Chapter 10 - Making Capital Investment D ecisions
Chapter 10 Making Capital Investment Decisions Multiple Choice Questions
1. The difference between a firm's ftre cash flows if it accepts a pro!ect and the firm's ftre cash flows if it does not accept the pro!ect is referred to as the pro!ect's" #. incremental cash flows. $. internal cash flows. C. e%ternal cash flows. D. erosion effects. &. financing cash flows.
. The fact that a proposed pro!ect is anal()ed based on the pro!ect's incremental cash flows is the assmption behind which one of the following principles* #. nderl(ing vale principle $. stand-alone principle C. e+ivalent cost principle D. salvage principle &. fndamental principle
,. hich one of the following costs was incrred in the past and cannot be recoped* #. incremental $. side C. snk D. opportnit( &. erosion
. 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 vale $. wasted vale C. snk cost D. opportnit( cost &. erosion
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Chapter 10 - Making Capital Investment D ecisions
/. hich one of the following best describes the concept of erosion* #. e%penses that have alread( been incrred 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 withot a particlar pro!ect
. hich one of the following best describes pro forma financial statements* #. financial statements e%pressed in a foreign crrenc( $. 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 vales for ftre time periods D. financial statements e%pressed in real dollars given a stated base (ear &. financial statements where all acconts are e%pressed as a percentage of last (ear's vales
2. hich one of the following is the depreciation method which allows accelerated write-offs of propert( nder varios lifetime classifications* #. I33 $. #C34 C. ##3 D. straight-line to )ero &. straight-line with salvage
5. The depreciation ta% shield is best defined as the" #. amont of ta% that is saved when an asset is prchased. $. ta% that is avoided when an asset is sold as salvage. C. amont of ta% that is de d e when an asset is sold. D. amont of ta% that is saved becase of the depreciation e%pense. &. amont b( which the afterta% depreciation e%pense lowers net income.
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Chapter 10 - Making Capital Investment D ecisions
6. The annal annit( ann it( stream of pa(ments that has the same present vale as a pro!ect's costs is referred to as which one of the following* #. (earl( incremental costs $. snk costs C. opportnit( costs D. erosion cost &. e+ivalent annal cost
10. 7elle('s $askets makes handmade baskets for distribtion to pscale retail otlets. The firm is crrentl( 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 spplies in the same space crrentl( sed for materials storage $. tili)ing the basket manager to oversee wreath prodction C. hiring additional emplo(ees to handle the increased workload shold 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( assming the proceeds of the wreath sales will be sed to redce the firm's crrentl( otstanding debt
11. Danielle's is a frnitre store that is considering adding ap pliances to its offerings. hich of the following shold be considered incremental cash flows of this pro!ect* I. tili)ing the credit offered b( a spplier to prchase the appliance inventor( II. benefiting from increased frnitre sales to appliance cstomers III. borrowing mone( from a bank to fnd the appliance pro!ect I8. prchasing 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
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Chapter 10 - Making Capital Investment D ecisions
1. The stand-alone principle advocates that pro!ect anal(sis shold be based solel( on which one of the following costs* #. snk $. total C. variable D. incremental &. fi%ed
1,. hich one of the following is an e%ample of a snk cost* #. 91/00 of lost sales becase an item was ot of stock $. 9100 paid to repair a machine last (ear C. 90000 pro!ect that mst be forfeited if another pro!ect is accepted D. 9/00 redction in crrent shoe sales if a store commences selling sandals &. 91500 increase in comic book sales if a store commences selling p))les
1. : ; < =lastic Molders spent 9100 last week repairing a machine. This week the compan( is tr(ing to decide if the machine cold be better tili)ed if the( assigned it a proposed pro!ect. hen anal()ing the proposed pro!ect the 9100 shold be treated as which t(pe of cost* #. opportnit( $. fi%ed C. incremental D. erosion &. snk
1/. hich one of the following best illstrates erosion as it relates to a hot dog stand located on the beach* #. providing both ketchp and mstard for its cstomer's se $. repairing the roof of the hot dog stand becase of water damage C. selling fewer hot dogs becase hambrgers were added to the men D. offering >rench fries bt not onion rings &. losing sales de to bad weather
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Chapter 10 - Making Capital Investment D ecisions
1. hich of the following shold be inclded in the anal(sis of a new prodct* I. mone( alread( spent for research and development of the new prodct II. redction in sales for a crrent prodct once the new prodct is introdced III. increase in acconts receivable needed to finance sales of the new prodct I8. market vale of a machine owned b( the firm which will be sed to prodce the new prodct #. 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
12. ?o are considering the prchase of a new machine. ?or anal(sis incldes the evalation of two machines which have differing initial and ongoing costs and differing lives. hichever machine is prchased will be replaced at the end of its sefl life. ?o shold select the machine which has the" #. longest life. $. highest annal operating cost. C. lowest annal operating cost. D. highest e+ivalent annal cost. &. lowest e+ivalent annal cost.
15. The bid price is" #. an afterta% price. $. the afterta% contribtion margin. C. the highest price (o shold charge if (o want the pro!ect. D. the onl( price (o can bid if the pro!ect is to be profitable. &. the minimm price (o shold charge if (o want to financiall( breakeven.
16. hich one of the following will increase a bid price* #. a decrease in the fi%ed costs $. a redction in the net working capital re+irement C. a redction in the firm's ta% rate D. an increase in the salvage vale &. an increase in the re+ired rate of retrn
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Chapter 10 - Making Capital Investment D ecisions
0. #ll of the following are related to a proposed pro!ect. hich of these shold be inclded in the cash flow at time )ero* I. prchase of 9100 of parts inventor( needed to spport the pro!ect II. loan of 91/000 sed to finance the pro!ect III. depreciation ta% shield of 91100 I8. 9/00 of e+ipment needed to commence the pro!ect #. I and II onl( $. I and I8 onl( C. II and I8 onl( D. I II and I8 onl( &. I II III and I8
1. Changes in the net working capital re+irements" #. 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%clded from pro!ect anal(sis de to their irrelevance to the total pro!ect. &. reflect onl( the changes in the crrent asset acconts.
. hich one of the following is a pro!ect cash inflow* Ignore an( ta% effects. #. decrease in acconts pa(able $. increase in inventor( C. decrease in acconts receivable D. depreciation e%pense based on M#C34 &. e+ipment ac+isition
,. @et working capital" #. can be ignored in pro!ect anal(sis becase an( e%penditre is normall( recoped at the end of the pro!ect. $. re+irements sch as an increase in acconts receivable create a cash inflow at the beginning of a pro!ect. C. is rarel( affected when a new prodct is introdced. D. can create either a cash inflow or a cash otflow at time )ero of a pro!ect. &. is the onl( e%penditre where at least a partial recover( can be made at the end of a pro!ect.
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Chapter 10 - Making Capital Investment D ecisions
. The operating cash flow of a cost ctting pro!ect" #. is e+al to the depreciation ta% shield. $. is e+al to )ero becase 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. incldes an( changes that occr in the crrent acconts. &. can be positive even thogh there are no sales.
/. =ro forma statements for a proposed pro!ect shold" I. be compiled on a stand-alone basis. II. inclde all the incremental cash flows related to the pro!ect. III. generall( e%clde interest e%pense. I8. inclde 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( &. I II III and I8
. hich one of the following statements is correct* #. =ro!ect anal(sis shold onl( inclde the cash flows that affect the income statement. $. # pro!ect can create a positive operating cash flow withot affecting sales. C. The depreciation ta% shield creates a cash otflow for a pro!ect. D. Interest e%pense shold alwa(s be inclded as a cash otflow when anal()ing a pro!ect. &. The opportnit( cost of a compan(-owned bilding that is going to be sed in a new pro!ect shold be inclded as a cash inflow to the pro!ect.
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. $. will have a greater ta% shield in (ear two of a pro!ect than it wold 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 dring the first (ear of the asset's life.
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Chapter 10 - Making Capital Investment D ecisions
5. Morris Motors !st prchased some M#C34 /-(ear propert( at a cost of 91000. hich one of the following will correctl( give (o the book vale of this e+ipment at the end of (ear *
#. 91000AB1 0.0 0., $. 91000 × B1 - 0.0 - 0., C. 91000 × B0.0 0., D. E91000 × B1 - 0.0F × B1 - 0., &. 91000AEB1 0.0B1 0.,F
6. 7e(ser =etrolem !st prchased some e+ipment at a cost of 92000. hat is the proper methodolog( for compting the depreciation e%pense for (ear if the e+ipment is classified as /-(ear propert( for M#C34*
#. 92000 × B1 - 0.0 × 0., $. 92000AB1 - 0.0 - 0., C. 92000 × B1 0., D. 92000 × B1 - 0., &. 92000 × 0.,
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Chapter 10 - Making Capital Investment D ecisions
,0. The crrent book vale of a fi%ed asset that was prchased two (ears ago is sed in the comptation of which one of the following* #. depreciation ta% shield $. ta% de on the salvage vale of that asset C. crrent (ear's operating cash flow D. change in net working capital &. M#C34 depreciation for the crrent (ear
,1. The net book vale of e+ipment will" #. remain constant over the life of the e+ipment. $. var( in response to changes in the market vale. C. decrease at a constant rate when M#C34 depreciation is sed. D. increase over the ta%able life of an asset. &. decrease slower nder straight-line depreciation than nder M#C34.
,. Three (ears ago 7no% :lass prchased 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 vale of that machine* BT represents the relevant ta% rate #. 4ale price B4ales price - $ook vale × T $. 4ale price B4ales price - $ook vale × B1 - T C. 4ale price B$ook vale - 4ale price × T D. 4ale price B$ook vale - 4ale price × B1 - T &. 4ale price × B1 - T
,,. hich one of the following is a correct method for compting the operating cash flow of a pro!ect assming that the interest e%pense is e+al to )ero* #. &$IT D $. &$IT - T C. @I D D. B4ales - Costs × B1 - D × B1- T &. B4ales - Costs × B1 - T
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Chapter 10 - Making Capital Investment D ecisions
,. The operating cash flow for a pro!ect shold e%clde which one of the following* #. ta%es $. variable costs C. fi%ed costs D. interest e%pense &. depreciation ta% shield
,/. The bottom-p approach to compting the operating cash flow applies onl( when" #. both the depreciation e%pense and the interest e%pense are e+al to )ero. $. the interest e%pense is e+al to )ero. C. the pro!ect is a cost-ctting 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.
,. The top-down approach to compting the operating cash flow" #. ignores noncash e%penses. $. applies onl( if a pro!ect increases sales. C. applies onl( to cost ctting pro!ects. D. is e+al to sales - costs - ta%es depreciation. &. is sed solel( to compte a bid price.
,2. Increasing which one of the following will increase the operating cash flow assming that the bottom-p approach is sed to compte the operating cash flow* #. erosion effects $. ta%es C. fi%ed e%penses D. salaries &. depreciation e%pense
,5. hich one of the following statements is correct concerning bid prices* #. The bid price is the ma%imm price that a firm shold bid. $. # firm can sbmit a bid that is higher than the compted bid price and still break even. C. # bid price ignores ta%es. D. # bid price shold be compted based solel( on the operating cash flows of the pro!ect. &. # bid price shold be compted based on a )ero percent re+ired rate of retrn.
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Chapter 10 - Making Capital Investment D ecisions
,6. Dan is comparing three machines to determine which one to prchase. The machines sell for differing prices have differing operating costs differing machine lives and will be replaced when worn ot. hich one of the following comptational methods shold Dan se as the basis for his decision* #. internal rate of retrn $. operating cash flow C. e+ivalent annal cost D. depreciation ta% shield &. bottom-p operating cash flow
0. The e+ivalent annal cost method is sefl in determining" #. which one of two machines to prchase if the machines are mtall( e%clsive have differing lives and are a one-time prchase. $. the ta% shield benefits of depreciation given the prchase of new assets for a pro!ect. C. the operating cash flows of a cost-ctting pro!ect. D. which one of two investments to accept when the investments have different re+ired rates of retrn. &. which one of two machines shold be prchased when the machines are mtall( e%clsive have different machine lives and will be replaced once the( are worn ot.
1. hen sing the e+ivalent annal cost as a basis for deciding which e+ipment shold be prchased the e+ipment nder consideration mst fit which two of the following criteria* I. differing prodctive lives II. differing manfactrers III. re+ired replacement at end of economic life I8. differing initial cost #. I and II $. I and III C. I and I8 D. II and IIII &. II and I8
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Chapter 10 - Making Capital Investment D ecisions
. The e+ivalent annal cost considers which of the following* I. re+ired rate of retrn II. operating costs III. need for replacement I8. afterta% salvage vale #. I and II onl( $. II and I8 onl( C. II III and I8 onl( D. I II and I8 onl( &. I II III and I8
,. The bid price alwa(s assmes 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 vale of the pro!ect is )ero. D. #n( assets prchased will have a positive salvage vale at the end of the pro!ect. &. #ssets will be depreciated based on M#C34.
. hich one of the following wold make a pro!ect nacceptable* #. cash inflow for net working capital at time )ero $. re+iring fi%ed assets that wold have no salvage vale C. an e+ivalent annal cost that e%ceeds that of an alternative pro!ect D. lack of revene generation &. a depreciation ta% shield that e%ceeds the vale of the interest e%pense
/. Decreasing which one of the following will increase the acceptabilit( of a pro!ect* #. snk costs $. salvage vale C. depreciation ta% shield D. e+ivalent annal cost &. acconts pa(able re+irement
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Chapter 10 - Making Capital Investment D ecisions
. De%ter 4mith ; Co. is replacing a machine simpl( becase it has worn ot. The new machine will not affect either sales or operating costs and will not have an( salvage vale 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 vale e+al to mins one times the machine's prchase price. $. The new machine will have a )ero rate of retrn. 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 otflow when the firm disposes of it at the end of its life. &. The new machine creates erosion effects.
2. 7ell('s Corner $aker( prchased a lot in Gil Cit( (ears ago at a cost of 950000. Toda( that lot has a market vale of 9,0000. #t the time of the prchase the compan( spent 91/000 to level the lot and another 90000 to install storm drains. The compan( now wants to bild a new facilit( on that site. The bilding cost is estimated at 91.2 million. hat amont shold be sed as the initial cash flow for this pro!ect* #. -9120000 $. -91510000 C. -915/000 D. -915/000 &. -9150000
5. 4ailcloth ; More crrentl( prodces boat sails and is considering e%panding its operations to inclde awnings for homes and travel trailers. The compan( owns land beside its crrent manfactring facilit( that cold be sed for the e%pansion. The compan( boght this land / (ears ago at a cost of 9,16000. #t the time of prchase the compan( paid 9000 to level ot the land so it wold be sitable for ftre se. Toda( the land is valed at 96/000. The compan( crrentl( has some nsed e+ipment that it crrentl( owns valed at 9,5000. This e+ipment cold be sed for prodcing awnings if 91000 is spent for e+ipment modifications. Gther e+ipment costing 960000 will also be re+ired. hat is the amont of the initial cash flow for this e%pansion pro!ect* #. -925/000 $. -95,000 C. -95,/000 D. -95/6000 &. -955,000
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Chapter 10 - Making Capital Investment D ecisions
6. ebster ; Moore paid 91,6000 in cash for a piece of e+ipment , (ears ago. #t the beginning of last (ear the compan( spent 91000 to pdate the e+ipment with the latest technolog(. The compan( no longer ses this e+ipment in its crrent operations and has received an offer of 956000 from a firm that wold like to prchase 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 evalating the e%pansion option what vale if an( shold the firm assign to this e+ipment as an initial cost of the pro!ect* #. 90 $. 91000 C. 956000 D. 9110000 &. 910000
/0. The >lff( >eather sells cstomi)ed handbags. Crrentl( it sells 15000 handbags annall( 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 2000 of the lower-priced handbags bt will sell ,000 less of the higher-priced handbags b( doing so. hat is the amont of the sales that shold be sed when evalating the addition of the lower-priced handbags* #. 91000 $. 92/000 C. 91,000 D. 9,000 &. 950000
/1. Mason >arms prchased a bilding for 926000 eight (ears ago. 4i% (ears ago repairs were made to the bilding which cost 91,000. The annal ta%es on the propert( are 911000. The bilding has a crrent market vale of 95/000 and a crrent book vale of 96000. The bilding is totall( paid for and solel( owned b( the firm. If the compan( decides to se this bilding for a new pro!ect what vale if an( shold be inclded in the initial cash flow of the pro!ect for this bilding* #. 96000 $. 9/5000 C. 95/000 D. 95/000 &. 96/,000
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Chapter 10 - Making Capital Investment D ecisions
/. ?o own a hose that (o rent for 91100 a month. The maintenance e%penses on the hose average 900 a month. The hose cost 916000 when (o prchased it (ears ago. # recent appraisal on the hose valed it at 9,6000. If (o sell the hose (o will incr 91000 in real estate fees. The annal propert( ta%es are 9000. ?o are deciding whether to sell the hose or convert it for (or own se as a professional office. hat vale shold (o place on this hose when anal()ing the option of sing it as a professional office* #. 911500 $. 91000 C. 9/000 D. 9,/000 &. 9,6000
/,. @elson Mfg. owns a manfactring facilit( that is crrentl( sitting idle. The facilit( is located on a piece of land that originall( cost 91/6000. The facilit( itself cost 910000 to bild. #s of now the book vale of the land and the facilit( are 91/6000 and 9/5000 respectivel(. The firm owes no debt on either the land or the facilit( at the present time. The firm received a bid of 91/00000 for the land and facilit( last week. The firm's management re!ected this bid even thogh 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( shold it inclde in the pro!ect anal(sis* #. 90 $. 912000 C. 910000 D. 91/00000 &. 9116000
/. Cool Comfort crrentl( 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 91000 each. Class C spas are priced at 9000 and the del%e model sells for 912000 each. The new mid-range spa will sell for 95000. hat is the vale of the erosion* #. 900000 $. 9100000 C. 91500000 D. 900000 &. 9,600000
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Chapter 10 - Making Capital Investment D ecisions
//. efferson ; 4ons is evalating a pro!ect that will increase annal sales b( 91,5000 and annal costs b( 96000. The pro!ect will initiall( re+ire 9110000 in fi%ed assets that will be depreciated straight-line to a )ero book vale over the -(ear life of the pro!ect. The applicable ta% rate is , percent. hat is the operating cash flow for this pro!ect* #. 9110 $. 9660 C. 9,520 D. 950 &. 90
/. Marie's >ashions is considering a pro!ect that will re+ire 95 000 in net working capital and 952000 in fi%ed assets. The pro!ect is e%pected to prodce annal sales of 92/000 with associated costs of 9/2000. The pro!ect has a /-(ear life. The compan( ses straight-line depreciation to a )ero book vale 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 $. -9/50 C. 90 D. 91/50 &. 91250
/2. The $each Hose has sales of 925000 and a profit margin of 11 percent. The annal depreciation e%pense is 91000. hat is the amont of the operating cash flow if the compan( has no long-term debt* #. 9520 $. 920 C. 950 D. 91000 &. 910120
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Chapter 10 - Making Capital Investment D ecisions
/5. The =ancake Hose has sales of 91000 depreciation of 92000 and net working capital of 915000. The firm has a ta% rate of ,/ percent and a profit margin of percent. The firm has no interest e%pense. hat is the amont of the operating cash flow* #. 965/0 $. 91//0 C. 91250 D. 9550 &. 9,,/0
/6. @orthern 3ailwa( is considering a pro!ect which will prodce annal sales of 962/000 and increase cash e%penses b( 95/6000. If the pro!ect is implemented ta%es will increase from 911000 to 91/000 and depreciation will increase from 916000 to 92000. The compan( is debt-free. hat is the amont of the operating cash flow sing the top-down approach* #. 9/000 $. 910,000 C. 91/2000 D. 9151000 &. 906000
0. $i-
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Chapter 10 - Making Capital Investment D ecisions
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( 91000. The pro!ect will cost 9000 and be depreciated sing straight-line depreciation to a )ero book vale 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 $. 92500 C. 91100 D. 91,,00 &. 9100
. The <mber ?ard is considering adding a new prodct line that is e%pected to increase annal sales b( 9,5000 and cash e%penses b( 915000. The initial investment will re+ire 96000 in fi%ed assets that will be depreciated sing the straight-line method to a )ero book vale over the -(ear life of the pro!ect. The compan( has a marginal ta% rate of , percent. hat is the annal vale of the depreciation ta% shield* #. 9/10 $. 91,10 C. 9/50 D. 9,/0 &. 9150
,. $ernie's $everages prchased some fi%ed assets classified as /-(ear propert( for M#C34. The assets cost 952000. hat will the accmlated depreciation be at the end of (ear three*
#. 91,/0 $. 9/0/ C. 9,51 D. 952/6 &. 916
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Chapter 10 - Making Capital Investment D ecisions
. ?o !st prchased some e+ipment that is classified as /-(ear propert( for M#C34. The e+ipment cost 912000. hat will the book vale of this e+ipment be at the end of (ears shold (o decide to resell the e+ipment at that point in time*
#. 952.0 $. 9/01.0 C. 9,,.00 D. 911/65.0 &. 91,5/,.50
/. =eterborogh Trcking !st prchased some fi%ed assets that are classified as ,-(ear propert( for M#C34. The assets cost 96500. hat is the amont of the depreciation e%pense in (ear ,*
#. 9/,2./ $. 91,2.12 C. 91/1.,5 D. 9166.11 &. 9122./
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Chapter 10 - Making Capital Investment D ecisions
. Crafter's 4ppl( prchased some fi%ed assets (ears ago at a cost of 9,5200. 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. 905,.5 D. 9,02.50 &. 9/11.06
2. ?o own some e+ipment that (o prchased (ears ago at a cost of 91000. 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 (or ta% rate is ,/ percent*
#. The ta% de on the sale is 9/. $. The book vale toda( is 91252/.0. C. The accmlated depreciation to date is 9,2,.50. D. The ta%able amont on the sale is 9,2,.50. &. The afterta% salvage vale is 91,5.5.
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Chapter 10 - Making Capital Investment D ecisions
5. &dward's Manfactred Homes prchased some machiner( (ears ago for 9,16000. 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 910000 to a foreign firm for se in its prodction facilit( in 4oth #merica. hat is the afterta% salvage vale from this sale if the ta% rate is ,/ percent*
#. 91,/05 $. 910000 C. 91,1 D. 91/6 &. 9150
6. $rno's <nch Conter is e%panding and e%pects operating cash flows of 9000 a (ear for (ears as a reslt. This e%pansion re+ires 9,6000 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 throghot the life of the pro!ect. hat is the net present vale of this e%pansion pro!ect at a re+ired rate of retrn of 1 percent* #. 91522.6 $. 910,,.,, C. 9555.20 D. 961.05 &. 9,06./2
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Chapter 10 - Making Capital Investment D ecisions
20. asper Metals is considering installing a new molding machine which is e%pected to prodce operating cash flows of 92,000 a (ear for 2 (ears. #t the beginning of the pro!ect inventor( will decrease b( 91000 acconts receivables will increase b( 91000 and acconts 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 96000. The e+ipment will be depreciated straight-line to a )ero book vale over the life of the pro!ect. The e+ipment will be salvaged at the end of the pro!ect creating a 95000 afterta% cash flow. #t the end of the pro!ect net working capital will retrn to its normal level. hat is the net present vale of this pro!ect given a re+ired retrn of 1./ percent* #. 92211.0 $. 92615.50 C. 95,,.01 D. 9506.2 &. 9526/./
21. # pro!ect will prodce an operating cash flow of 9100 a (ear for 5 (ears. The initial fi%ed asset investment in the pro!ect will be 95600. The net afterta% salvage vale is estimated at 911000 and will be received dring the last (ear of the pro!ect's life. hat is the net present vale of the pro!ect if the re+ired rate of retrn is 1 percent* #. 9,2./ $. 95020. C. 9,2./ D. 9,6020. &. 9100.5,
2. 7wik Jn Hot Dogs is considering the installation of a new compteri)ed pressre cooker that will ct annal operating costs b( 9,000. The s(stem will cost 9,6600 to prchase 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 amont of the earnings before interest and ta%es for this pro!ect* #. 910// $. 91,0/ C. 91/// D. 91600 &. 91600
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Chapter 10 - Making Capital Investment D ecisions
2,. Colors and More is considering replacing the e+ipment it ses to prodce cra(ons. The e+ipment wold cost 91.,2 million have a 1-(ear life and lower manfactring costs b( an estimated 9,0000 a (ear. The e+ipment will be depreciated sing straight-line depreciation to a book vale of )ero. The re+ired rate of retrn is 1/ percent and the ta% rate is ,/ percent. hat is the net income from this proposed pro!ect* #. 915/05.2/ $. 9011. C. 91.2 D. 91,,61.2 &. 91,206.5
2. :atewa( Commnications 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 vale 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 9,00000. The pro!ect will not directl( prodce an( sales bt will redce 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 recoped when the pro!ect ends. 4hold this pro!ect be implemented if the firm re+ires a 1 percent rate of retrn* h( or wh( not* #. @oK The @=8 is -9126,2.6. $. @oK The @=8 is -95250.5. C. ?esK The @=8 is 9/150., D. ?esK The @=8 is 9,52/1.2 &. ?esK The @=8 is 960./2
2/. ?o are working on a bid to bild two cit( parks a (ear for the ne%t three (ears. This pro!ect re+ires the prchase of 9150000 of e+ipment that will be depreciated sing straightline depreciation to a )ero book vale 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 90000 in net working capital for the dration of the pro!ect. The fi%ed costs will be 91000 a (ear and the variable costs will be 915000 per park. ?or re+ired rate of retrn is 1/ percent and (or ta% rate is , percent. hat is the minimal amont (o shold bid per park* B3ond (or answer to the nearest 9100 #. 92/00 $. 91500 C. 91/,00 D. 9156100 &. 91200
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Chapter 10 - Making Capital Investment D ecisions
2. ?o are working on a bid to bild two apartment bildings a (ear for the ne%t / (ears for a local college. This pro!ect re+ires the prchase of 92/0000 of e+ipment that will be depreciated sing straight-line depreciation to a )ero book vale 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 910000 in net working capital over the life of the pro!ect. The fi%ed costs will be 95000 a (ear and the variable costs will be 9165000 per bilding. ?or re+ired rate of retrn is 1./ percent for this pro!ect and (or ta% rate is ,/ percent. hat is the minimal amont ronded to the nearest 9100 (o shold bid per bilding* #. 91,200 $. 9156/00 C. 912,,000 D. 925000 &. 9,/600
22. #tomated Manfactrers ses high-tech e+ipment to prodce speciali)ed alminm prodcts for its cstomers. &ach one of these machines costs 9150000 to prchase pls an additional 96000 a (ear to operate. The machines have a -(ear life after which the( are worthless. hat is the e+ivalent annal cost of one these machines if the re+ired retrn is 1 percent* #. -9/0/2 $. -92106 C. -9,01/5 D. -96/2 &. -9/62
25. Champion $akers ses speciali)ed ovens to bake its bread. Gne oven costs 956000 and lasts abot (ears before it needs to be replaced. The annal operating cost per over is 91000. hat is the e+ivalent annal cost of an oven if the re+ired rate of retrn is 1, percent* #. -92,5 $. -95,1, C. -9,02 D. -900/1 &. 91610
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Chapter 10 - Making Capital Investment D ecisions
26. =recision Tool is anal()ing two machines to determine which one it shold prchase. The compan( re+ires a 1/ percent rate of retrn and ses straight-line depreciation to a )ero book vale over the life of its e+ipment. Machine # has a cost of 956000 annal operating costs of 9,00 and a -(ear life. Machine $ costs 9112000 has annal operating costs of 916/00 and has a /-(ear life. hichever machine is prchased will be replaced at the end of its sefl life. =recision Tool shold prchase Machine LLLLL becase it lowers the firm's annal cost b( appro%imatel( LLLLLLL as compared to the other machine. #. #K 916/. $. #K 9120 C. $K 916/ D. $K 9120 &. $K 912/1
50. The $ck 4tore is considering a pro!ect that will re+ire additional inventor( of 9 1000 and will increase acconts pa(able b( 9151000. #cconts receivable are crrentl( 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* #. -95/0 $. -91/0 C. 91/0 D. 9,/0 &. 9/0
51. The Card 4hoppe needs to maintain , percent of its sales in net working capital. Crrentl( the shoppe is considering a -(ear pro!ect that will increase sales from its crrent level of 9,52000 to 91000 the first (ear and to 9/000 a (ear for the following / (ears of the pro!ect. hat amont shold be inclded in the pro!ect anal(sis for net working capital in (ear of the pro!ect* #. -91260 $. -9660 C. 90 D. 9660 &. 91260
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Chapter 10 - Making Capital Investment D ecisions
5. Home >rnishings &%press is e%panding its prodct offerings to reach a wider range of cstomers. The e%pansion pro!ect incldes increasing the floor inventor( b( 9,0000 and increasing its debt to sppliers b( 20 percent of that amont. The compan( will also spend 9/0000 for a bilding 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 cstomers and ths e%pects acco nts receivable to rise b( 960000. >or the pro!ect anal(sis what amont shold be sed as the initial cash flow for net working capital* #. -9,6000 $. -920000 C. -91/000 D. -916000 &. -9,61000
5,. Hollister ; Hollister is considering a new pro!ect. The pro!ect will re+ire 9/000 for new fi%ed assets 915000 for additional inventor( and 9,6000 for additional acconts 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 vale 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 retrns to its original level at the end of the pro!ect. The pro!ect is e%pected to generate annal sales of 952/000 with costs of 90000. The ta% rate is , percent and the re+ired rate of retrn is 1 percent. hat is the pro!ect's cash flow at time )ero* #. -9/,000 $. -91000 C. -920000 D. -9226000 &. -96000
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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 915000 for additional inventor( and 9,6000 for additional acconts 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 vale 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 retrns to its original level at the end of the pro!ect. The pro!ect is e%pected to generate annal sales of 952/000 and costs of 90000. The ta% rate is , percent and the re+ired rate of retrn is 1 percent. hat is the amont of the earnings before interest and ta%es for the first (ear of this pro!ect* #. 96250 $. 91,0000 C. 915000 D. 912,0 &. 9,/000
5/. Hollister ; Hollister is considering a new pro!ect. The pro!ect will re+ire 9/000 for new fi%ed assets 915000 for additional inventor( and 9,6000 for additional acconts 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 vale 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 retrns to its original level at the end of the pro!ect. The pro!ect is e%pected to generate annal sales of 952/000 and costs of 90000. The ta% rate is , percent and the re+ired rate of retrn is 1 percent. hat is the amont of the afterta% cash flow from the sale of the fi%ed assets at the end of this pro!ect* #. 9,/6 $. 9560 C. 91000 D. 9521/ &. 9,/0
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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 915000 for additional inventor( and 9,6000 for additional acconts 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 vale 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 retrns to its original level at the end of the pro!ect. The pro!ect is e%pected to generate annal sales of 952/000 and costs of 90000. The ta% rate is , percent and the re+ired rate of retrn is 1 percent. hat is the cash flow recover( from net working capital at the end of this pro!ect* #. 91000 $. 92/000 C. 96000 D. 9,000 &. 9000
52. 7e(ser Mining is considering a pro!ect that will re+ire the prchase of 9650000 in new e+ipment. The e+ipment will be depreciated straight-line to a )ero book vale 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. #nnal sales from this pro!ect are estimated at 90000. @et working capital e+al to 0 percent of sales will be re+ired to spport the pro!ect. #ll of the net working capital will be recoped. The re+ired retrn is 1 percent and the ta% rate is ,/ percent. hat is the vale of the depreciation ta% shield in (ear of the pro!ect* #. 96000 $. 9/00 C. 9500 D. 92100 &. 92/00
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Chapter 10 - Making Capital Investment D ecisions
55. 7e(ser Mining is considering a pro!ect that will re+ire the prchase of 9650000 in new e+ipment. The e+ipment will be depreciated straight-line to a )ero book vale 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. #nnal sales from this pro!ect are estimated at 90000. @et working capital e+al to 0 percent of sales will be re+ired to spport the pro!ect. #ll of the net working capital will be recoped. The re+ired retrn is 1 percent and the ta% rate is ,/ percent. hat is the amont of the afterta% salvage vale of the e+ipment* #. 9121/0 $. 9,15/0 C. 9115500 D. 9,200 &. 9,,000
56. 7e(ser Mining is considering a pro!ect that will re+ire the prchase of 9650000 in new e+ipment. The e+ipment will be depreciated straight-line to a )ero book vale 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. #nnal sales from this pro!ect are estimated at 90000. @et working capital e+al to 0 percent of sales will be re+ired to spport the pro!ect. #ll of the net working capital will be recoped. The re+ired retrn is 1 percent and the ta% rate is ,/ percent. hat is the recover( amont attribtable to net working capital at the end of the pro!ect* #. 91000 $. 9/00 C. 95000 D. 9125000 &. 916000
Essay Questions
60. In a single sentence e%plain how (o can determine which cash flows shold be inclded in the anal(sis of a pro!ect.
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Chapter 10 - Making Capital Investment D ecisions
61. hat is the formla for the ta%-shield approach to GC>* &%plain the two ke( points the formla illstrates.
6. hat is the primar( prpose of compting the e+ivalent annal costs when comparing two machines* hat is the assmption that is being made abot each machine*
6,. #ssme a firm sets its bid price for a pro!ect at the minimm level as compted sing the disconted cash flow method. :iven this what do (o know abot the net present vale and the internal rate of retrn on the pro!ect as bid*
6. Can the initial cash flow at time )ero for a pro!ect ever be a positive vale* If (es give an e%ample. If no e%plain wh( not.
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Chapter 10 - Making Capital Investment D ecisions
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. crrentl( sells 500 motor homes per (ear at 9,00 each and 1150 l%r( motor coaches per (ear at 926600 each. The compan( wants to introdce a new portable camper to fill ot its prodct line. It hopes to sell 1620 of these campers per (ear at 91150 each. #n independent consltant has determined that if innebagel introdces the new campers it shold boost the sales of its e%isting motor homes b( 200 nits per (ear and redce the sales of its motor coaches b( 1 nits per (ear. hat is the amont that shold be sed as the annal sales figre when evalating this pro!ect* #. 9621,00 $. 9,0100,00 C. 9,111500 D. 9,,5,600 &. 9,256/00
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Chapter 10 - Making Capital Investment D ecisions
62. Consider the following income statement"
hat is the amont of the depreciation ta% shield* #. 9,02 $. 916 C. 9/65 D. 911 &. 9616
65. Consider an asset that costs 912000 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 9000. The relevant ta% rate is ,0 percent. hat is the afterta% cash flow from the sale of this asset* #. 9,1500 $. 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/,5000 in annal sales with costs of 91,100. The ta% rate is ,1 percent. hat is the operating cash flow for this pro!ect* #. 9156,15 $. 91102 C. 9/1/5 D. 9,01 &. 955,1/
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Chapter 10 - Making Capital Investment D ecisions
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 905000 in annal sales with costs of 955,00. The ta% rate is , percent and the re+ired retrn on the pro!ect is 11 percent. hat is the net present vale 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 vale of 9,1000. The pro!ect re+ires an initial investment in net working capital of 9,, 0000 all of which will be recovered at the end of the pro!ect. The pro!ect is estimated to generate 90000 in annal sales with costs of 910/000. The ta% rate is ,1 percent and the re+ired retrn for the pro!ect is 1/ percent. hat is the net present vale for this pro!ect* #. 9210/ $. 92,,620 C. 921,,/ D. 9205 &. 92/6/
10. Dog pN >ranks is looking at a new sasage s(stem with an installed cost of 9,62500. This cost will be depreciated straight-line to )ero over the pro!ect's 2-(ear life at the end of which the sasage s(stem can be scrapped for 9100. The sasage s(stem will save the firm 9100 per (ear in preta% operating costs and the s(stem re+ires an initial investment in net working capital of 95/0. #ll of the net working capital will be recovered at the end of the pro!ect. The ta% rate is ,, percent and the discont rate is 6 percent. hat is the net present vale of this pro!ect* #. -91,11 $. -9250 C. 951/02 D. 9651 &. 911551
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Chapter 10 - Making Capital Investment D ecisions
10,. ?or firm is contemplating the prchase of a new 915000 compter-based order entr( s(stem. The s(stem will be depreciated straight-line to )ero over its /-(ear life. It will be worth 91/500 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 redce working capital b( 911/2 Bthis is a one-time redction. The net working capital will retrn to its o riginal level when the pro!ect ends. The ta% rate is ,/ percent. hat is the internal rate of retrn 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 9,000 and initial net working capital investment of 9600 and an annal operating cash flow of -920. The fi%ed asset is fll( depreciated over the life of the pro!ect and has no salvage vale. The net working capital will be recovered when the pro!ect ends. The re+ired retrn is 1/ percent. hat is the pro!ect's e+ivalent annal cost or &#C* #. -91/561 $. -91/,06 C. -91255 D. -91//06 &. -911
10/. Heer &nterprises needs someone to sppl( it with /000 cartons of machine screws per (ear to spport its manfactring needs over the ne%t 2 (ears and (o've decided to bid on the contract. It will cost (o 91120000 to install the e+ipment necessar( to start prodctionK (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. ?or fi%ed prodction costs will be 9,0000 per (ear and (or variable prodction costs shold 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. ?or ta% rate is , percent and (o re+ire a 1, percent retrn on (or investment. hat bid price per carton shold (o sbmit* #. 912.0 $. 91./ C. 91/.26 D. 91/.0, &. 91.51
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Chapter 10 - Making Capital Investment D ecisions
10. Chapman Machine 4hop is considering a -(ear pro!ect to improve its prodction efficienc(. $(ing a new machine press for 9/2000 is estimated to reslt in 916000 in annal preta% cost savings. The press falls in the M#C34 /-(ear class and it will have a salvage vale at the end of the pro!ect of 95000. The press also re+ires an initial investment in spare parts inventor( of 9000 along with an additional 9,00 in inventor( for each scceeding (ear of the pro!ect. The inventor( will retrn to its original level wh en the pro!ect ends. The shop's ta% rate is ,/ percent and its discont rate is 11 percent. 4hold the firm b( and install the machine press* h( or wh( not*
#. noK The net present vale is -9256. $. noK The net present vale is -92. C. (esK The net present vale is 911. D. (esK The net present vale is 9,16. &. (esK The net present vale is 95,.
102. &ads Indstrial 4(stems Compan( B&I4C is tr(ing to decide between two different conve(or belt s(stems. 4(stem # costs 92000 has a -(ear life and re+ires 911000 in preta% annal operating costs. 4(stem $ costs 9/12000 has an 5-(ear life and re+ires 926000 in preta% annal operating costs. $oth s(stems are to be depreciated straight-line to )ero over their lives and will have a )ero salvage vale. hichever s(stem is chosen it will not be replaced when it wears ot. The ta% rate is ,, percent and the discont rate is percent. hich s(stem shold the firm choose and wh(* #. #K The net present vale is 911/1. $. #K The net present vale is -9/520. C. #K The net present vale is -9,11. D. $K The net present vale is 9,05. &. $" The net present vale is -9/1,.
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Chapter 10 - Making Capital Investment D ecisions
105. Consider a pro!ect to sppl( 0500000 postage stamps to the .4. =ostal 4ervice for the ne%t / (ears. ?o have an idle parcel of land available that cost 920000 five (ears agoK if the land were sold toda( it wold net (o 961000 afterta%. The land can be sold for 91/00000 after ta%es in / (ears. ?o will need to install 9,/000 in new manfactring plant and e+ipment to actall( prodce 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 96000 in initial net working capital for the pro!ect and an additional investment of 9,5000 in ever( (ear thereafter. #ll net working capital will be recovered when the pro!ect ends. ?or prodction costs are 0.,5 cents per stamp and (o have fi%ed costs of 905000 per (ear. ?or ta% rate is ,1 percent and (or re+ired retrn on this pro!ect is 11 percent. hat bid price per stamp shold (o sbmit* #. 90.015 $. 90.00 C. 90.0, D. 90.0 &. 90.06
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Chapter 10 - Making Capital Investment D ecisions
Chapter 10 Making Capital Investment Decisions #nswer 7e(
Multiple Choice Questions
1. The difference between a firm's ftre cash flows if it accepts a pro!ect and the firm's ftre cash flows if it does not accept the pro!ect is referred to as the pro!ect's" A. incremental cash flows. $. internal cash flows. C. e%ternal cash flows. D. erosion effects. &. financing cash flows. 3efer to section 10.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%" &oic: (ncremental cas) flows
. The fact that a proposed pro!ect is anal()ed based on the pro!ect's incremental cash flows is the assmption behind which one of the following principles* #. nderl(ing vale principle B. stand-alone principle C. e+ivalent cost principle D. salvage principle &. fndamental principle 3efer to section 10.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%" &oic: Stand$along rincile
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Chapter 10 - Making Capital Investment D ecisions
,. hich one of the following costs was incrred in the past and cannot be recoped* #. incremental $. side C. snk D. opportnit( &. erosion 3efer to section 10.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: 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 vale $. wasted vale C. snk cost D. opportnit( cost &. erosion 3efer to section 10.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: Oortunity cost
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Chapter 10 - Making Capital Investment D ecisions
/. hich one of the following best describes the concept of erosion* #. e%penses that have alread( been incrred and cannot be recovered $. change in net working capital related to implementing a new pro!ect C. the cash flows of a new pro!ect that come at the e%pense of a firm's e%isting cash flows D. the alternative that is forfeited when a fi%ed asset is tili)ed b( a pro!ect &. the differences in a firm's cash flows with and withot a particlar pro!ect 3efer to section 10.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: ,rosion
. hich one of the following best describes pro forma financial statements* #. financial statements e%pressed in a foreign crrenc( $. financial statements where the assets are e%pressed as a percentage of total assets and costs are e%pressed as a percentage of sales C. financial statements showing pro!ected vales for ftre time periods D. financial statements e%pressed in real dollars given a stated base (ear &. financial statements where all acconts are e%pressed as a percentage of last (ear's vales 3efer to section 10.,
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%&oic: .ro forma financial statements
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Chapter 10 - Making Capital Investment D ecisions
2. hich one of the following is the depreciation method which allows accelerated write-offs of propert( nder varios 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 Obecti!e: "#$" Section: "#% &oic: Accelerated cost reco!ery system
5. The depreciation ta% shield is best defined as the" #. amont of ta% that is saved when an asset is prchased. $. ta% that is avoided when an asset is sold as salvage. C. amont of ta% that is de when an asset is sold. D. amont of ta% that is saved becase of the depreciation e%pense. &. amont b( which the afterta% depreciation e%pense lowers net income. 3efer to section 10./
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: Dereciation ta1 s)ield
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Chapter 10 - Making Capital Investment D ecisions
6. The annal annit( stream of pa(ments that has the same present vale as a pro!ect's costs is referred to as which one of the following* #. (earl( incremental costs $. snk costs C. opportnit( costs D. erosion cost E. e+ivalent annal cost 3efer to section 10.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$ Section: "#%2 &oic: ,3ui!alent annual cost
10. 7elle('s $askets makes handmade baskets for distribtion to pscale retail otlets. The firm is crrentl( 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 spplies in the same space crrentl( sed for materials storage $. tili)ing the basket manager to oversee wreath prodction C. hiring additional emplo(ees to handle the increased workload shold the firm accept the wreath pro!ect D. researching the market to determine if wreath sales might be profitable before deciding to proceed &. planning on lower interest e%pense b( assming the proceeds of the wreath sales will be sed to redce the firm's crrentl( otstanding debt 3efer to section 10.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%" &oic: 4ele!ant cas) flows
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Chapter 10 - Making Capital Investment D ecisions
11. Danielle's is a frnitre store that is considering adding ap pliances to its offerings. hich of the following shold be considered incremental cash flows of this pro!ect* I. tili)ing the credit offered b( a spplier to prchase the appliance inventor( II. benefiting from increased frnitre sales to appliance cstomers III. borrowing mone( from a bank to fnd the appliance pro!ect I8. prchasing parts for inventor( to handle an( appliance repairs that might be necessar( #. I and II onl( $. III and I8 onl( C. I II and I8 onl( D. II III and I8 onl( &. I II III and I8 3efer to sections 10.1 and 10.
AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%" and "#%* &oic: 4ele!ant cas) flows
1. The stand-alone principle advocates that pro!ect anal(sis shold be based solel( on which one of the following costs* #. snk $. total C. variable D. incremental &. fi%ed 3efer to section 10.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%" &oic: (ncremental costs
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Chapter 10 - Making Capital Investment D ecisions
1,. hich one of the following is an e%ample of a snk cost* #. 91/00 of lost sales becase an item was ot of stock B. 9100 paid to repair a machine last (ear C. 90000 pro!ect that mst be forfeited if another pro!ect is accepted D. 9/00 redction in crrent shoe sales if a store commences selling sandals &. 91500 increase in comic book sales if a store commences selling p))les 3efer to section 10.
AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: Sun+ cost
1. : ; < =lastic Molders spent 9100 last week repairing a machine. This week the compan( is tr(ing to decide if the machine cold be better tili)ed if the( assigned it a proposed pro!ect. hen anal()ing the proposed pro!ect the 9100 shold be treated as which t(pe of cost* #. opportnit( $. fi%ed C. incremental D. erosion E. snk 3efer to section 10.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: Sun+ cost
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Chapter 10 - Making Capital Investment D ecisions
1/. hich one of the following best illstrates erosion as it relates to a hot dog stand located on the beach* #. providing both ketchp and mstard for its cstomer's se $. repairing the roof of the hot dog stand becase of water damage C. selling fewer hot dogs becase hambrgers were added to the men D. offering >rench fries bt not onion rings &. losing sales de to bad weather 3efer to section 10.
AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: ,rosion
1. hich of the following shold be inclded in the anal(sis of a new prodct* I. mone( alread( spent for research and development of the new prodct II. redction in sales for a crrent prodct once the new prodct is introdced III. increase in acconts receivable needed to finance sales of the new prodct I8. market vale of a machine owned b( the firm which will be sed to prodce the new prodct #. I and III onl( $. II and I8 onl( C. I II and III onl( D. II III and I8 onl( &. I II III and I8 3efer to section 10.
AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: (ncremental cas) flows
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Chapter 10 - Making Capital Investment D ecisions
12. ?o are considering the prchase of a new machine. ?or anal(sis incldes the evalation of two machines which have differing initial and ongoing costs and differing lives. hichever machine is prchased will be replaced at the end of its sefl life. ?o shold select the machine which has the" #. longest life. $. highest annal operating cost. C. lowest annal operating cost. D. highest e+ivalent annal cost. E. lowest e+ivalent annal cost. 3efer to section 10.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$ Section: "#%2 &oic: ,3ui!alent annual cost
15. The bid price is" #. an afterta% price. $. the afterta% contribtion margin. C. the highest price (o shold charge if (o want the pro!ect. D. the onl( price (o can bid if the pro!ect is to be profitable. E. the minimm price (o shold charge if (o want to financiall( breakeven. 3efer to section 10.
AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$Section: "#%2 &oic: Bid rice
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Chapter 10 - Making Capital Investment D ecisions
16. hich one of the following will increase a bid price* #. a decrease in the fi%ed costs $. a redction in the net working capital re+irement C. a redction in the firm's ta% rate D. an increase in the salvage vale E. an increase in the re+ired rate of retrn 3efer to section 10.
AACSB: N/A Bloom's: Comre)ension Difficulty: (ntermediate Learning Obecti!e: "#$Section: "#%2 &oic: Bid rice
0. #ll of the following are related to a proposed pro!ect. hich of these shold be inclded in the cash flow at time )ero* I. prchase of 9100 of parts inventor( needed to spport the pro!ect II. loan of 91/000 sed to finance the pro!ect III. depreciation ta% shield of 91100 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: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: .roect cas) flows
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Chapter 10 - Making Capital Investment D ecisions
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. $. onl( affect the initial cash flows of a pro!ect. C. onl( affect the cash flow at time )ero and the final (ear of a pro!ect. D. are generall( e%clded from pro!ect anal(sis de to their irrelevance to the total pro!ect. &. reflect onl( the changes in the crrent asset acconts. 3efer to section 10.
AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Net wor+ing caital
. hich one of the following is a pro!ect cash inflow* Ignore an( ta% effects. #. decrease in acconts pa(able $. increase in inventor( C. decrease in acconts receivable D. depreciation e%pense based on M#C34 &. e+ipment ac+isition 3efer to section 10.
AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: .roect cas) flows
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Chapter 10 - Making Capital Investment D ecisions
,. @et working capital" #. can be ignored in pro!ect anal(sis becase an( e%penditre is normall( recoped at the end of the pro!ect. $. re+irements sch as an increase in acconts receivable create a cash inflow at the beginning of a pro!ect. C. is rarel( affected when a new prodct is introdced. D. can create either a cash inflow or a cash otflow at time )ero of a pro!ect. &. is the onl( e%penditre where at least a partial recover( can be made at the end of a pro!ect. 3efer to section 10.
AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Net wor+ing caital
. The operating cash flow of a cost ctting pro!ect" #. is e+al to the depreciation ta% shield. $. is e+al to )ero becase there is no incremental sales. C. can onl( be anal()ed b( pro!ecting the sales and costs for a firm's entire operations. D. incldes an( changes that occr in the crrent acconts. E. can be positive even thogh there are no sales. 3efer to section 10.
AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%2 &oic: Cost reduction roect
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Chapter 10 - Making Capital Investment D ecisions
/. =ro forma statements for a proposed pro!ect shold" I. be compiled on a stand-alone basis. II. inclde all the incremental cash flows related to the pro!ect. III. generall( e%clde interest e%pense. I8. inclde all pro!ect-related fi%ed asset ac+isitions and disposals. #. I and II onl( $. II and III onl( C. I II and I8 onl( D. II III and I8 onl( E. I II III and I8 3efer to section 10.,
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%&oic: .ro forma statement
. hich one of the following statements is correct* #. =ro!ect anal(sis shold onl( inclde the cash flows that affect the income statement. B. # pro!ect can create a positive operating cash flow withot affecting sales. C. The depreciation ta% shield creates a cash otflow for a pro!ect. D. Interest e%pense shold alwa(s be inclded as a cash otflow when anal()ing a pro!ect. &. The opportnit( cost of a compan(-owned bilding that is going to be sed in a new pro!ect shold be inclded as a cash inflow to the pro!ect. 3efer to section 10.
AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%2 &oic: Cost cutting roect
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Chapter 10 - Making Capital Investment D ecisions
2. # compan( that tili)es the M#C34 s(stem of depreciation" #. will have e+al depreciation costs each (ear of an asset's life. B. will have a greater ta% shield in (ear two of a pro!ect than it wold have if the firm had opted for straight-line depreciation given the same depreciation life. C. can depreciate the cost of land if it so desires. D. will e%pense less than the entire cost of an asset. &. cannot e%pense an( of the cost of a new asset dring the first (ear of the asset's life. 3efer to section 10.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: 5AC4S dereciation
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Chapter 10 - Making Capital Investment D ecisions
5. Morris Motors !st prchased some M#C34 /-(ear propert( at a cost of 91000. hich one of the following will correctl( give (o the book vale of this e+ipment at the end of (ear *
#. 91000AB1 0.0 0., B. 91000 × B1 - 0.0 - 0., C. 91000 × B0.0 0., D. E91000 × B1 - 0.0F × B1 - 0., &. 91000AEB1 0.0B1 0.,F 3efer to section 10.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: 5AC4S dereciation
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Chapter 10 - Making Capital Investment D ecisions
6. 7e(ser =etrolem !st prchased some e+ipment at a cost of 92000. hat is the proper methodolog( for compting the depreciation e%pense e%p ense for (ear if the e+ipment e+ip ment is classified as /-(ear propert( for M#C34*
#. 92000 × B1 - 0.0 × 0., #. 92000 $. 92000AB1 $. 92000AB1 - 0.0 - 0., C. 92000 C. 92000 × B1 0., D. 92000 D. 92000 × B1 - 0., E. 92000 × 0., 3efer to section 10.
AACSB: N/A Bloom's: Knowledge Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: 5AC4S dereciation
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Chapter 10 - Making Capital Investment D ecisions
,0. The crrent book vale of a fi%ed asset that was prchased two (ears ago is sed in the comptation of which one of the following* #. depreciation #. depreciation ta% shield B. ta% de on the salvage vale of that asset C. crrent C. crrent (ear's operating cash flow D. change D. change in net working capital &. M#C34 &. M#C34 depreciation for the crrent (ear 3efer to section 10.
AACSB: N/A Bloom's: Comre)ension Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: &a1 on sal!age !alue
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Chapter 10 - Making Capital Investment D ecisions
,1. The net book vale of e+ipment will" #. remain #. remain constant over the life of the e+ipment. $. var( $. var( in response to changes in the market vale. C. decrease C. decrease at a constant rate when M#C34 depreciation is sed. D. increase D. increase over the ta%able life of an asset. E. decrease slower nder straight-line depreciation than nder M#C34. 3efer to section 10.
AACSB: N/A Bloom's: Comre)ension Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Boo+ !alue
,. Three (ears ago 7no% :lass prchased 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 vale of that machine* BT represents the relevant ta% rate #. 4ale #. 4ale price B4ales price - $ook vale × T $. 4ale $. 4ale price B4ales price - $ook $oo k vale × B1 - T C. 4ale price B$ook vale - 4ale price × T D. 4ale D. 4ale price B$ook vale - 4ale price × B1 - T &. 4ale &. 4ale price × B1 - T 3efer to section 10.
AACSB: N/A Bloom's: Knowledge Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Afterta1 sal!age !alue
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Chapter 10 - Making Capital Investment D ecisions
,,. hich one of the following is a correct method for compting the operating cash flow of a pro!ect assming 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 Obecti!e: "#$" Section: "#%0 &oic: Bottom u oerating cas) flow
,. The operating cash flow for a pro!ect shold e%clde which one of the following* #. ta%es $. variable costs C. fi%ed costs D. interest e%pense &. depreciation ta% shield 3efer to section 10./
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: Oerating cas) flow
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Chapter 10 - Making Capital Investment D ecisions
,/. The bottom-p approach to compting 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-ctting 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: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: Bottom$u oerating cas) flow
,. The top-down approach to compting the operating cash flow" A. ignores noncash e%penses. $. applies onl( if a pro!ect increases sales. C. applies onl( to cost ctting pro!ects. D. is e+al to sales - costs - ta%es depreciation. &. is sed solel( to compte a bid price. 3efer to section 10./
AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: &o$down oerating cas) flow
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Chapter 10 - Making Capital Investment D ecisions
,2. Increasing which one of the following will increase the operating cash flow assming that the bottom-p approach is sed to compte the operating cash flow* #. erosion effects $. ta%es C. fi%ed e%penses D. salaries E. depreciation e%pense 3efer to section 10./
AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: Bottom$u oerating cas) flow
,5. hich one of the following statements is correct concerning bid prices* #. The bid price is the ma%imm price that a firm shold bid. B. # firm can sbmit a bid that is higher than the compted bid price and still break even. C. # bid price ignores ta%es. D. # bid price shold be compted based solel( on the operating cash flows of the pro!ect. &. # bid price shold be compted based on a )ero percent re+ired rate of retrn. 3efer to section 10.
AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$Section: "#%2 &oic: Bid rice
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Chapter 10 - Making Capital Investment D ecisions
,6. Dan is comparing three machines to determine which one to prchase. The machines sell for differing prices have differing operating costs differing machine lives and will be replaced when worn ot. hich one of the following comptational methods shold Dan se as the basis for his decision* #. internal rate of retrn $. operating cash flow C. e+ivalent annal cost D. depreciation ta% shield &. bottom-p operating cash flow 3efer to section 10.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$ Section: "#%2 &oic: ,3ui!alent annual cost
0. The e+ivalent annal cost method is sefl in determining" #. which one of two machines to prchase if the machines are mtall( e%clsive have differing lives and are a one-time prchase. $. the ta% shield benefits of depreciation given the prchase of new assets for a pro!ect. C. the operating cash flows of a cost-ctting pro!ect. D. which one of two investments to accept when the investments have different re+ired rates of retrn. E. which one of two machines shold be prchased when the machines are mtall( e%clsive have different machine lives and will be replaced once the( are worn ot. 3efer to section 10.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$ Section: "#%2 &oic: ,3ui!alent annual cost
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Chapter 10 - Making Capital Investment D ecisions
1. hen sing the e+ivalent annal cost as a basis for deciding which e+ipment shold be prchased the e+ipment nder consideration mst fit which two of the following criteria* I. differing prodctive lives II. differing manfactrers 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.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$ Section: "#%2 &oic: ,3ui!alent annual cost
. The e+ivalent annal cost considers which of the following* I. re+ired rate of retrn II. operating costs III. need for replacement I8. afterta% salvage vale #. I and II onl( $. II and I8 onl( C. II III and I8 onl( D. I II and I8 onl( E. I II III and I8 3efer to section 10.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$ Section: "#%2 &oic: ,3ui!alent annual cost
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Chapter 10 - Making Capital Investment D ecisions
,. The bid price alwa(s assmes which one of the following* #. # pro!ect has a one-(ear life. $. The afterta% net income of the pro!ect is )ero. C. The net present vale of the pro!ect is )ero. D. #n( assets prchased will have a positive salvage vale at the end of the pro!ect. &. #ssets will be depreciated based on M#C34. 3efer to section 10.
AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$Section: "#%2 &oic: Bid rice
. hich one of the following wold make a pro!ect nacceptable* #. cash inflow for net working capital at time )ero $. re+iring fi%ed assets that wold have no salvage vale C. an e+ivalent annal cost that e%ceeds that of an alternative pro!ect D. lack of revene generation &. a depreciation ta% shield that e%ceeds the vale of the interest e%pense 3efer to section 10.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$ Section: "#%2 &oic: ,3ui!alent annual cost
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Chapter 10 - Making Capital Investment D ecisions
/. Decreasing which one of the following will increase the acceptabilit( of a pro!ect* #. snk costs $. salvage vale C. depreciation ta% shield D. e+ivalent annal cost &. acconts pa(able re+irement 3efer to section 10.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: "#$ Section: "#%2 &oic: ,3ui!alent annual cost
. De%ter 4mith ; Co. is replacing a machine simpl( becase it has worn ot. The new machine will not affect either sales or operating costs and will not have an( salvage vale 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 vale e+al to mins one times the machine's prchase price. $. The new machine will have a )ero rate of retrn. C. The new machine will generate positive operating cash flows at least in the first few (ears of its life. D. The new machine will create a cash otflow when the firm disposes of it at the end of its life. &. The new machine creates erosion effects. 3efer to section 10./
AACSB: N/A Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: Dereciation ta1 s)ield
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Chapter 10 - Making Capital Investment D ecisions
2. 7ell('s Corner $aker( prchased a lot in Gil Cit( (ears ago at a cost of 950000. Toda( that lot has a market vale of 9,0000. #t the time of the prchase the compan( spent 91/000 to level the lot and another 90000 to install storm drains. The compan( now wants to bild a new facilit( on that site. The bilding cost is estimated at 91.2 million. hat amont shold be sed as the initial cash flow for this pro!ect* #. -9120000 B. -91510000 C. -915/000 D. -915/000 &. -9150000 C>0 O -9,0000 - 9120000 O -91510000
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: 4ele!ant cas) flows
5. 4ailcloth ; More crrentl( prodces boat sails and is considering e%panding its operations to inclde awnings for homes and travel trailers. The compan( owns land beside its crrent manfactring facilit( that cold be sed for the e%pansion. The compan( boght this land / (ears ago at a cost of 9,16000. #t the time of prchase the compan( paid 9000 to level ot the land so it wold be sitable for ftre se. Toda( the land is valed at 96/000. The compan( crrentl( has some nsed e+ipment that it crrentl( owns valed at 9,5000. This e+ipment cold be sed for prodcing awnings if 91000 is spent for e+ipment modifications. Gther e+ipment costing 960000 will also be re+ired. hat is the amont of the initial cash flow for this e%pansion pro!ect* #. -925/000 $. -95,000 C. -95,/000 D. -95/6000 &. -955,000 C>0 O -96/000 - 9,5000 - 91000 - 960000 O -95,/000
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: 4ele!ant costs
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Chapter 10 - Making Capital Investment D ecisions
6. ebster ; Moore paid 91,6000 in cash for a piece of e+ipment , (ears ago. #t the beginning of last (ear the compan( spent 91000 to pdate the e+ipment with the latest technolog(. The compan( no longer ses this e+ipment in its crrent operations and has received an offer of 956000 from a firm that wold like to prchase 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 evalating the e%pansion option what vale if an( shold the firm assign to this e+ipment as an initial cost of the pro!ect* #. 90 $. 91000 C. 956000 D. 9110000 &. 910000 3elevant vale O 956000
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: Oortunity cost
/0. The >lff( >eather sells cstomi)ed handbags. Crrentl( it sells 15000 handbags annall( 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 2000 of the lower-priced handbags bt will sell ,000 less of the higher-priced handbags b( doing so. hat is the amont of the sales that shold be sed when evalating the addition of the lower-priced handbags* A. 91000 $. 92/000 C. 91,000 D. 9,000 &. 950000 4ales O B2000 × 9/6 B-,000 × 956 O 91000
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: ,rosion
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Chapter 10 - Making Capital Investment D ecisions
/1. Mason >arms prchased a bilding for 926000 eight (ears ago. 4i% (ears ago repairs were made to the bilding which cost 91,000. The annal ta%es on the propert( are 911000. The bilding has a crrent market vale of 95/000 and a crrent book vale of 96000. The bilding is totall( paid for and solel( owned b( the firm. If the compan( decides to se this bilding for a new pro!ect what vale if an( shold be inclded in the initial cash flow of the pro!ect for this bilding* #. 96000 $. 9/5000 C. 95/000 D. 95/000 &. 96/,000 Gpportnit( cost O 95/000
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: Oortunity cost
/. ?o own a hose that (o rent for 91100 a month. The maintenance e%penses on the hose average 900 a month. The hose cost 916000 when (o prchased it (ears ago. # recent appraisal on the hose valed it at 9,6000. If (o sell the hose (o will incr 91000 in real estate fees. The annal propert( ta%es are 9000. ?o are deciding whether to sell the hose or convert it for (or own se as a professional office. hat vale shold (o place on this hose when anal()ing the option of sing it as a professional office* #. 911500 $. 91000 C. 9/000 D. 9,/000 &. 9,6000 Gpportnit( cost O 9,6000 - 91000 O 9/000
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: Oortunity cost
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Chapter 10 - Making Capital Investment D ecisions
/,. @elson Mfg. owns a manfactring facilit( that is crrentl( sitting idle. The facilit( is located on a piece of land that originall( cost 91/6000. The facilit( itself cost 910000 to bild. #s of now the book vale of the land and the facilit( are 91/6000 and 9/5000 respectivel(. The firm owes no debt on either the land or the facilit( at the present time. The firm received a bid of 91/00000 for the land and facilit( last week. The firm's management re!ected this bid even thogh 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( shold it inclde in the pro!ect anal(sis* #. 90 $. 912000 C. 910000 D. 91/00000 &. 9116000 3elevant cost O 91/00000
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: Oortunity cost
/. Cool Comfort crrentl( 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 91000 each. Class C spas are priced at 9000 and the del%e model sells for 912000 each. The new mid-range spa will sell for 95000. hat is the vale of the erosion* #. 900000 $. 9100000 C. 91500000 D. 900000 &. 9,600000 &rosion O EB,00 - / × 91000F EB/0 - 00 × 9000F O 900000
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: ,rosion
10-/
Chapter 10 - Making Capital Investment D ecisions
//. efferson ; 4ons is evalating a pro!ect that will increase annal sales b( 91,5000 91,500 0 and annal costs b( 96000. The pro!ect will initiall( re+ire 9110000 in fi%ed assets that will be depreciated straight-line to a )ero book vale over the -(ear life of the pro!ect. The applicable ta% rate is , percent. hat is the operating cash flow for this pro!ect* #. 9110 #. 9110 $. 9660 $. 9660 C. 9,520 D. 950 D. 950 &. 90 &. 90 GC> O B91,5000 - 96000B1 - 0., B9110000AB0., O 9,520
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: Dereciation ta1 s)ield OC6
/. Marie's >ashions is considering a pro!ect that will re+ire 95 000 in net working capital and 952000 in fi%ed assets. The pro!ect is e%pected to prodce annal sales of 92/000 with associated costs of 9/2000. The pro!ect p ro!ect has a /-(ear life. The compan( ses straight-line depreciation to a )ero book vale 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 $. -9/50 C. 90 C. 90 D. 91/50 D. 91/50 E. 91250 GC> O B92/000 - 9/2000B1 - 0.,0 B952000A/B0.,0 O 91250
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: Dereciation ta1 s)ield OC6
10-
Chapter 10 - Making Capital Investment D ecisions
/2. The $each Hose has sales of 925000 and a profit margin of 11 percent. The annal depreciation e%pense is 91000. hat is the amont of the operating cash c ash flow if the compan( has no long-term debt* #. 9520 #. 9520 $. 920 $. 920 C. 950 C. 950 D. 91000 &. 910120 &. 910120 GC> O B925000 × 0.11 91000 O 91000
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: Bottom$u OC6
/5. The =ancake Hose has sales of 91000 depreciation of 92000 and net working capital of 915000. The firm has a ta% rate of ,/ percent and a profit margin of percent. The firm has no interest e%pense. hat is the amont of the operating cash flow* #. 965/0 #. 965/0 B. 91//0 C. 91250 C. 91250 D. 9550 D. 9550 &. 9,,/0 &. 9,,/0 GC> O B91000 × 0.0 92000 O 91//0
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: Bottom$u OC6
10-2
Chapter 10 - Making Capital Investment D ecisions
/6. @orthern 3ailwa( is considering a pro!ect which will prodce annal sales of 962/000 and increase cash e%penses b( 95/6000. If the pro!ect is implemented ta%es will increase from 911000 to 91/000 and depreciation will increase from 916000 to 92000. The compan( is debt-free. hat is the amont of the operating cash flow sing the top-down approach* #. 9/000 #. 9/000 B. 910,000 C. 91/2000 C. 91/2000 D. 9151000 D. 9151000 &. 906000 &. 906000 GC> O 962/000 - 95/6000 - B91/000 - 911000 O 910,000
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: &o$down OC6
0. $i- O 95000 - 912/00 - 9,000 O 92/00
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: &o$down OC6
10-5
Chapter 10 - Making Capital Investment D ecisions
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( 91000. The pro!ect will cost 9000 and be depreciated sing straight-line depreciation to a )ero book vale 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 $. 92500 C. 91100 D. 91,,00 &. 9100 GC> O B9,/000 - 91000 B1 - 0.,0 B9000A B0.,0 O 91100
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: &a1$s)ield OC6
. The <mber ?ard is considering adding a new prodct line that is e%pected to increase annal sales b( 9,5000 and cash e%penses b( 915000. The initial investment will re+ire 96000 in fi%ed assets that will be depreciated sing the straight-line method to a )ero book vale over the -(ear life of the pro!ect. The compan( has a marginal ta% rate of , percent. hat is the annal vale of the depreciation ta% shield* A. 9/10 $. 91,10 C. 9/50 D. 9,/0 &. 9150 Depreciation ta% shield O B96000A × 0., O 9/10
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: Dereciation ta1 s)ield
10-6
Chapter 10 - Making Capital Investment D ecisions
,. $ernie's $everages prchased some fi%ed assets classified as /-(ear propert( for M#C34. The assets cost 952000. hat will the accmlated depreciation be at the end of (ear three*
#. 91,/0 $. 9/0/ C. 9,51 D. 952/6 E. 916 Depreciation O 952000 × B0.0 0., 0.16 O 916
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Accumulated 5AC4S dereciation
10-20
Chapter 10 - Making Capital Investment D ecisions
. ?o !st prchased some e+ipment that is classified as /-(ear propert( for M#C34. The e+ipment cost 912000. hat will the book vale of this e+ipment be at the end of (ears shold (o decide to resell the e+ipment at that point in time*
#. 952.0 B. 9/01.0 C. 9,,.00 D. 911/65.0 &. 91,5/,.50 $ook 8ale O 912000 × B0.11/ 0.0/2 O 9/01.0
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Boo+ !alue
10-21
Chapter 10 - Making Capital Investment D ecisions
/. =eterborogh Trcking !st prchased some fi%ed assets that are classified as ,-(ear propert( for M#C34. The assets cost 96500. hat is the amont of the depreciation e%pense in (ear ,*
#. 9/,2./ $. 91,2.12 C. 91/1.,5 D. 9166.11 &. 9122./ Depreciation, O 96500 × 0.151 O 91/1.,5
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: 5AC4S dereciation
10-2
Chapter 10 - Making Capital Investment D ecisions
. Crafter's 4ppl( prchased some fi%ed assets (ears ago at a cost of 9,5200. 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. 905,.5 D. 9,02.50 &. 9/11.06 $ook vale O 9,5200 × B1 - 0.0 - 0., O 915/2 #fterta% salvage O 9/000 EB915/2 - 9/000 × 0.,0F O 9,02.50
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Afterta1 sal!age
10-2,
Chapter 10 - Making Capital Investment D ecisions
2. ?o own some e+ipment that (o prchased (ears ago at a cost of 91000. 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 (or ta% rate is ,/ percent*
#. The ta% de on the sale is 9/. $. The book vale toda( is 91252/.0. C. The accmlated depreciation to date is 9,2,.50. D. The ta%able amont on the sale is 9,2,.50. E. The afterta% salvage vale is 91,5.5. #ccmlated depreciation O 91000 × B0.0 0., 0.16 0.11/ O 91252/.0 $ook 8ale O 91000 - 91252/.0 O 9,2,.50 Ta%able gain on sale O 92//00 - 9,2,.50 O 9,512/.0 Ta% de O 9,512/.0 × 0.,/ O 91,,1., #fterta% salvage vale O 92//00 - 91,,1., O 91,5.5
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Afterta1 sal!age !alue
10-2
Chapter 10 - Making Capital Investment D ecisions
5. &dward's Manfactred Homes prchased some machiner( (ears ago for 9,16000. 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 910000 to a foreign firm for se in its prodction facilit( in 4oth #merica. hat is the afterta% salvage vale from this sale if the ta% rate is ,/ percent*
#. 91,/05 $. 910000 C. 91,1 D. 91/6 &. 9150 $ook vale O 9,16000 × B1 - 0.0 - 0., O 91/,10 Ta% on sale O B910000 - 91/,10 × 0.,/ O -9/6 Bta% savings #fter-ta% cash flow O 910000 9/6 O 91/6
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Afterta1 sal!age !alue
10-2/
Chapter 10 - Making Capital Investment D ecisions
6. $rno's <nch Conter is e%panding and e%pects operating cash flows of 9000 a (ear for (ears as a reslt. This e%pansion re+ires 9,6000 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 throghot the life of the pro!ect. hat is the net present vale of this e%pansion pro!ect at a re+ired rate of retrn of 1 percent* #. 91522.6 $. 910,,.,, C. 9555.20 D. 961.05 E. 9,06./2
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%&oic: Net resent !alue
10-2
Chapter 10 - Making Capital Investment D ecisions
20. asper Metals is considering installing a new molding machine which is e%pected to prodce operating cash flows of 92,000 a (ear for 2 (ears. #t the beginning of the pro!ect inventor( will decrease b( 91000 acconts receivables will increase b( 91000 and acconts 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 96000. The e+ipment will be depreciated straight-line to a )ero book vale over the life of the pro!ect. The e+ipment will be salvaged at the end of the pro!ect creating a 95000 afterta% cash flow. #t the end of the pro!ect net working capital will retrn to its normal level. hat is the net present vale of this pro!ect given a re+ired retrn of 1./ percent* #. 92211.0 $. 92615.50 C. 95,,.01 D. 9506.2 &. 9526/./ C>0 O -96000 91000 - 91000 91/000 O -9,6000 C02 O 92,000 95000 - 91000 91000 - 91/000 O 9111000
AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Obecti!e: "#$" Section: "#%&oic: Net resent !alue
10-22
Chapter 10 - Making Capital Investment D ecisions
21. # pro!ect will prodce an operating cash flow of 9100 a (ear for 5 (ears. The initial fi%ed asset investment in the pro!ect will be 95600. The net afterta% salvage vale is estimated at 911000 and will be received dring the last (ear of the pro!ect's life. hat is the net present vale of the pro!ect if the re+ired rate of retrn is 1 percent* #. 9,2./ B. 95020. C. 9,2./ D. 9,6020. &. 9100.5,
AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Obecti!e: "#$" Section: "#%&oic: Net resent !alue
2. 7wik Jn Hot Dogs is considering the installation of a new compteri)ed pressre cooker that will ct annal operating costs b( 9,000. The s(stem will cost 9,6600 to prchase and install. This s(stem is e%pected to have a -(ear life and will be depreciated to )ero sing straight-line depreciation. hat is the amont of the earnings before interest and ta%es for this pro!ect* #. 910// B. 91,0/ C. 91/// D. 91600 &. 91600 &arnings before interest and ta%es O 9,000 - B9,6600A O 91,0/
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%2 &oic: Cost$cutting ,B(&
10-25
Chapter 10 - Making Capital Investment D ecisions
2,. Colors and More is considering replacing the e+ipment it ses to prodce cra(ons. The e+ipment wold cost 91.,2 million have a 1-(ear life and lower manfactring costs b( an estimated 9,0000 a (ear. The e+ipment will be depreciated sing straight-line depreciation to a book vale of )ero. The re+ired rate of retrn is 1/ percent and the ta% rate is ,/ percent. hat is the net income from this proposed pro!ect* #. 915/05.2/ $. 9011. C. 91.2 D. 91,,61.2 &. 91,206.5 @et income O E9,0000 - B91,20000A1F × E1 - 0.,/F O 91,,61.2
AACSB: Analytic Bloom's: Alication Difficulty: (ntermediate Learning Obecti!e: "#$" Section: "#%2 &oic: Cost$Cutting net income
10-26
Chapter 10 - Making Capital Investment D ecisions
2. :atewa( Commnications 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 vale 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 9,00000. The pro!ect will not directl( prodce an( sales bt will redce 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 recoped when the pro!ect ends. 4hold this pro!ect be implemented if the firm re+ires a 1 percent rate of retrn* h( or wh( not* #. @oK The @=8 is -9126,2.6. $. @oK The @=8 is -95250.5. C. ?esK The @=8 is 9/150., D. ?esK The @=8 is 9,52/1.2 E. ?esK The @=8 is 960./2 Initial cash flow O -90000 - 9/000 O -9/0/000 GC> O 92/000B1 - 0.,/ B90000A10B0.,/ O 9//2,/0 >inal cash flow O 9/000 9,00000 B1 - 0.,/ O 90000
AACSB: Analytic Bloom's: Analysis Difficulty: (ntermediate Learning Obecti!e: "#$* Section: "#%- and "#%2 &oic: Cost$cutting N.7
10-50
Chapter 10 - Making Capital Investment D ecisions
2/. ?o are working on a bid to bild two cit( parks a (ear for the ne%t three (ears. This pro!ect re+ires the prchase of 9150000 of e+ipment that will be depreciated sing straightline depreciation to a )ero book vale 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 90000 in net working capital for the dration of the pro!ect. The fi%ed costs will be 91000 a (ear and the variable costs will be 915000 per park. ?or re+ired rate of retrn is 1/ percent and (or ta% rate is , percent. hat is the minimal amont (o shold bid per park* B3ond (or answer to the nearest 9100 #. 92/00 $. 91500 C. 91/,00 D. 9156100 E. 91200
@I O 92/,2,./ - B9150000A, O 91/,2,./ &$T O 91/,2,./AB1 - 0., O 9,6,.1 4ales O 9,6,.1 B9150000A, 91000 B915000 × O 9,/6,.1 $id per park O 9,/6,.1A O 912.21 hen ronded to the nearest 9100 the bid price is 91200.
AACSB: Analytic Bloom's: Analysis Difficulty: (ntermediate Learning Obecti!e: "#$Section: "#%2 &oic: Bid rice
10-51
Chapter 10 - Making Capital Investment D ecisions
2. ?o are working on a bid to bild two apartment bildings a (ear for the ne%t / (ears for a local college. This pro!ect re+ires the prchase of 92/0000 of e+ipment that will be depreciated sing straight-line depreciation to a )ero book vale 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 910000 in net working capital over the life of the pro!ect. The fi%ed costs will be 95000 a (ear and the variable costs will be 9165000 per bilding. ?or re+ired rate of retrn is 1./ percent for this pro!ect and (or ta% rate is ,/ percent. hat is the minimal amont ronded to the nearest 9100 (o shold bid per bilding* #. 91,200 $. 9156/00 C. 912,,000 D. 925000 &. 9,/600
@I O 9062/0.,0 - B92/0000A/ O 9/62/0.,0 &$T O 9/62/0.,0AB1 - 0.,/ O 9616,./ 4ales O 9616,./ B92/0000A/ 95000 B9165000 × O 9,/6,./ $id per bilding O 9,/6,./A O 912,61.22 hen ronded to the nearest 9100 the bid price is 912,,000
AACSB: Analytic Bloom's: Analysis Difficulty: (ntermediate Learning Obecti!e: "#$Section: "#%2 &oic: Bid rice
10-5
Chapter 10 - Making Capital Investment D ecisions
22. #tomated Manfactrers ses high-tech e+ipment to prodce speciali)ed alminm prodcts for its cstomers. &ach one of these machines costs 9150000 to prchase pls an additional 96000 a (ear to operate. The machines have a -(ear life after which the( are worthless. hat is the e+ivalent annal cost of one these machines if the re+ired retrn is 1 percent* A. -9/0/2 $. -92106 C. -9,01/5 D. -96/2 &. -9/62
AACSB: Analytic Bloom's: Analysis Difficulty: (ntermediate Learning Obecti!e: "#$ Section: "#%2 &oic: ,3ui!alent annual cost
10-5,
Chapter 10 - Making Capital Investment D ecisions
25. Champion $akers ses speciali)ed ovens to bake its bread. Gne oven costs 956000 and lasts abot (ears before it needs to be replaced. The annal operating cost per over is 91000. hat is the e+ivalent annal cost of an oven if the re+ired rate of retrn is 1, percent* A. -92,5 $. -95,1, C. -9,02 D. -900/1 &. 91610
AACSB: Analytic Bloom's: Analysis Difficulty: (ntermediate Learning Obecti!e: "#$ Section: "#%2 &oic: ,3ui!alent annual cost
10-5
Chapter 10 - Making Capital Investment D ecisions
26. =recision Tool is anal()ing two machines to determine which one it shold prchase. The compan( re+ires a 1/ percent rate of retrn and ses straight-line depreciation to a )ero book vale over the life of its e+ipment. Machine # has a cost of 956000 annal operating costs of 9,00 and a -(ear life. Machine $ costs 9112000 has annal operating costs of 916/00 and has a /-(ear life. hichever machine is prchased will be replaced at the end of its sefl life. =recision Tool shold prchase Machine LLLLL becase it lowers the firm's annal cost b( appro%imatel( LLLLLLL as compared to the other machine. A. #K 916/. $. #K 9120 C. $K 916/ D. $K 9120 &. $K 912/1
Difference in costs O -9,,52,.6 - B-9,//201., O 916.6 Machine # lowers the firm's annal costs b( abot 916/.
AACSB: Analytic Bloom's: Analysis Difficulty: (ntermediate Learning Obecti!e: "#$ Section: "#%2 &oic: ,3ui!alent annual cost
10-5/
Chapter 10 - Making Capital Investment D ecisions
50. The $ck 4tore is considering a pro!ect that will re+ire additional inventor( of 9 1000 and will increase acconts pa(able b( 9151000. #cconts receivable are crrentl( 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 $. -91/0 C. 91/0 D. 9,/0 &. 9/0 @C re+irement O -91000 9151000 - B9//000 × 0.06 O - 95/0
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Net wor+ing caital
51. The Card 4hoppe needs to maintain , percent of its sales in net working capital. Crrentl( the shoppe is considering a -(ear pro!ect that will increase sales from its crrent level of 9,52000 to 91000 the first (ear and to 9/000 a (ear for the following / (ears of the pro!ect. hat amont shold be inclded in the pro!ect anal(sis for net working capital in (ear of the pro!ect* #. -91260 $. -9660 C. 90 D. 9660 E. 91260 @C recover( O B9/000 - 9,52000 × 0., O 91260
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Net wor+ing caital
10-5
Chapter 10 - Making Capital Investment D ecisions
5. Home >rnishings &%press is e%panding its prodct offerings to reach a wider range of cstomers. The e%pansion pro!ect incldes increasing the floor inventor( b( 9,0000 and increasing its debt to sppliers b( 20 percent of that amont. The compan( will also spend 9/0000 for a bilding 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 cstomers and ths e%pects acco nts receivable to rise b( 960000. >or the pro!ect anal(sis what amont shold be sed as the initial cash flow for net working capital* #. -9,6000 $. -920000 C. -91/000 D. -916000 &. -9,61000 @C re+irement O -9,0000 B0.20 × 9,0000 - 960000 O -916000
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Net wor+ing caital
10-52
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 915000 for additional inventor( and 9,6000 for additional acconts 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 vale 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 retrns to its original level at the end of the pro!ect. The pro!ect is e%pected to generate annal sales of 952/000 with costs of 90000. The ta% rate is , percent and the re+ired rate of retrn is 1 percent. hat is the pro!ect's cash flow at time )ero* #. -9/,000 B. -91000 C. -920000 D. -9226000 &. -96000 Initial cash flow O -9/000 - 915000 - 9,6000 91/000 O -91000
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: (nitial cas) flow
10-55
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 915000 for additional inventor( and 9,6000 for additional acconts 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 vale 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 retrns to its original level at the end of the pro!ect. The pro!ect is e%pected to generate annal sales of 952/000 and costs of 90000. The ta% rate is , percent and the re+ired rate of retrn is 1 percent. hat is the amont of the earnings before interest and ta%es for the first (ear of this pro!ect* #. 96250 $. 91,0000 C. 915000 D. 912,0 &. 9,/000 &$IT O 952/000 - 90000 - B9/000A O 915000
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#%&oic: .roect earnings
10-56
Chapter 10 - Making Capital Investment D ecisions
5/. Hollister ; Hollister is considering a new pro!ect. The pro!ect will re+ire 9/000 for new fi%ed assets 915000 for additional inventor( and 9,6000 for additional acconts receivable. 4hort-term debt is e%pected to increase b( 91/000. The pro!ect has a -(ear life. The fi%ed assets will be depreciated straight-line to a )ero book vale over the life of the pro!ect. #t the end of the pro!ect the fi%ed assets can be sold for 0 percent of their original cost. The net working capital retrns to its original level at the end of the pro!ect. The pro!ect is e%pected to generate annal sales of 952/000 and costs of 90000. The ta% rate is , percent and the re+ired rate of retrn is 1 percent. hat is the amont of the afterta% cash flow from the sale of the fi%ed assets at the end of this pro!ect* #. 9,/6 B. 9560 C. 91000 D. 9521/ &. 9,/0 #fterta% salvage vale O 9/000 × 0.0 × B1 - 0., O 9560
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Afterta1 sal!age
10-60
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 915000 for additional inventor( and 9,6000 for additional acconts 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 vale 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 retrns to its original level at the end of the pro!ect. The pro!ect is e%pected to generate annal sales of 952/000 and costs of 90000. The ta% rate is , percent and the re+ired rate of retrn is 1 percent. hat is the cash flow recover( from net working capital at the end of this pro!ect* #. 91000 $. 92/000 C. 96000 D. 9,000 &. 9000 @et working capital recover( O 915000 9,6000 - 91/000 O 96000
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Net wor+ing caital reco!ery
10-61
Chapter 10 - Making Capital Investment D ecisions
52. 7e(ser Mining is considering a pro!ect that will re+ire the prchase of 9650000 in new e+ipment. The e+ipment will be depreciated straight-line to a )ero book vale 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. #nnal sales from this pro!ect are estimated at 90000. @et working capital e+al to 0 percent of sales will be re+ired to spport the pro!ect. #ll of the net working capital will be recoped. The re+ired retrn is 1 percent and the ta% rate is ,/ percent. hat is the vale of the depreciation ta% shield in (ear of the pro!ect* A. 96000 $. 9/00 C. 9500 D. 92100 &. 92/00 Depreciation ta% shield O 9650000A2 × 0.,/ O 96000
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Dereciation ta1 s)ield
55. 7e(ser Mining is considering a pro!ect that will re+ire the prchase of 9650000 in new e+ipment. The e+ipment will be depreciated straight-line to a )ero book vale 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. #nnal sales from this pro!ect are estimated at 90000. @et working capital e+al to 0 percent of sales will be re+ired to spport the pro!ect. #ll of the net working capital will be recoped. The re+ired retrn is 1 percent and the ta% rate is ,/ percent. hat is the amont of the afterta% salvage vale of the e+ipment* #. 9121/0 B. 9,15/0 C. 9115500 D. 9,200 &. 9,,000 #fterta% salvage vale O 9650000 × 0.0/ × B1 - 0.,/ O 9,15/0
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Afterta1 sal!age
10-6
Chapter 10 - Making Capital Investment D ecisions
56. 7e(ser Mining is considering a pro!ect that will re+ire the prchase of 9650000 in new e+ipment. The e+ipment will be depreciated straight-line to a )ero book vale 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. #nnal sales from this pro!ect are estimated at 90000. @et working capital e+al to 0 percent of sales will be re+ired to spport the pro!ect. #ll of the net working capital will be recoped. The re+ired retrn is 1 percent and the ta% rate is ,/ percent. hat is the recover( amont attribtable to net working capital at the end of the pro!ect* #. 91000 $. 9/00 C. 95000 D. 9125000 &. 916000 @C recaptre O 90000 × 0.0 O 95000
AACSB: Analytic Bloom's: Alication Difficulty: Basic Learning Obecti!e: "#$" Section: "#% &oic: Net wor+ing caital reco!ery
Essay Questions
60. In a single sentence e%plain how (o can determine which cash flows shold be inclded in the anal(sis of a pro!ect. #n( changes in cash flows that will reslt from accepting a new pro!ect shold be inclded in the anal(sis of that pro!ect. >eedback" 3efer to section 10.1
AACSB: 4eflecti!e t)in+ing Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%" &oic: 4ele!ant cas) flows
10-6,
Chapter 10 - Making Capital Investment D ecisions
61. hat is the formla for the ta%-shield approach to GC>* &%plain the two ke( points the formla illstrates. GC> O B4ales - Costs × B1 - T Depreciation × T The formla illstrates that cash income and e%penses affect GC> on an afterta% basis. The formla also illstrates that even thogh depreciation is a non -cash e%pense it does affect GC> becase of the ta% savings reali)ed from the depreciation e%pense. >eedback" 3efer to section 10./
AACSB: 4eflecti!e t)in+ing Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$" Section: "#%0 &oic: &a1$s)ield OC6
6. hat is the primar( prpose of compting the e+ivalent annal costs when comparing two machines* hat is the assmption that is being made abot each machine* The primar( prpose is to compte the annal cost of each machine on a comparable basis so that the least e%pensive machine can be identified given that the machines generall( have differing lives and costs. The assmption is that whichever machine is ac+ired it will be replaced at the end of its sefl life. >eedback" 3efer to section 10.
AACSB: 4eflecti!e t)in+ing Bloom's: Comre)ension Difficulty: Basic Learning Obecti!e: "#$ Section: "#%2 &oic: ,3ui!alent annual cost
10-6
Chapter 10 - Making Capital Investment D ecisions
6,. #ssme a firm sets its bid price for a pro!ect at the minimm level as compted sing the disconted cash flow method. :iven this what do (o know abot the net present vale and the internal rate of retrn on the pro!ect as bid* The disconted cash flow approach to setting a bid price assmes the net present vale of the pro!ect will be )ero which means the internal rate of retrn mst e+al the re+ired rate. >eedback" 3efer to section 10.
AACSB: 4eflecti!e t)in+ing Bloom's: Analysis Difficulty: (ntermediate Learning Obecti!e: "#$Section: "#%2 &oic: Bid rice and N.7
6. Can the initial cash flow at time )ero for a pro!ect ever be a positive vale* If (es give an e%ample. If no e%plain wh( not. The initial cash flow can be a positive vale. >or e%ample if a pro!ect redced net working capital b( an amont that e%ceeded the initial cost for fi%ed assets the initial cash flow wo ld be a positive amont. >eedback" 3efer to section 10.
AACSB: 4eflecti!e t)in+ing Bloom's: Analysis Difficulty: Basic Learning Obecti!e: "#$" Section: "#%* &oic: .roect cas) flows
10-6/
Chapter 10 - Making Capital Investment D ecisions
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 sall( arrives at a different calclated bid price becase the( se different assmptions in the evalation process sch 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 retrn and ta% rates. >eedback" 3efer to section 10.
AACSB: 4eflecti!e t)in+ing Bloom's: Analysis Difficulty: Basic Learning Obecti!e: "#$Section: "#%2 &oic: Bid rice
Multiple Choice Questions
6. innebagel Corp. crrentl( sells 500 motor homes per (ear at 9,00 each and 1150 l%r( motor coaches per (ear at 926600 each. The compan( wants to introdce a new portable camper to fill ot its prodct line. It hopes to sell 1620 of these campers per (ear at 91150 each. #n independent consltant has determined that if innebagel introdces the new campers it shold boost the sales of its e%isting motor homes b( 200 nits per (ear and redce the sales of its motor coaches b( 1 nits per (ear. hat is the amont that shold be sed as the annal sales figre when evalating this pro!ect* #. 9621,00 $. 9,0100,00 C. 9,111500 D. 9,,5,600 &. 9,256/00 4ales O B1620 × 91150 B200 × 9,00 B-1 × 926600 O 9,,5,600
AACSB: Analytic Bloom's: Analysis Difficulty: Basic ,OC 8: "#$* Learning Obecti!e: "#$" Section: "#%" &oic: 4ele!ant cas) flows
10-6
Chapter 10 - Making Capital Investment D ecisions
62. Consider the following income statement"
hat is the amont of the depreciation ta% shield* #. 9,02 B. 916 C. 9/65 D. 911 &. 9616 Depreciation ta% shield O 92/00 × ., O 916
AACSB: Analytic Bloom's: Alication Difficulty: Basic ,OC 8: "#$ Learning Obecti!e: "#$" Section: "#%0 &oic: Dereciation ta1 s)ield
10-62
Chapter 10 - Making Capital Investment D ecisions
65. Consider an asset that costs 912000 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 9000. The relevant ta% rate is ,0 percent. hat is the afterta% cash flow from the sale of this asset* #. 9,1500 $. 9,00 C. 9,,,00 D. 9,100 E. 9,00 $ook vale at end of (ear 2 O 912000 × A11 O 9000 #fterta% salvage vale O 9000 EB9000 - 9000 × .,0F O 9,00
AACSB: Analytic Bloom's: Alication Difficulty: Basic ,OC 8: "#$9 Learning Obecti!e: "#$" Section: "#% &oic: 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/,5000 in annal sales with costs of 91,100. The ta% rate is ,1 percent. hat is the operating cash flow for this pro!ect* #. 9156,15 $. 91102 C. 9/1/5 D. 9,01 &. 955,1/ GC> O B/,5000 - 91,100B1 - 0.,1 B9/66000AB0.,1 O 9/1/5
AACSB: Analytic Bloom's: Alication Difficulty: Basic ,OC 8: "#$ Learning Obecti!e: "#$" Section: "#%&oic: Oerating cas) flow
10-65
Chapter 10 - Making Capital Investment D ecisions
100. =hone Home Inc. is considering a new /-(ear e%pansion pro!ect that re+ires an initial fi%ed asset investment of 9.5 million. The fi%ed asset will be depreciated straight-line to )ero over its /-(ear ta% life after which time it will be worthless. The pro!ect is estimated to generate 905000 in annal sales with costs of 955,00. The ta% rate is , percent and the re+ired retrn on the pro!ect is 11 percent. hat is the net present vale for this pro!ect* #. 91,1// B. 91,,0/6 C. 91,065 D. 91,12 &. 91,/005 GC> O B905000 - 955,00B1 - 0., B95000A/B0., O 910/650
AACSB: Analytic Bloom's: Alication Difficulty: Basic ,OC 8: "#$"# Learning Obecti!e: "#$" Section: "#%&oic: Net resent !alue
10-66
Chapter 10 - Making Capital Investment D ecisions
101. =hone Home Inc. is considering a new -(ear e%pansion pro!ect that re+ires an initial fi%ed asset investment of 9, million. The fi%ed asset will be d epreciated straight-line to )ero over its -(ear ta% life after which time it will have a market vale of 9,1000. The pro!ect re+ires an initial investment in net working capital of 9,, 0000 all of which will be recovered at the end of the pro!ect. The pro!ect is estimated to generate 90000 in annal sales with costs of 910/000. The ta% rate is ,1 percent and the re+ired retrn for the pro!ect is 1/ percent. hat is the net present vale for this pro!ect* #. 9210/ B. 92,,620 C. 921,,/ D. 9205 &. 92/6/ GC> O B90000 - 910/000B1 - 0.,1 B9,000000AB0.,1 O 91,/0
AACSB: Analytic Bloom's: Alication Difficulty: Basic ,OC 8: "#$"" Learning Obecti!e: "#$" Section: "#%&oic: Net resent !alue
10-100
Chapter 10 - Making Capital Investment D ecisions
10. Dog pN >ranks is looking at a new sasage s(stem with an installed cost of 9,62500. This cost will be depreciated straight-line to )ero over the pro!ect's 2-(ear life at the end of which the sasage s(stem can be scrapped for 9100. The sasage s(stem will save the firm 9100 per (ear in preta% operating costs and the s(stem re+ires an initial investment in net working capital of 95/0. #ll of the net working capital will be recovered at the end of the pro!ect. The ta% rate is ,, percent and the discont rate is 6 percent. hat is the net present vale of this pro!ect* #. -91,11 $. -9250 C. 951/02 D. 9651 E. 911551 GC> O 9100B1 - 0.,, B9,62500A2B0.,, O 910021.,
AACSB: Analytic Bloom's: Alication Difficulty: Basic ,OC 8: "#$" Learning Obecti!e: "#$" Section: "#%&oic: Net resent !alue
10-101
Chapter 10 - Making Capital Investment D ecisions
10,. ?or firm is contemplating the prchase of a new 915000 compter-based order entr( s(stem. The s(stem will be depreciated straight-line to )ero over its /-(ear life. It will be worth 91/500 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 redce working capital b( 911/2 Bthis is a one-time redction. The net working capital will retrn to its o riginal level when the pro!ect ends. The ta% rate is ,/ percent. hat is the internal rate of retrn for this pro!ect* #. 11.25 percent $. 1,.6 percent C. 15.1 percent D. 1./ percent &. ,./5 percent GC> O 9,00B1 - 0.,/ B915000A/B0.,/ O 9//500
AACSB: Analytic Bloom's: Alication Difficulty: Basic ,OC 8: "#$" Learning Obecti!e: "#$" Section: "#%&oic: (nternal rate of return
10-10
Chapter 10 - Making Capital Investment D ecisions
10. # -(ear pro!ect has an initial asset investment of 9,000 and initial net working capital investment of 9600 and an annal operating cash flow of -920. The fi%ed asset is fll( depreciated over the life of the pro!ect and has no salvage vale. The net working capital will be recovered when the pro!ect ends. The re+ired retrn is 1/ percent. hat is the pro!ect's e+ivalent annal cost or &#C* A. -91/561 $. -91/,06 C. -91255 D. -91//06 &. -911
AACSB: Analytic Bloom's: Alication Difficulty: Basic ,OC 8: "#$"2 Learning Obecti!e: "#$ Section: "#%2 &oic: ,3ui!alent annual cost
10-10,
Chapter 10 - Making Capital Investment D ecisions
10/. Heer &nterprises needs someone to sppl( it with /000 cartons of machine screws per (ear to spport its manfactring needs over the ne%t 2 (ears and (o've decided to bid on the contract. It will cost (o 91120000 to install the e+ipment necessar( to start prodctionK (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. ?or fi%ed prodction costs will be 9,0000 per (ear and (or variable prodction costs shold 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. ?or ta% rate is , percent and (o re+ire a 1, percent retrn on (or investment. hat bid price per carton shold (o sbmit* #. 912.0 $. 91./ C. 91/.26 D. 91/.0, &. 91.51
922.66 O EB= - 91.2/B/000 - 9,0000FE1 - 0., B91120000A2B0., = O 91/.26
AACSB: Analytic Bloom's: Analysis Difficulty: Basic ,OC 8: "#$"; Learning Obecti!e: "#$Section: "#%2 &oic: Bid rice
10-10
Chapter 10 - Making Capital Investment D ecisions
10. Chapman Machine 4hop is considering a -(ear pro!ect to improve its prodction efficienc(. $(ing a new machine press for 9/2000 is estimated to reslt in 916000 in annal preta% cost savings. The press falls in the M#C34 /-(ear class and it will have a salvage vale at the end of the pro!ect of 95000. The press also re+ires an initial investment in spare parts inventor( of 9000 along with an additional 9,00 in inventor( for each scceeding (ear of the pro!ect. The inventor( will retrn to its original level wh en the pro!ect ends. The shop's ta% rate is ,/ percent and its discont rate is 11 percent. 4hold the firm b( and install the machine press* h( or wh( not*
A. noK The net present vale is -9256. $. noK The net present vale is -92. C. (esK The net present vale is 911. D. (esK The net present vale is 9,16. &. (esK The net present vale is 95,.
Deprec1 O 9/2000 × 0.0 O 911/00 Deprec O 9/2000 × 0., O 915,0 Deprec, O 9/2000 × 0.160 O 9110/6 Deprec O 9/2000 × 0.11/ O 9,//.0 $ook vale O 9/2000 - 911/00 - 915,0 - 9110/6 - 9,//.0 O 966/,.50 #fterta% salvage vale O 95000 B966/,.50 - 95000B0.,/ O 956,.5 GC>1 O 916000B1 - 0.,/ 911/00B0.,/ O 91/10 GC> O 916000B1 - 0.,/ 915,0B0.,/ O 9156,1 GC>, O 916000B1 - 0.,/ 9110/6B0.,/ O 91,/02.0 GC> O 916000B1 - 0.,/ 9,//.0B0.,/ O 9150.,
The machine shold not be prchased becase the net present vale is negative.
10-10/
Chapter 10 - Making Capital Investment D ecisions
AACSB: Analytic Bloom's: Analysis Difficulty: (ntermediate ,OC 8: "#$" Learning Obecti!e: "#$* Section: "#%2 &oic: Costs$cutting roosal
102. &ads Indstrial 4(stems Compan( B&I4C is tr(ing to decide between two different conve(or belt s(stems. 4(stem # costs 92000 has a -(ear life and re+ires 911000 in preta% annal operating costs. 4(stem $ costs 9/12000 has an 5-(ear life and re+ires 926000 in preta% annal operating costs. $oth s(stems are to be depreciated straight-line to )ero over their lives and will have a )ero salvage vale. hichever s(stem is chosen it will not be replaced when it wears ot. The ta% rate is ,, percent and the discont rate is percent. hich s(stem shold the firm choose and wh(* #. #K The net present vale is 911/1. B. #K The net present vale is -9/520. C. #K The net present vale is -9,11. D. $K The net present vale is 9,05. &. $" The net present vale is -9/1,.
4(stem # shold be chosen becase it has the more positive Bsmaller negative net present vale.
AACSB: Analytic Bloom's: Analysis Difficulty: (ntermediate ,OC 8: "#$*# Learning Obecti!e: "#$" Section: "#%&oic: 5utually e1clusi!e roects
10-10
