10.

AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Net wor+ing caital

. The operating cash flow of a cost ctting pro!ect" #. is e+al to the depreciation ta% shield. $. is e+al to )ero becase there is no incremental sales. C. can onl( be anal()ed b( pro!ecting the sales and costs for a firm's entire operations. D. incldes an( changes that occr in the crrent acconts. E. can be positive even thogh there are no sales. 3efer to section 10.

AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%2 &oic: Cost reduction roect

10-5


/. =ro forma statements for a proposed pro!ect shold" I. be compiled on a stand-alone basis. II. inclde all the incremental cash flows related to the pro!ect. III. generall( e%clde interest e%pense. I8. inclde all pro!ect-related fi%ed asset ac+isitions and disposals. #. I and II onl( $. II and III onl( C. I II and I8 onl( D. II III and I8 onl( E. I II III and I8 3efer to section 10.,

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%&oic: .ro forma statement

. hich one of the following statements is correct* #. =ro!ect anal(sis shold onl( inclde the cash flows that affect the income statement. B. # pro!ect can create a positive operating cash flow withot affecting sales. C. The depreciation ta% shield creates a cash otflow for a pro!ect. D. Interest e%pense shold alwa(s be inclded as a cash otflow when anal()ing a pro!ect. &. The opportnit( cost of a compan(-owned bilding that is going to be sed in a new pro!ect shold be inclded as a cash inflow to the pro!ect. 3efer to section 10.

AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%2 &oic: Cost cutting roect

10-6


2. # compan( that tili)es the M#C34 s(stem of depreciation" #. will have e+al depreciation costs each (ear of an asset's life. B. will have a greater ta% shield in (ear two of a pro!ect than it wold have if the firm had opted for straight-line depreciation given the same depreciation life. C. can depreciate the cost of land if it so desires. D. will e%pense less than the entire cost of an asset. &. cannot e%pense an( of the cost of a new asset dring the first (ear of the asset's life. 3efer to section 10.

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: 5AC4S dereciation

10-/0


5. Morris Motors !st prchased some M#C34 /-(ear propert( at a cost of 91000. hich one of the following will correctl( give (o the book vale of this e+ipment at the end of (ear *

#. 91000AB1  0.0  0., B. 91000 × B1 - 0.0 - 0., C. 91000 × B0.0  0., D. E91000 × B1 - 0.0F × B1 - 0., &. 91000AEB1  0.0B1  0.,F 3efer to section 10.

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: 5AC4S dereciation

10-/1


6. 7e(ser =etrolem !st prchased some e+ipment at a cost of 92000. hat is the proper methodolog( for compting the depreciation e%pense e%p ense for (ear  if the e+ipment e+ip ment is classified as /-(ear propert( for M#C34*

#. 92000 × B1 - 0.0 × 0., #. 92000 $. 92000AB1 $. 92000AB1 - 0.0 - 0., C. 92000 C. 92000 × B1  0., D. 92000 D. 92000 × B1 - 0., E. 92000 × 0., 3efer to section 10.

AACSB: N/A Bloom's: Knowledge Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: 5AC4S dereciation

10-/


,0. The crrent book vale of a fi%ed asset that was prchased two (ears ago is sed in the comptation of which one of the following* #. depreciation #. depreciation ta% shield B. ta% de on the salvage vale of that asset C. crrent C. crrent (ear's operating cash flow D. change D. change in net working capital &. M#C34 &. M#C34 depreciation for the crrent (ear 3efer to section 10.

AACSB: N/A Bloom's: Comre)ension Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: &a1 on sal!age !alue

10-/,


,1. The net book vale of e+ipment will" #. remain #. remain constant over the life of the e+ipment. $. var( $. var( in response to changes in the market vale. C. decrease C. decrease at a constant rate when M#C34 depreciation is sed. D. increase D. increase over the ta%able life of an asset. E. decrease slower nder straight-line depreciation than nder M#C34. 3efer to section 10.

AACSB: N/A Bloom's: Comre)ension Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Boo+ !alue

,. Three (ears ago 7no% :lass prchased a machine for a ,-(ear pro!ect. The machine is being depreciated straight-line to )ero over a /-(ear period. Toda( the pro!ect ended and the machine was sold. hich one of the following correctl( defines the afterta% salvage vale of that machine* BT represents the relevant ta% rate #. 4ale #. 4ale price  B4ales price - $ook vale × T $. 4ale $. 4ale price  B4ales price - $ook $oo k vale × B1 - T C. 4ale price  B$ook vale - 4ale price × T D. 4ale D. 4ale price  B$ook vale - 4ale price × B1 - T &. 4ale &. 4ale price × B1 - T 3efer to section 10.

AACSB: N/A Bloom's: Knowledge Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Afterta1 sal!age !alue

10-/


,,. hich one of the following is a correct method for compting the operating cash flow of a pro!ect assming that the interest e%pense is e+al to )ero* #. &$IT  D $. &$IT - T C. @I  D D. B4ales - Costs × B1 - D × B1- T &. B4ales - Costs × B1 - T 3efer to section 10./

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: Bottom u oerating cas) flow

,. The operating cash flow for a pro!ect shold e%clde which one of the following* #. ta%es $. variable costs C. fi%ed costs D. interest e%pense &. depreciation ta% shield 3efer to section 10./

AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: Oerating cas) flow

10-//


,/. The bottom-p approach to compting the operating cash flow applies onl( when" #. both the depreciation e%pense and the interest e%pense are e+al to )ero. B. the interest e%pense is e+al to )ero. C. the pro!ect is a cost-ctting pro!ect. D. no fi%ed assets are re+ired for a pro!ect. &. both ta%es and the interest e%pense are e+al to )ero. 3efer to section 10./

AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: Bottom$u oerating cas) flow

,. The top-down approach to compting the operating cash flow" A. ignores noncash e%penses. $. applies onl( if a pro!ect increases sales. C. applies onl( to cost ctting pro!ects. D. is e+al to sales - costs - ta%es  depreciation. &. is sed solel( to compte a bid price. 3efer to section 10./

AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: &o$down oerating cas) flow

10-/


,2. Increasing which one of the following will increase the operating cash flow assming that the bottom-p approach is sed to compte the operating cash flow* #. erosion effects $. ta%es C. fi%ed e%penses D. salaries E. depreciation e%pense 3efer to section 10./

AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: Bottom$u oerating cas) flow

,5. hich one of the following statements is correct concerning bid prices* #. The bid price is the ma%imm price that a firm shold bid. B. # firm can sbmit a bid that is higher than the compted bid price and still break even. C. # bid price ignores ta%es. D. # bid price shold be compted based solel( on the operating cash flows of the pro!ect. &. # bid price shold be compted based on a )ero percent re+ired rate of retrn. 3efer to section 10.


10-/2


,6. Dan is comparing three machines to determine which one to prchase. The machines sell for differing prices have differing operating costs differing machine lives and will be replaced when worn ot. hich one of the following comptational methods shold Dan se as the basis for his decision* #. internal rate of retrn $. operating cash flow C. e+ivalent annal cost D. depreciation ta% shield &. bottom-p operating cash flow 3efer to section 10.


0. The e+ivalent annal cost method is sefl in determining" #. which one of two machines to prchase if the machines are mtall( e%clsive have differing lives and are a one-time prchase. $. the ta% shield benefits of depreciation given the prchase of new assets for a pro!ect. C. the operating cash flows of a cost-ctting pro!ect. D. which one of two investments to accept when the investments have different re+ired rates of retrn. E. which one of two machines shold be prchased when the machines are mtall( e%clsive have different machine lives and will be replaced once the( are worn ot. 3efer to section 10.


10-/5


1. hen sing the e+ivalent annal cost as a basis for deciding which e+ipment shold be prchased the e+ipment nder consideration mst fit which two of the following criteria* I. differing prodctive lives II. differing manfactrers III. re+ired replacement at end of economic life I8. differing initial cost #. I and II B. I and III C. I and I8 D. II and IIII &. II and I8 3efer to section 10.


. The e+ivalent annal cost considers which of the following* I. re+ired rate of retrn II. operating costs III. need for replacement I8. afterta% salvage vale #. I and II onl( $. II and I8 onl( C. II III and I8 onl( D. I II and I8 onl( E. I II III and I8 3efer to section 10.


10-/6


,. The bid price alwa(s assmes which one of the following* #. # pro!ect has a one-(ear life. $. The afterta% net income of the pro!ect is )ero. C. The net present vale of the pro!ect is )ero. D. #n( assets prchased will have a positive salvage vale at the end of the pro!ect. &. #ssets will be depreciated based on M#C34. 3efer to section 10.


. hich one of the following wold make a pro!ect nacceptable* #. cash inflow for net working capital at time )ero $. re+iring fi%ed assets that wold have no salvage vale C. an e+ivalent annal cost that e%ceeds that of an alternative pro!ect D. lack of revene generation &. a depreciation ta% shield that e%ceeds the vale of the interest e%pense 3efer to section 10.


10-0


/. Decreasing which one of the following will increase the acceptabilit( of a pro!ect* #. snk costs $. salvage vale C. depreciation ta% shield D. e+ivalent annal cost &. acconts pa(able re+irement 3efer to section 10.


. De%ter 4mith ; Co. is replacing a machine simpl( becase it has worn ot. The new machine will not affect either sales or operating costs and will not have an( salvage vale at the end of its /-(ear life. The firm has a , percent ta% rate ses straight-line depreciation over an asset's life and has a positive net income. :iven this which one of the following statements is correct* #. #s a pro!ect the new machine has a net present vale e+al to mins one times the machine's prchase price. $. The new machine will have a )ero rate of retrn. C. The new machine will generate positive operating cash flows at least in the first few (ears of its life. D. The new machine will create a cash otflow when the firm disposes of it at the end of its life. &. The new machine creates erosion effects. 3efer to section 10./

AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: Dereciation ta1 s)ield

10-1


2. 7ell('s Corner $aker( prchased a lot in Gil Cit(  (ears ago at a cost of 950000. Toda( that lot has a market vale of 9,0000. #t the time of the prchase the compan( spent 91/000 to level the lot and another 90000 to install storm drains. The compan( now wants to bild a new facilit( on that site. The bilding cost is estimated at 91.2 million. hat amont shold be sed as the initial cash flow for this pro!ect* #. -9120000 B. -91510000 C. -915/000 D. -915/000 &. -9150000 C>0 O -9,0000 - 9120000 O -91510000

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: 4ele!ant cas) flows

5. 4ailcloth ; More crrentl( prodces boat sails and is considering e%panding its operations to inclde awnings for homes and travel trailers. The compan( owns land beside its crrent manfactring facilit( that cold be sed for the e%pansion. The compan( boght this land / (ears ago at a cost of 9,16000. #t the time of prchase the compan( paid 9000 to level ot the land so it wold be sitable for ftre se. Toda( the land is valed at 96/000. The compan( crrentl( has some nsed e+ipment that it crrentl( owns valed at 9,5000. This e+ipment cold be sed for prodcing awnings if 91000 is spent for e+ipment modifications. Gther e+ipment costing 960000 will also be re+ired. hat is the amont of the initial cash flow for this e%pansion pro!ect* #. -925/000 $. -95,000 C. -95,/000 D. -95/6000 &. -955,000 C>0 O -96/000 - 9,5000 - 91000 - 960000 O -95,/000

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: 4ele!ant costs

10-


6. ebster ; Moore paid 91,6000 in cash for a piece of e+ipment , (ears ago. #t the beginning of last (ear the compan( spent 91000 to pdate the e+ipment with the latest technolog(. The compan( no longer ses this e+ipment in its crrent operations and has received an offer of 956000 from a firm that wold like to prchase it. ebster ; Moore is debating whether to sell the e+ipment or to e%pand its operations so that the e+ipment can be sed. hen evalating the e%pansion option what vale if an( shold the firm assign to this e+ipment as an initial cost of the pro!ect* #. 90 $. 91000 C. 956000 D. 9110000 &. 910000 3elevant vale O 956000

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: Oortunity cost

/0. The >lff( >eather sells cstomi)ed handbags. Crrentl( it sells 15000 handbags annall( at an average price of 956 each. It is considering adding a lower-priced line of handbags that sell for 9/6 each. The firm estimates it can sell 2000 of the lower-priced handbags bt will sell ,000 less of the higher-priced handbags b( doing so. hat is the amont of the sales that shold be sed when evalating the addition of the lower-priced handbags* A. 91000 $. 92/000 C. 91,000 D. 9,000 &. 950000 4ales O B2000 × 9/6  B-,000 × 956 O 91000

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: ,rosion

10-,


/1. Mason >arms prchased a bilding for 926000 eight (ears ago. 4i% (ears ago repairs were made to the bilding which cost 91,000. The annal ta%es on the propert( are 911000. The bilding has a crrent market vale of 95/000 and a crrent book vale of 96000. The bilding is totall( paid for and solel( owned b( the firm. If the compan( decides to se this bilding for a new pro!ect what vale if an( shold be inclded in the initial cash flow of the pro!ect for this bilding* #. 96000 $. 9/5000 C. 95/000 D. 95/000 &. 96/,000 Gpportnit( cost O 95/000


/. ?o own a hose that (o rent for 91100 a month. The maintenance e%penses on the hose average 900 a month. The hose cost 916000 when (o prchased it  (ears ago. # recent appraisal on the hose valed it at 9,6000. If (o sell the hose (o will incr 91000 in real estate fees. The annal propert( ta%es are 9000. ?o are deciding whether to sell the hose or convert it for (or own se as a professional office. hat vale shold (o place on this hose when anal()ing the option of sing it as a professional office* #. 911500 $. 91000 C. 9/000 D. 9,/000 &. 9,6000 Gpportnit( cost O 9,6000 - 91000 O 9/000


10-


/,. @elson Mfg. owns a manfactring facilit( that is crrentl( sitting idle. The facilit( is located on a piece of land that originall( cost 91/6000. The facilit( itself cost 910000 to bild. #s of now the book vale of the land and the facilit( are 91/6000 and 9/5000 respectivel(. The firm owes no debt on either the land or the facilit( at the present time. The firm received a bid of 91/00000 for the land and facilit( last week. The firm's management re!ected this bid even thogh the( were told that it is a reasonable offer in toda('s market. If the firm was to consider sing this land and facilit( in a new pro!ect what cost if an( shold it inclde in the pro!ect anal(sis* #. 90 $. 912000 C. 910000 D. 91/00000 &. 9116000 3elevant cost O 91/00000


/. Cool Comfort crrentl( sells ,00 Class # spas /0 Class C spas and 00 del%e model spas each (ear. The firm is considering adding a mid-class spa and e%pects that if it does it can sell ,2/ of them. However if the new spa is added Class # sales are e%pected to decline to / nits while the Class C sales are e%pected to decline to 00. The sales of the del%e model will not be affected. Class # spas sell for an average of 91000 each. Class C spas are priced at 9000 and the del%e model sells for 912000 each. The new mid-range spa will sell for 95000. hat is the vale of the erosion* #. 900000 $. 9100000 C. 91500000 D. 900000 &. 9,600000 &rosion O EB,00 - / × 91000F  EB/0 - 00 × 9000F O 900000

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: ,rosion

10-/


//. efferson ; 4ons is evalating a pro!ect that will increase annal sales b( 91,5000 91,500 0 and annal costs b( 96000. The pro!ect will initiall( re+ire 9110000 in fi%ed assets that will be depreciated straight-line to a )ero book vale over the -(ear life of the pro!ect. The applicable ta% rate is , percent. hat is the operating cash flow for this pro!ect* #. 9110 #. 9110 $. 9660 $. 9660 C. 9,520 D. 950 D. 950 &. 90 &. 90 GC> O B91,5000 - 96000B1 - 0.,  B9110000AB0., O 9,520

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: Dereciation ta1 s)ield OC6

/. Marie's >ashions is considering a pro!ect that will re+ire 95 000 in net working capital and 952000 in fi%ed assets. The pro!ect is e%pected to prodce annal sales of 92/000 with associated costs of 9/2000. The pro!ect p ro!ect has a /-(ear life. The compan( ses straight-line depreciation to a )ero book vale over the life of the pro!ect. The ta% rate is ,0 percent. hat is the operating cash flow for this pro!ect* #. -91/0 #. -91/0 $. -9/50 $. -9/50 C. 90 C. 90 D. 91/50 D. 91/50 E. 91250 GC> O B92/000 - 9/2000B1 - 0.,0  B952000A/B0.,0 O 91250

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: Dereciation ta1 s)ield OC6

10-


/2. The $each Hose has sales of 925000 and a profit margin of 11 percent. The annal depreciation e%pense is 91000. hat is the amont of the operating cash c ash flow if the compan( has no long-term debt* #. 9520 #. 9520 $. 920 $. 920 C. 950 C. 950 D. 91000 &. 910120 &. 910120 GC> O B925000 × 0.11  91000 O 91000

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: Bottom$u OC6

/5. The =ancake Hose has sales of 91000 depreciation of 92000 and net working capital of 915000. The firm has a ta% rate of ,/ percent and a profit margin of  percent. The firm has no interest e%pense. hat is the amont of the operating cash flow* #. 965/0 #. 965/0 B. 91//0 C. 91250 C. 91250 D. 9550 D. 9550 &. 9,,/0 &. 9,,/0 GC> O B91000 × 0.0  92000 O 91//0

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: Bottom$u OC6

10-2


/6. @orthern 3ailwa( is considering a pro!ect which will prodce annal sales of 962/000 and increase cash e%penses b( 95/6000. If the pro!ect is implemented ta%es will increase from 911000 to 91/000 and depreciation will increase from 916000 to 92000. The compan( is debt-free. hat is the amont of the operating cash flow sing the top-down approach* #. 9/000 #. 9/000 B. 910,000 C. 91/2000 C. 91/2000 D. 9151000 D. 9151000 &. 906000 &. 906000 GC> O 962/000 - 95/6000 - B91/000 - 911000 O 910,000

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: &o$down OC6

0. $i- O 95000 - 912/00 - 9,000 O 92/00

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: &o$down OC6

10-5


1. # proposed e%pansion pro!ect is e%pected to increase sales of < Ticker's 4tore b( 9,/000 and increase cash e%penses b( 91000. The pro!ect will cost 9000 and be depreciated sing straight-line depreciation to a )ero book vale over the -(ear life of the pro!ect. The store has a marginal ta% rate of ,0 percent. hat is the operating cash flow of the pro!ect sing the ta% shield approach* #. 9/00 $. 92500 C. 91100 D. 91,,00 &. 9100 GC> O B9,/000 - 91000 B1 - 0.,0  B9000A B0.,0 O 91100

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: &a1$s)ield OC6

. The <mber ?ard is considering adding a new prodct line that is e%pected to increase annal sales b( 9,5000 and cash e%penses b( 915000. The initial investment will re+ire 96000 in fi%ed assets that will be depreciated sing the straight-line method to a )ero book vale over the -(ear life of the pro!ect. The compan( has a marginal ta% rate of , percent. hat is the annal vale of the depreciation ta% shield* A. 9/10 $. 91,10 C. 9/50 D. 9,/0 &. 9150 Depreciation ta% shield O B96000A × 0., O 9/10

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: Dereciation ta1 s)ield

10-6


,. $ernie's $everages prchased some fi%ed assets classified as /-(ear propert( for M#C34. The assets cost 952000. hat will the accmlated depreciation be at the end of (ear three*

#. 91,/0 $. 9/0/ C. 9,51 D. 952/6 E. 916 Depreciation O 952000 × B0.0  0.,  0.16 O 916

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Accumulated 5AC4S dereciation

10-20


. ?o !st prchased some e+ipment that is classified as /-(ear propert( for M#C34. The e+ipment cost 912000. hat will the book vale of this e+ipment be at the end of  (ears shold (o decide to resell the e+ipment at that point in time*

#. 952.0 B. 9/01.0 C. 9,,.00 D. 911/65.0 &. 91,5/,.50 $ook 8ale O 912000 × B0.11/  0.0/2 O 9/01.0

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Boo+ !alue

10-21


/. =eterborogh Trcking !st prchased some fi%ed assets that are classified as ,-(ear propert( for M#C34. The assets cost 96500. hat is the amont of the depreciation e%pense in (ear ,*

#. 9/,2./ $. 91,2.12 C. 91/1.,5 D. 9166.11 &. 9122./ Depreciation, O 96500 × 0.151 O 91/1.,5

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: 5AC4S dereciation

10-2


. Crafter's 4ppl( prchased some fi%ed assets  (ears ago at a cost of 9,5200. It no longer needs these assets so it is going to sell them toda( for 9/000. The assets are classified as /(ear propert( for M#C34. hat is the net cash flow from this sale if the firm's ta% rate is ,0 percent*

#. 91,1.0 $. 915/2.00 C. 905,.5 D. 9,02.50 &. 9/11.06 $ook vale O 9,5200 × B1 - 0.0 - 0., O 915/2 #fterta% salvage O 9/000  EB915/2 - 9/000 × 0.,0F O 9,02.50

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Afterta1 sal!age

10-2,


2. ?o own some e+ipment that (o prchased  (ears ago at a cost of 91000. The e+ipment is /-(ear propert( for M#C34. ?o are considering selling the e+ipment toda( for 92//00. hich one of the following statements is correct if (or ta% rate is ,/ percent*

#. The ta% de on the sale is 9/. $. The book vale toda( is 91252/.0. C. The accmlated depreciation to date is 9,2,.50. D. The ta%able amont on the sale is 9,2,.50. E. The afterta% salvage vale is 91,5.5. #ccmlated depreciation O 91000 × B0.0  0.,  0.16  0.11/ O 91252/.0 $ook 8ale O 91000 - 91252/.0 O 9,2,.50 Ta%able gain on sale O 92//00 - 9,2,.50 O 9,512/.0 Ta% de O 9,512/.0 × 0.,/ O 91,,1., #fterta% salvage vale O 92//00 - 91,,1., O 91,5.5

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Afterta1 sal!age !alue

10-2


5. &dward's Manfactred Homes prchased some machiner(  (ears ago for 9,16000. These assets are classified as /-(ear propert( for M#C34. The compan( is replacing this machiner( toda( with newer machines that tili)e the latest in technolog(. The old machines are being sold for 910000 to a foreign firm for se in its prodction facilit( in 4oth #merica. hat is the afterta% salvage vale from this sale if the ta% rate is ,/ percent*

#. 91,/05 $. 910000 C. 91,1 D. 91/6 &. 9150 $ook vale O 9,16000 × B1 - 0.0 - 0., O 91/,10 Ta% on sale O B910000 - 91/,10 × 0.,/ O -9/6 Bta% savings #fter-ta% cash flow O 910000  9/6 O 91/6

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Afterta1 sal!age !alue

10-2/


6. $rno's <nch Conter is e%panding and e%pects operating cash flows of 9000 a (ear for  (ears as a reslt. This e%pansion re+ires 9,6000 in new fi%ed assets. These assets will be worthless at the end of the pro!ect. In addition the pro!ect re+ires 9,000 of net working capital throghot the life of the pro!ect. hat is the net present vale of this e%pansion pro!ect at a re+ired rate of retrn of 1 percent* #. 91522.6 $. 910,,.,, C. 9555.20 D. 961.05 E. 9,06./2

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%&oic: Net resent !alue

10-2


20. asper Metals is considering installing a new molding machine which is e%pected to prodce operating cash flows of 92,000 a (ear for 2 (ears. #t the beginning of the pro!ect inventor( will decrease b( 91000 acconts receivables will increase b( 91000 and acconts pa(able will increase b( 91/000. #ll net working capital will be recovered at the end of the pro!ect. The initial cost of the molding machine is 96000. The e+ipment will be depreciated straight-line to a )ero book vale over the life of the pro!ect. The e+ipment will be salvaged at the end of the pro!ect creating a 95000 afterta% cash flow. #t the end of the pro!ect net working capital will retrn to its normal level. hat is the net present vale of this pro!ect given a re+ired retrn of 1./ percent* #. 92211.0 $. 92615.50 C. 95,,.01 D. 9506.2 &. 9526/./ C>0 O -96000  91000 - 91000  91/000 O -9,6000 C02 O 92,000  95000 - 91000  91000 - 91/000 O 9111000

AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Obecti!e: "#$" Section: "#%&oic: Net resent !alue

10-22


21. # pro!ect will prodce an operating cash flow of 9100 a (ear for 5 (ears. The initial fi%ed asset investment in the pro!ect will be 95600. The net afterta% salvage vale is estimated at 911000 and will be received dring the last (ear of the pro!ect's life. hat is the net present vale of the pro!ect if the re+ired rate of retrn is 1 percent* #. 9,2./ B. 95020. C. 9,2./ D. 9,6020. &. 9100.5,

AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Obecti!e: "#$" Section: "#%&oic: Net resent !alue

2. 7wik Jn Hot Dogs is considering the installation of a new compteri)ed pressre cooker that will ct annal operating costs b( 9,000. The s(stem will cost 9,6600 to prchase and install. This s(stem is e%pected to have a -(ear life and will be depreciated to )ero sing straight-line depreciation. hat is the amont of the earnings before interest and ta%es for this pro!ect* #. 910// B. 91,0/ C. 91/// D. 91600 &. 91600 &arnings before interest and ta%es O 9,000 - B9,6600A O 91,0/

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%2 &oic: Cost$cutting ,B(&

10-25


2,. Colors and More is considering replacing the e+ipment it ses to prodce cra(ons. The e+ipment wold cost 91.,2 million have a 1-(ear life and lower manfactring costs b( an estimated 9,0000 a (ear. The e+ipment will be depreciated sing straight-line depreciation to a book vale of )ero. The re+ired rate of retrn is 1/ percent and the ta% rate is ,/ percent. hat is the net income from this proposed pro!ect* #. 915/05.2/ $. 9011. C. 91.2 D. 91,,61.2 &. 91,206.5 @et income O E9,0000 - B91,20000A1F × E1 - 0.,/F O 91,,61.2

AACSB: Analytic Bloom's: Alication Difficulty: (ntermediate Learning Obecti!e: "#$" Section: "#%2 &oic: Cost$Cutting net income

10-26


2. :atewa( Commnications is considering a pro!ect with an initial fi%ed asset cost of 9. million which will be depreciated straight-line to a )ero boo k vale over the 10-(ear life of the pro!ect. #t the end of the pro!ect the e+ipment will be sold for an estimated 9,00000. The pro!ect will not directl( prodce an( sales bt will redce operating costs b( 92/000 a (ear. The ta% rate is ,/ percent. The pro!ect will re+ire 9/000 of inventor( which will be recoped when the pro!ect ends. 4hold this pro!ect be implemented if the firm re+ires a 1 percent rate of retrn* h( or wh( not* #. @oK The @=8 is -9126,2.6. $. @oK The @=8 is -95250.5. C. ?esK The @=8 is 9/150., D. ?esK The @=8 is 9,52/1.2 E. ?esK The @=8 is 960./2 Initial cash flow O -90000 - 9/000 O -9/0/000 GC> O 92/000B1 - 0.,/  B90000A10B0.,/ O 9//2,/0 >inal cash flow O 9/000  9,00000 B1 - 0.,/ O 90000

AACSB: Analytic Bloom's: Analysis Difficulty: (ntermediate Learning Obecti!e: "#$* Section: "#%- and "#%2 &oic: Cost$cutting N.7

10-50


2/. ?o are working on a bid to bild two cit( parks a (ear for the ne%t three (ears. This pro!ect re+ires the prchase of 9150000 of e+ipment that will be depreciated sing straightline depreciation to a )ero book vale over the ,-(ear pro!ect life. The e+ipment can be sold at the end of the pro!ect for 9,000. ?o will also need 90000 in net working capital for the dration of the pro!ect. The fi%ed costs will be 91000 a (ear and the variable costs will be 915000 per park. ?or re+ired rate of retrn is 1/ percent and (or ta% rate is , percent. hat is the minimal amont (o shold bid per park* B3ond (or answer to the nearest 9100 #. 92/00 $. 91500 C. 91/,00 D. 9156100 E. 91200

@I O 92/,2,./ - B9150000A, O 91/,2,./ &$T O 91/,2,./AB1 - 0., O 9,6,.1 4ales O 9,6,.1  B9150000A,  91000  B915000 ×  O 9,/6,.1 $id per park O 9,/6,.1A O 912.21 hen ronded to the nearest 9100 the bid price is 91200.

AACSB: Analytic Bloom's: Analysis Difficulty: (ntermediate Learning Obecti!e: "#$Section: "#%2 &oic: Bid rice

10-51


2. ?o are working on a bid to bild two apartment bildings a (ear for the ne%t / (ears for a local college. This pro!ect re+ires the prchase of 92/0000 of e+ipment that will be depreciated sing straight-line depreciation to a )ero book vale over the pro!ect's life. The e+ipment can be sold at the end of the pro!ect for 9,/000. ?o will also need 910000 in net working capital over the life of the pro!ect. The fi%ed costs will be 95000 a (ear and the variable costs will be 9165000 per bilding. ?or re+ired rate of retrn is 1./ percent for this pro!ect and (or ta% rate is ,/ percent. hat is the minimal amont ronded to the nearest 9100 (o shold bid per bilding* #. 91,200 $. 9156/00 C. 912,,000 D. 925000 &. 9,/600

@I O 9062/0.,0 - B92/0000A/ O 9/62/0.,0 &$T O 9/62/0.,0AB1 - 0.,/ O 9616,./ 4ales O 9616,./  B92/0000A/  95000  B9165000 ×  O 9,/6,./ $id per bilding O 9,/6,./A O 912,61.22 hen ronded to the nearest 9100 the bid price is 912,,000

AACSB: Analytic Bloom's: Analysis Difficulty: (ntermediate Learning Obecti!e: "#$Section: "#%2 &oic: Bid rice

10-5


22. #tomated Manfactrers ses high-tech e+ipment to prodce speciali)ed alminm prodcts for its cstomers. &ach one of these machines costs 9150000 to prchase pls an additional 96000 a (ear to operate. The machines have a -(ear life after which the( are worthless. hat is the e+ivalent annal cost of one these machines if the re+ired retrn is 1 percent* A. -9/0/2 $. -92106 C. -9,01/5 D. -96/2 &. -9/62

AACSB: Analytic Bloom's: Analysis Difficulty: (ntermediate Learning Obecti!e: "#$ Section: "#%2 &oic: ,3ui!alent annual cost

10-5,


25. Champion $akers ses speciali)ed ovens to bake its bread. Gne oven costs 956000 and lasts abot  (ears before it needs to be replaced. The annal operating cost per over is 91000. hat is the e+ivalent annal cost of an oven if the re+ired rate of retrn is 1, percent* A. -92,5 $. -95,1, C. -9,02 D. -900/1 &. 91610


10-5


26. =recision Tool is anal()ing two machines to determine which one it shold prchase. The compan( re+ires a 1/ percent rate of retrn and ses straight-line depreciation to a )ero book vale over the life of its e+ipment. Machine # has a cost of 956000 annal operating costs of 9,00 and a -(ear life. Machine $ costs 9112000 has annal operating costs of 916/00 and has a /-(ear life. hichever machine is prchased will be replaced at the end of its sefl life. =recision Tool shold prchase Machine LLLLL becase it lowers the firm's annal cost b( appro%imatel( LLLLLLL as compared to the other machine. A. #K 916/. $. #K 9120 C. $K 916/ D. $K 9120 &. $K 912/1

Difference in costs O -9,,52,.6 - B-9,//201., O 916.6 Machine # lowers the firm's annal costs b( abot 916/.


10-5/


50. The $ck 4tore is considering a pro!ect that will re+ire additional inventor( of 9 1000 and will increase acconts pa(able b( 9151000. #cconts receivable are crrentl( 9//000 and are e%pected to increase b( 6 percent if this pro!ect is accepted. hat is the pro!ect's initial cash flow for net working capital* A. -95/0 $. -91/0 C. 91/0 D. 9,/0 &. 9/0 @C re+irement O -91000  9151000 - B9//000 × 0.06 O - 95/0

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Net wor+ing caital

51. The Card 4hoppe needs to maintain , percent of its sales in net working capital. Crrentl( the shoppe is considering a -(ear pro!ect that will increase sales from its crrent level of 9,52000 to 91000 the first (ear and to 9/000 a (ear for the following / (ears of the pro!ect. hat amont shold be inclded in the pro!ect anal(sis for net working capital in (ear  of the pro!ect* #. -91260 $. -9660 C. 90 D. 9660 E. 91260 @C recover( O B9/000 - 9,52000 × 0., O 91260


10-5


5. Home >rnishings &%press is e%panding its prodct offerings to reach a wider range of cstomers. The e%pansion pro!ect incldes increasing the floor inventor( b( 9,0000 and increasing its debt to sppliers b( 20 percent of that amont. The compan( will also spend 9/0000 for a bilding contractor to e%pand the si)e of its showroom. #s part of the e%pansion plan the compan( will be offering credit to its cstomers and ths e%pects acco nts receivable to rise b( 960000. >or the pro!ect anal(sis what amont shold be sed as the initial cash flow for net working capital* #. -9,6000 $. -920000 C. -91/000 D. -916000 &. -9,61000 @C re+irement O -9,0000  B0.20 × 9,0000 - 960000 O -916000


10-52


5,. Hollister ; Hollister is considering a new pro!ect. The pro!ect will re+ire 9/000 for new fi%ed assets 915000 for additional inventor( and 9,6000 for additional acconts receivable. 4hort-term debt is e%pected to increase b( 91/000. The pro!ect has a -(ear life. The fi%ed assets will be depreciated straight-line to a )ero book vale over the life of the pro!ect. #t the end of the pro!ect the fi%ed assets can be sold for 0 percent of their original cost. The net working capital retrns to its original level at the end of the pro!ect. The pro!ect is e%pected to generate annal sales of 952/000 with costs of 90000. The ta% rate is , percent and the re+ired rate of retrn is 1 percent. hat is the pro!ect's cash flow at time )ero* #. -9/,000 B. -91000 C. -920000 D. -9226000 &. -96000 Initial cash flow O -9/000 - 915000 - 9,6000  91/000 O -91000

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: (nitial cas) flow

10-55


5. Hollister ; Hollister is considering a new pro!ect. The pro!ect will re+ire 9/000 for new fi%ed assets 915000 for additional inventor( and 9,6000 for additional acconts receivable. 4hort-term debt is e%pected to increase b( 91/000. The pro!ect has a -(ear life. The fi%ed assets will be depreciated straight-line to a )ero book vale over the life of the pro!ect. #t the end of the pro!ect the fi%ed assets can be sold for 0 percent of their original cost. The net working capital retrns to its original level at the end of the pro!ect. The pro!ect is e%pected to generate annal sales of 952/000 and costs of 90000. The ta% rate is , percent and the re+ired rate of retrn is 1 percent. hat is the amont of the earnings before interest and ta%es for the first (ear of this pro!ect* #. 96250 $. 91,0000 C. 915000 D. 912,0 &. 9,/000 &$IT O 952/000 - 90000 - B9/000A O 915000

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%&oic: .roect earnings

10-56


5/. Hollister ; Hollister is considering a new pro!ect. The pro!ect will re+ire 9/000 for new fi%ed assets 915000 for additional inventor( and 9,6000 for additional acconts receivable. 4hort-term debt is e%pected to increase b( 91/000. The pro!ect has a -(ear life. The fi%ed assets will be depreciated straight-line to a )ero book vale over the life of the pro!ect. #t the end of the pro!ect the fi%ed assets can be sold for 0 percent of their original cost. The net working capital retrns to its original level at the end of the pro!ect. The pro!ect is e%pected to generate annal sales of 952/000 and costs of 90000. The ta% rate is , percent and the re+ired rate of retrn is 1 percent. hat is the amont of the afterta% cash flow from the sale of the fi%ed assets at the end of this pro!ect* #. 9,/6 B. 9560 C. 91000 D. 9521/ &. 9,/0 #fterta% salvage vale O 9/000 × 0.0 × B1 - 0., O 9560


10-60


5. Hollister ; Hollister is considering a new pro!ect. The pro!ect will re+ire 9/000 for new fi%ed assets 915000 for additional inventor( and 9,6000 for additional acconts receivable. 4hort-term debt is e%pected to increase b( 91/000. The pro!ect has a -(ear life. The fi%ed assets will be depreciated straight-line to a )ero book vale over the life of the pro!ect. #t the end of the pro!ect the fi%ed assets can be sold for 0 percent of their original cost. The net working capital retrns to its original level at the end of the pro!ect. The pro!ect is e%pected to generate annal sales of 952/000 and costs of 90000. The ta% rate is , percent and the re+ired rate of retrn is 1 percent. hat is the cash flow recover( from net working capital at the end of this pro!ect* #. 91000 $. 92/000 C. 96000 D. 9,000 &. 9000 @et working capital recover( O 915000  9,6000 - 91/000 O 96000

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Net wor+ing caital reco!ery

10-61


52. 7e(ser Mining is considering a pro!ect that will re+ire the prchase of 9650000 in new e+ipment. The e+ipment will be depreciated straight-line to a )ero book vale over the 2(ear life of the pro!ect. The e+ipment can be scraped at the end of the pro!ect for / percent of its original cost. #nnal sales from this pro!ect are estimated at 90000. @et working capital e+al to 0 percent of sales will be re+ired to spport the pro!ect. #ll of the net working capital will be recoped. The re+ired retrn is 1 percent and the ta% rate is ,/ percent. hat is the vale of the depreciation ta% shield in (ear  of the pro!ect* A. 96000 $. 9/00 C. 9500 D. 92100 &. 92/00 Depreciation ta% shield O 9650000A2 × 0.,/ O 96000

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Dereciation ta1 s)ield

55. 7e(ser Mining is considering a pro!ect that will re+ire the prchase of 9650000 in new e+ipment. The e+ipment will be depreciated straight-line to a )ero book vale over the 2(ear life of the pro!ect. The e+ipment can be scraped at the end of the pro!ect for / percent of its original cost. #nnal sales from this pro!ect are estimated at 90000. @et working capital e+al to 0 percent of sales will be re+ired to spport the pro!ect. #ll of the net working capital will be recoped. The re+ired retrn is 1 percent and the ta% rate is ,/ percent. hat is the amont of the afterta% salvage vale of the e+ipment* #. 9121/0 B. 9,15/0 C. 9115500 D. 9,200 &. 9,,000 #fterta% salvage vale O 9650000 × 0.0/ × B1 - 0.,/ O 9,15/0


10-6


56. 7e(ser Mining is considering a pro!ect that will re+ire the prchase of 9650000 in new e+ipment. The e+ipment will be depreciated straight-line to a )ero book vale over the 2(ear life of the pro!ect. The e+ipment can be scraped at the end of the pro!ect for / percent of its original cost. #nnal sales from this pro!ect are estimated at 90000. @et working capital e+al to 0 percent of sales will be re+ired to spport the pro!ect. #ll of the net working capital will be recoped. The re+ired retrn is 1 percent and the ta% rate is ,/ percent. hat is the recover( amont attribtable to net working capital at the end of the pro!ect* #. 91000 $. 9/00 C. 95000 D. 9125000 &. 916000 @C recaptre O 90000 × 0.0 O 95000

AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Net wor+ing caital reco!ery

Essay Questions

60. In a single sentence e%plain how (o can determine which cash flows shold be inclded in the anal(sis of a pro!ect. #n( changes in cash flows that will reslt from accepting a new pro!ect shold be inclded in the anal(sis of that pro!ect. >eedback" 3efer to section 10.1

AACSB: 4eflecti!e t)in+ing Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%" &oic: 4ele!ant cas) flows

10-6,


61. hat is the formla for the ta%-shield approach to GC>* &%plain the two ke( points the formla illstrates. GC> O B4ales - Costs × B1 - T  Depreciation × T The formla illstrates that cash income and e%penses affect GC> on an afterta% basis. The formla also illstrates that even thogh depreciation is a non -cash e%pense it does affect GC> becase of the ta% savings reali)ed from the depreciation e%pense. >eedback" 3efer to section 10./

AACSB: 4eflecti!e t)in+ing Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: &a1$s)ield OC6

6. hat is the primar( prpose of compting the e+ivalent annal costs when comparing two machines* hat is the assmption that is being made abot each machine* The primar( prpose is to compte the annal cost of each machine on a comparable basis so that the least e%pensive machine can be identified given that the machines generall( have differing lives and costs. The assmption is that whichever machine is ac+ired it will be replaced at the end of its sefl life. >eedback" 3efer to section 10.

AACSB: 4eflecti!e t)in+ing Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$ Section: "#%2 &oic: ,3ui!alent annual cost

10-6


6,. #ssme a firm sets its bid price for a pro!ect at the minimm level as compted sing the disconted cash flow method. :iven this what do (o know abot the net present vale and the internal rate of retrn on the pro!ect as bid* The disconted cash flow approach to setting a bid price assmes the net present vale of the pro!ect will be )ero which means the internal rate of retrn mst e+al the re+ired rate. >eedback" 3efer to section 10.

AACSB: 4eflecti!e t)in+ing Bloom's: Analysis Difficulty: (ntermediate Learning Obecti!e: "#$Section: "#%2 &oic: Bid rice and N.7

6. Can the initial cash flow at time )ero for a pro!ect ever be a positive vale* If (es give an e%ample. If no e%plain wh( not. The initial cash flow can be a positive vale. >or e%ample if a pro!ect redced net working capital b( an amont that e%ceeded the initial cost for fi%ed assets the initial cash flow wo ld be a positive amont. >eedback" 3efer to section 10.

AACSB: 4eflecti!e t)in+ing Bloom's: Analysis Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: .roect cas) flows

10-6/


6/. How can two firms arrive at two different bid prices when bidding for the same !ob and given the same bid specifications* &ach bidding firm sall( arrives at a different calclated bid price becase the( se different assmptions in the evalation process sch as the estimated time to complete the pro!ect the material costs and the estimated labor costs. In addition firms often times have differing re+ired rates of retrn and ta% rates. >eedback" 3efer to section 10.

AACSB: 4eflecti!e t)in+ing Bloom's: Analysis Difficulty: Basic Learning Obecti!e: "#$Section: "#%2 &oic: Bid rice


6. innebagel Corp. crrentl( sells 500 motor homes per (ear at 9,00 each and 1150 l%r( motor coaches per (ear at 926600 each. The compan( wants to introdce a new portable camper to fill ot its prodct line. It hopes to sell 1620 of these campers per (ear at 91150 each. #n independent consltant has determined that if innebagel introdces the new campers it shold boost the sales of its e%isting motor homes b( 200 nits per (ear and redce the sales of its motor coaches b( 1 nits per (ear. hat is the amont that shold be sed as the annal sales figre when evalating this pro!ect* #. 9621,00 $. 9,0100,00 C. 9,111500 D. 9,,5,600 &. 9,256/00 4ales O B1620 × 91150  B200 × 9,00  B-1 × 926600 O 9,,5,600

AACSB: Analytic Bloom's: Analysis Difficulty: Basic ,OC 8: "#$* Learning Obecti!e: "#$" Section: "#%" &oic: 4ele!ant cas) flows

10-6


62. Consider the following income statement"

hat is the amont of the depreciation ta% shield* #. 9,02 B. 916 C. 9/65 D. 911 &. 9616 Depreciation ta% shield O 92/00 × ., O 916

AACSB: Analytic Bloom's: Alication Difficulty: Basic ,OC 8: "#$ Learning Obecti!e: "#$" Section: "#%0 &oic: Dereciation ta1 s)ield

10-62


65. Consider an asset that costs 912000 and is depreciated straight-line to )ero over its 11(ear ta% life. The asset is to be sed in a 2-(ear pro!ectK at the end of the pro!ect the asset can be sold for 9000. The relevant ta% rate is ,0 percent. hat is the afterta% cash flow from the sale of this asset* #. 9,1500 $. 9,00 C. 9,,,00 D. 9,100 E. 9,00 $ook vale at end of (ear 2 O 912000 × A11 O 9000 #fterta% salvage vale O 9000  EB9000 - 9000 × .,0F O 9,00

AACSB: Analytic Bloom's: Alication Difficulty: Basic ,OC 8: "#$9 Learning Obecti!e: "#$" Section: "#% &oic: Sal!age !alue

66. =hone Home Inc. is considering a new -(ear e%pansion pro!ect that re+ires an initial fi%ed asset investment of 9/.66 million. The fi%ed asset will be depreciated straight-line to )ero over its -(ear ta% life after which time it will be worthless. The pro!ect is estimated to generate 9/,5000 in annal sales with costs of 91,100. The ta% rate is ,1 percent. hat is the operating cash flow for this pro!ect* #. 9156,15 $. 91102 C. 9/1/5 D. 9,01 &. 955,1/ GC> O B/,5000 - 91,100B1 - 0.,1  B9/66000AB0.,1 O 9/1/5

AACSB: Analytic Bloom's: Alication Difficulty: Basic ,OC 8: "#$ Learning Obecti!e: "#$" Section: "#%&oic: Oerating cas) flow

10-65


100. =hone Home Inc. is considering a new /-(ear e%pansion pro!ect that re+ires an initial fi%ed asset investment of 9.5 million. The fi%ed asset will be depreciated straight-line to )ero over its /-(ear ta% life after which time it will be worthless. The pro!ect is estimated to generate 905000 in annal sales with costs of 955,00. The ta% rate is , percent and the re+ired retrn on the pro!ect is 11 percent. hat is the net present vale for this pro!ect* #. 91,1// B. 91,,0/6 C. 91,065 D. 91,12 &. 91,/005 GC> O B905000 - 955,00B1 - 0.,  B95000A/B0., O 910/650

AACSB: Analytic Bloom's: Alication Difficulty: Basic ,OC 8: "#$"# Learning Obecti!e: "#$" Section: "#%&oic: Net resent !alue

10-66


101. =hone Home Inc. is considering a new -(ear e%pansion pro!ect that re+ires an initial fi%ed asset investment of 9, million. The fi%ed asset will be d epreciated straight-line to )ero over its -(ear ta% life after which time it will have a market vale of 9,1000. The pro!ect re+ires an initial investment in net working capital of 9,, 0000 all of which will be recovered at the end of the pro!ect. The pro!ect is estimated to generate 90000 in annal sales with costs of 910/000. The ta% rate is ,1 percent and the re+ired retrn for the pro!ect is 1/ percent. hat is the net present vale for this pro!ect* #. 9210/ B. 92,,620 C. 921,,/ D. 9205 &. 92/6/ GC> O B90000 - 910/000B1 - 0.,1  B9,000000AB0.,1 O 91,/0

AACSB: Analytic Bloom's: Alication Difficulty: Basic ,OC 8: "#$"" Learning Obecti!e: "#$" Section: "#%&oic: Net resent !alue

10-100


10. Dog pN >ranks is looking at a new sasage s(stem with an installed cost of 9,62500. This cost will be depreciated straight-line to )ero over the pro!ect's 2-(ear life at the end of which the sasage s(stem can be scrapped for 9100. The sasage s(stem will save the firm 9100 per (ear in preta% operating costs and the s(stem re+ires an initial investment in net working capital of 95/0. #ll of the net working capital will be recovered at the end of the pro!ect. The ta% rate is ,, percent and the discont rate is 6 percent. hat is the net present vale of this pro!ect* #. -91,11 $. -9250 C. 951/02 D. 9651 E. 911551 GC> O 9100B1 - 0.,,  B9,62500A2B0.,, O 910021.,

AACSB: Analytic Bloom's: Alication Difficulty: Basic ,OC 8: "#$" Learning Obecti!e: "#$" Section: "#%&oic: Net resent !alue

10-101


10,. ?or firm is contemplating the prchase of a new 915000 compter-based order entr( s(stem. The s(stem will be depreciated straight-line to )ero over its /-(ear life. It will be worth 91/500 at the end of that time. ?o will save 9,,00 before ta%es per (ear in order processing costs and (o will be able to redce working capital b( 911/2 Bthis is a one-time redction. The net working capital will retrn to its o riginal level when the pro!ect ends. The ta% rate is ,/ percent. hat is the internal rate of retrn for this pro!ect* #. 11.25 percent $. 1,.6 percent C. 15.1 percent D. 1./ percent &. ,./5 percent GC> O 9,00B1 - 0.,/  B915000A/B0.,/ O 9//500

AACSB: Analytic Bloom's: Alication Difficulty: Basic ,OC 8: "#$" Learning Obecti!e: "#$" Section: "#%&oic: (nternal rate of return

10-10


10. # -(ear pro!ect has an initial asset investment of 9,000 and initial net working capital investment of 9600 and an annal operating cash flow of -920. The fi%ed asset is fll( depreciated over the life of the pro!ect and has no salvage vale. The net working capital will be recovered when the pro!ect ends. The re+ired retrn is 1/ percent. hat is the pro!ect's e+ivalent annal cost or &#C* A. -91/561 $. -91/,06 C. -91255 D. -91//06 &. -911

AACSB: Analytic Bloom's: Alication Difficulty: Basic ,OC 8: "#$"2 Learning Obecti!e: "#$ Section: "#%2 &oic: ,3ui!alent annual cost

10-10,


10/. Heer &nterprises needs someone to sppl( it with /000 cartons of machine screws per (ear to spport its manfactring needs over the ne%t 2 (ears and (o've decided to bid on the contract. It will cost (o 91120000 to install the e+ipment necessar( to start prodctionK (o'll depreciate this cost straight-line to )ero over the p ro!ect's life. ?o estimate that in 2 (ears this e+ipment can be salvaged for 92/000. ?or fi%ed prodction costs will be 9,0000 per (ear and (or variable prodction costs shold be 91.2/ per carton. ?o also need an initial investment in net working capital of 911/00 all of which will be recovered when the pro!ect ends. ?or ta% rate is , percent and (o re+ire a 1, percent retrn on (or investment. hat bid price per carton shold (o sbmit* #. 912.0 $. 91./ C. 91/.26 D. 91/.0, &. 91.51

922.66 O EB= - 91.2/B/000 - 9,0000FE1 - 0.,  B91120000A2B0., = O 91/.26

AACSB: Analytic Bloom's: Analysis Difficulty: Basic ,OC 8: "#$"; Learning Obecti!e: "#$Section: "#%2 &oic: Bid rice

10-10


10. Chapman Machine 4hop is considering a -(ear pro!ect to improve its prodction efficienc(. $(ing a new machine press for 9/2000 is estimated to reslt in 916000 in annal preta% cost savings. The press falls in the M#C34 /-(ear class and it will have a salvage vale at the end of the pro!ect of 95000. The press also re+ires an initial investment in spare parts inventor( of 9000 along with an additional 9,00 in inventor( for each scceeding (ear of the pro!ect. The inventor( will retrn to its original level wh en the pro!ect ends. The shop's ta% rate is ,/ percent and its discont rate is 11 percent. 4hold the firm b( and install the machine press* h( or wh( not*

A. noK The net present vale is -9256. $. noK The net present vale is -92. C. (esK The net present vale is 911. D. (esK The net present vale is 9,16. &. (esK The net present vale is 95,.

Deprec1 O 9/2000 × 0.0 O 911/00 Deprec O 9/2000 × 0., O 915,0 Deprec, O 9/2000 × 0.160 O 9110/6 Deprec O 9/2000 × 0.11/ O 9,//.0 $ook vale O 9/2000 - 911/00 - 915,0 - 9110/6 - 9,//.0 O 966/,.50 #fterta% salvage vale O 95000  B966/,.50 - 95000B0.,/ O 956,.5 GC>1 O 916000B1 - 0.,/  911/00B0.,/ O 91/10 GC> O 916000B1 - 0.,/  915,0B0.,/ O 9156,1 GC>, O 916000B1 - 0.,/  9110/6B0.,/ O 91,/02.0 GC> O 916000B1 - 0.,/  9,//.0B0.,/ O 9150.,

The machine shold not be prchased becase the net present vale is negative.

10-10/


AACSB: Analytic Bloom's: Analysis Difficulty: (ntermediate ,OC 8: "#$" Learning Obecti!e: "#$* Section: "#%2 &oic: Costs$cutting roosal

102. &ads Indstrial 4(stems Compan( B&I4C is tr(ing to decide between two different conve(or belt s(stems. 4(stem # costs 92000 has a -(ear life and re+ires 911000 in preta% annal operating costs. 4(stem $ costs 9/12000 has an 5-(ear life and re+ires 926000 in preta% annal operating costs. $oth s(stems are to be depreciated straight-line to )ero over their lives and will have a )ero salvage vale. hichever s(stem is chosen it will not be replaced when it wears ot. The ta% rate is ,, percent and the discont rate is  percent. hich s(stem shold the firm choose and wh(* #. #K The net present vale is 911/1. B. #K The net present vale is -9/520. C. #K The net present vale is -9,11. D. $K The net present vale is 9,05. &. $" The net present vale is -9/1,.

4(stem # shold be chosen becase it has the more positive Bsmaller negative net present vale.

AACSB: Analytic Bloom's: Analysis Difficulty: (ntermediate ,OC 8: "#$*# Learning Obecti!e: "#$" Section: "#%&oic: 5utually e1clusi!e roects

10-10

Chap 010

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