CHAPTER 8 Making Capital Investment Decisions
I.
DEFINITIONS
INCREMENTA CASH FO!S a 1. The The chan change gess in a firm firm’’s fut futur uree cash cash flo flows ws that that are are a dire direct ct con conse sequ quen ence ce of of acce accept ptin ing ga project are called _____ _____ cash flows. a. incremental b. stand-alone c. after-tax d. net present value e. erosion Difficulty level: Easy E"#I$AENT E"#I$AENT ANN#A ANN #A COST e 2. The The annu annual al ann annui uit t str strea eam m of pam pamen ents ts with with the the same same pre prese sent nt val value ue as as a pro proje ject ct’’s cost costss is called the project’s project’s _____ cost. a. incremental b. sun! c. opportunit d. erosion e. equivalent annual Difficulty level: Easy S#N% COSTS c ". # cost cost that that has has alr alrea ead d bee been n pai paid$ d$ or or the the liab liabil ilit it to to pa pa has has alrea alread d been been incu incurre rred$ d$ is is a%n&' a. sal salvage age va value lue exp expense ense.. b. net wor!ing capital expense. c. sun! cost. d. opportunit co cost. e. erosion cost. Difficulty level: Easy OPPORT#NIT& COSTS d (. The The most most valu valuab able le inve invest stme ment nt give given n up if an an alte altern rnat ativ ivee inv inves estm tmen entt is chos chosen en is a%n a%n&' &' a. sal salvage age va value lue exp expense ense.. b. net wor!ing capital expense. c. sun! cost. d. opportunit co cost. e. erosion cost. Difficulty level: Easy EROSION COSTS
e
). a. b. c. d. e.
The The cash cash flo flows ws of of a new new proj projec ectt tha thatt come come at at the the expe expens nsee of a firm firm’’s exis existi ting ng pro proje ject ctss are called' sal salvage age va value lue exp expen ense sess. net wor!ing capital expenses. sun! costs. opportunit cos costs. erosion co costs.
Difficulty level: Easy PRO FORMA FINANCIA FINANCI A STATEMENT STATEMENTS S a *. # pro fo forma fi financial st statement is is on one th that' a. proj projec ects ts futu future re ears ears’’ oper operat atio ions ns.. b. is expressed as a percentage percentage of the total assets of of the firm. c. is expr express essed ed as a perce percenta ntage ge of of the the total total sales sales of of the the firm. firm. d. is expre expresse ssed d relati relative ve to a chose chosen n base base ear’s ear’s fina financi ncial al state statemen ment. t. e. reflec reflects ts the the past past and curren currentt opera operatio tions ns of of the the firm. firm. Difficulty level: Easy MACRS DEPRECIATION b +. The depreciation method method currentl allowed under under , tax law governing governing the accelerated write-off of propert under various lifetime classifications is called _____ depreciation. a. /0 b. #3 c. straight-line d. sumsum-of of- -ea ears rs dig digits e. curvilinear Difficulty level: Easy DEPRECIATION TA' SHIED c 4. The The cash cash flo flow w tax tax savi saving ngss gene genera rate ted d as a resu result lt of of a firm firm’’s taxtax-de dedu duct ctib ible le dep deprec recia iati tion on expense is called the' a. afte afterr-ta tax x depr deprec ecia iati tion on savi saving ngs. s. b. depreciable basis. c. dep depreci reciat atiion tax tax shi shiel eld d. d. oper operat atin ing g cash cash flow flow.. e. aft after-t er-tax ax sal salva vage ge val valu ue. Difficulty level: Easy CASH FO! d 5. The The cas cash h flo flow w fro from m pro proje ject ctss for for a comp compan an is comp comput uted ed as the' the' a. net operati operating ng cash cash flow flow generated generated b the the project$ project$ less less an an sun! sun! costs costs and erosion erosion costs. costs. b. sum of the incremental operating operating cash flow and after-tax after-tax salvage value of the the project. c. net income income generat generated ed b b the the project project$$ plus plus the the annual annual deprec depreciatio iation n expense expense.. d. sum of the incremen incremental tal operatin operating g cash flow$ flow$ capital capital spendin spending$ g$ and net wor!ing wor!ing capital capital expenses incurred b the project. e. sum of the the sun! sun! costs costs$$ opportu opportunit nit costs$ costs$ and and erosio erosion n costs costs of the the projec project. t.
Difficulty level: Medium II.
CONCEPTS
PRO FORMA INCOME INCOM E STATEMENT STATEMENT b 16. The pro forma income statement statement for a cost reduction project' project' a. will will reflec reflectt a reduct reduction ion in the sales sales of the the firm firm.. b. will generall reflect reflect no incremental sales. c. has to to be prep prepare ared d reflec reflectin ting g the the total total sales sales and and expen expenses ses of of a firm. firm. d. cannot cannot be be prepar prepared ed due due to the the lac! lac! of an an projec projectt relate related d sales. sales. e. will will alwa alwass reflec reflectt a negati negative ve proje project ct opera operatin ting g cash cash flow flow. Difficulty level: Easy INCREMENTA CASH FO! b 11. 0ne purpose of identifing identifing all of the incremental incremental cash flows related to to a proposed project is to' a. isolate isolate the the total total sun! sun! costs costs so the the can be evaluat evaluated ed to determine determine if the the project project will add value to the firm. b. eliminate an cost which which has previousl been incurred so that it can be omitted from the analsis of the project. c. ma!e ma!e each each proje project ct appea appearr as prof profita itable ble as as possi possible ble for for the the firm firm.. d. include include both both the the propos proposed ed and the curren currentt operatio operations ns of a firm firm in the the analsi analsiss of the the project. e. identif identif an and and all all changes changes in in the cash flows flows of the the firm firm for the past past ear ear so so the the can be included in the analsis. analsis. Difficulty level: Medium INCREMENTA CASH FO! e 12. 12. 7hic 7hich h of of the the foll follow owin ing g are are exam exampl ples es of an incr increm emen enta tall cas cash h flo flow8 w8 /. an incr increa ease se in in acco accoun unts ts rec recei eiva vabl blee //. //. a dec decre reas asee in in net net wor wor!i !ing ng capi capita tall ///. ///. an incr increa ease se in taxe taxess /9. /9. a decre decrease ase in the the cost cost of of goods goods sold sold a. / and /// onl b. /// and /9 onl c. / and /9 onl d. /$ // ///$ an and /9 /9 onl e. /$ //$ // ///$ an and /9 Difficulty level: Medium INCREMENTA CASH FO! c 1". 1". 7hic 7hich h one one of the the foll follow owin ing g is is an an exa examp mple le of of an incr increme ement ntal al cash cash flow flow88 a. the annual annual salar salar of the the compan compan president president which is a contractu contractual al oblig obligation ation b. the rent on a warehouse which which is currentl being being utili:ed c. the rent rent on on some some new mach machine iner r that that is requ require ired d for an an upcomi upcoming ng proj project ect
d. e.
the proper propert t taxes taxes on on the the currentl currentl owned owned wareho warehouse use which which has been been sitti sitting ng idle idle but but is going to be utili:ed for a new project the insura insurance nce on on a compan compan-own -owned ed buildi building ng which which will will be be utili:ed utili:ed for a new projec projectt
Difficulty level: Medium INCREMENTA COSTS d 1(. 1(. ;roj ;rojec ectt anal anals sis is is focu focuse sed d on ____ _____ _ cost costs. s. a. sun! b. total c. variable d. incremental e. fixed Difficulty level: Medium S#N% COST c 1). un! costs include an cost that' a. will will chan change ge if a pro proje ject ct is is u und nder erta ta!e !en. n. b. will be incurred if a project project is accepted. c. has previo previous usl l been been incurr incurred ed and cannot cannot be chan changed ged.. d. is paid paid to a third third part part and and cannot cannot be refunde refunded d for an reason reason whatsoe whatsoever ver.. e. will will occur occur if a proj project ect is is accept accepted ed and and once once incurr incurred ed$$ cannot cannot be recou recouped ped.. Difficulty level: Easy S#N% COST d 1*. ow >ow$ the the bra!e bra!ess are are acting up and ou are tring to decide whether to fix them or trade the car in for a newer model. /n anal:ing the bra!e situation$ the =)66 ou spent fixing the transmission is a%n& _____ cost. a. opportunit b. fixed c. incremental d. sun! e. relevant Difficulty level: Easy EROSION b 1+. ?rosion can be explained explained as the' a. additi additiona onall income income gene generat rated ed from from the sales sales of of a newl newl added added produ product. ct. b. loss of current sales due due to a new project being implemented. implemented. c. loss loss of reve revenu nuee due due to empl emplo oee ee theft theft.. d. loss loss of reve revenu nuee due due to cust custom omer er the theft ft.. e. loss of cash cash due due to the expens expenses es required required to fix fix a par!in par!ing g lot lot after after a heav heav rain storm. storm. Difficulty level: Easy EROSION
a
14. 14. 7hic 7hich h of of the the foll follow owin ing g are are exam exampl ples es of eros erosio ion8 n8 /. the loss loss of sale saless due due to incr increas eased ed comp competi etitio tion n in the the prod product uct mar!et mar!et //. the loss loss of sales because because our our chief chief competito competitorr just just opened opened a store store across across the the street street from our store ///. the loss loss of sales sales due to a new produc productt which which ou recentl recentl introduc introduced ed /9. /9. the loss loss of sales due due to a new product product recentl recentl introduce introduced d b our competi competitor tor a. /// onl b. /// and /9 onl c. /$ /// and /9 onl d. // and /9 onl e. /$ //$ // ///$ an and /9 Difficulty level: Medium
T&PES OF COSTS d 15. 15. 7hic 7hich h of the the fol follo lowi wing ng ssho houl uld d be inc inclu lude ded d in the the ana anal lsi siss of a proj projec ect8 t8 /. sun! costs //. //. oppo opport rtun unit it co costs sts ///. ///. eros erosio ion n cost costss /9. /9. incr increm emen enta tall cost costss a. / and // onl b. /// and /9 onl c. // and /9 onl d. //$ ///$ and /9 onl e. /$ //$ and /9 onl Difficulty level: Medium NET !OR%IN( CAPITA d 26. #ll #ll of the follow following ing are antici anticipa pated ted effec effects ts of a propos proposed ed proj project ect.. 7hic 7hich h of of these these should be included in the initial project cash flow related to net wor!ing capital8 /. an inve invent ntor or decr decrea ease se of =)$6 =)$666 66 //. an increa increase se in in accou account ntss recei receivab vable le of of =1$)6 =1$)66 6 ///. ///. an incre increase ase in in fixed fixed asset assetss of =+$*6 =+$*66 6 /9. /9. a decrea decrease se in accou account ntss paabl paablee of =2$16 =2$166 6 a. / and // onl b. / and /// onl c. // and /9 onl d. /$ //$ and /9 onl e. /$ //$ // ///$ an and /9 Difficulty level: Medium NET !OR%IN( CAPITA a 21. hanges in in th the ne net wo wor!ing ca capital' a. can affe affect ct the the cash cash flows flows of of a projec projectt ever ever ear ear of the the proje project’ ct’ss life. life. b. onl affect the initial initial cash flows of a project. project. c. are included included in project project analsis analsis onl if the the represent represent cash outflows outflows.. d. are genera generall ll exclud excluded ed from from project project analsis analsis due to to their their irrelev irrelevance ance to to the the total total project.
e.
affect affect the the initial initial and the the final final cash cash flows flows of a projec projectt but but not the cash cash flows flows of of the middle ears.
Difficulty level: Medium NET !OR%IN( CAPITA c 22. 22. 7hic 7hich h one one of the the foll follow owin ing g wil willl decr decrea ease se net net wor wor!i !ing ng capi capita tall of a firm firm88 a. a dec decre reas asee in in acc accou oun nts paa paabl blee b. an increase in inventor inventor c. a decr decrea ease se in in acco accoun unts ts rec recei eiv vable able d. an incr increas easee in the firm’ firm’ss chec! chec!ing ing accoun accountt balan balance ce e. a dec decre reas asee in in fi fixed asse assets ts Difficulty level: Easy NET !OR%IN( CAPITA d 2". >et wor!ing capital' a. can be be ignored ignored in projec projectt analsi analsiss because because an an expend expenditure iture is normall normall recouped recouped b the the end of the project. b. requirements generall generall$ but not alwas$ create a cash inflow inflow at the beginning of a project. c. expend expenditu itures res common commonl l occu occurr at the end of a proj project ect.. d. is freque frequentl ntl affected affected b the the addit additional ional sales generated generated b a new project. project. e. is the the onl onl expendit expenditure ure where where at least least a partial partial recover recover can be made made at the the end end of a project. Difficulty level: Easy MACRS d 2(. 2(. a. b. c. d. e.
# comp compan an whi which ch use usess the the #3 #3 sst sstem em of of dep depre reci ciat atio ion' n' will will have have equal equal depr depreci eciati ation on costs costs each each ear ear of of an asset asset’’s life. life. will expense the cost cost of nonresidential real estate estate over a period of + ears. can deprec depreciat iatee the the cost cost of land$ land$ if if the the so desi desire. re. will write off the entire entire cost cost of of an asset over the asset’ asset’ss class class life. life. cannot cannot expense expense an of of the cost of a new asset asset during during the the first first ear of the the asset’ asset’ss life. life.
Difficulty level: Easy MACRS a 2). @et Ar @il @iltt Tos Tos just just purc purchas hased ed som somee #3 #3 )-ear )-ear proper propert t at a cost cost of =2" =2"6$6 6$666 66.. 7hich of the following will correctl give ou the boo! value of this equipment at the end of ear 28
#3 )-ear propert
* ).+*B /. )2B of of th the asset co cost //. //. (4B (4B of of the the ass asset cost cost ///. ///. *4B *4B of of 46B 46B of the asset asset cost cost /9. /9. the asset asset cost$ cost$ minus 26B 26B of the asset asset cost$ cost$ minus "2B "2B of 46B of the the asset cost cost a. // onl b. /// and /9 onl c. / and /// onl d. // and /9 onl e. /$ //$ // ///$ an and /9 Difficulty level: Easy MACRS e 2*. 2*. 7ill ill Co$ Co$ /nc. /nc. just just pur purch chas ased ed som somee equi equipm pmen entt at a cos costt of =*) =*)6$6 6$666 66.. 7hat 7hat is is the the proper methodolog methodolog for computing the depreciation depreciation expense for ear " if if the equipment is classified as )-ear propert for #38
a. b. c. d. e.
#3 )-ear propert
Difficulty level: Medium )OO% $A#E d 2+. 2+. The The boo boo! ! val value ue of an asse assett is is pri primar maril il use used d to to com compu pute te the' the' a. annu annual al dep depre reci ciat atio ion n tax tax shie shield ld.. b. amount of cash received from from the sale of an asset. c. amount amount of tax tax save saved d annua annuall ll due to the the depr depreci eciati ation on expe expense nse.. d. amou amount nt of tax tax due due on on the the sale sale of of an asse asset. t. e. change change in in deprec depreciat iation ion need needed ed to refle reflect ct the the mar!et mar!et value value of of the asset asset.. Difficulty level: Easy SA$A(E $A#E c 24. The salvag salvagee value value of an an asset asset create createss an after after-ta -tax x cash cash infl inflow ow to the firm firm in an amou amount nt equal to the' a. sales ales pric pricee of of the the asse assett. b. sales price minus the boo! boo! value. c. sales price minus minus the the tax tax due due based based on the the sales sales price price minus minus the the boo! boo! value. value.
d. e.
sales price plus the tax due due based based on on the the sales sales price price minus minus the the boo! boo! value. value. sales price plus the tax due due based based on on the the boo! boo! value value minus minus the the sales sales price. price.
Difficulty level: Easy
SA$A(E $A#E e 25. 25. The The pre pre-t -tax ax salv salvag agee val value ue of an asse assett is is equ equal al to the' the' a. boo boo! ! valu valuee if if strai straight ght-li -line ne deprec depreciat iation ion is used. used. b. boo! value if #3 depreciation depreciation is used. c. mar! mar!et et valu valuee min minus us the the boo boo! ! valu value. e. d. boo! boo! valu valuee min minus us the the mar mar!e !ett val value ue.. e. mar!et value. Difficulty level: Easy PRO*ECT OCF a "6. "6. # proj projec ect’ t’ss o ope pera rati ting ng cash cash flow flow will will incr increa ease se whe when' n' a. the the dep depre reci ciat atio ion n exp expen ense se incr increa ease ses. s. b. the sales projections projections are lowered. c. the the int inter eres estt exp expen ense se is is low lower ered ed.. d. the net wor!i wor!ing ng capit capital al requ require iremen mentt incr increas eases. es. e. the earnin earnings gs befor beforee inte interes restt and and taxes taxes decrea decreases ses.. Difficulty level: Easy PRO*ECT CASH FO!S c "1. The ca cash fl flows of of a project sh should' a. be comp comput uted ed on a pre pre-t -tax ax basi basis. s. b. include all sun! costs costs and opportunit opportunit costs. c. includ includee all incr increme ementa ntall costs costs$$ includ including ing oppo opportu rtuni nit t costs costs.. d. be applied applied to to the ear when when the the related related expense expense or or income income is recogn recogni:ed i:ed b b E##; E##;. e. include include all financ financing ing costs costs related related to new new debt debt acquired acquired to financ financee the the project project.. Difficulty level: Easy PRO*ECT OCF a "2. 7hich 7hich of the the follo followin wing g are are corr correct ect method methodss for for comput computing ing the operat operating ing cash cash flow flow of a project assuming that the interest expense is equal to :ero8 /. ?@/T @/T D Cep Cepreci reciat atio ion n - Tax Taxes es //. //. ?@/T ?@/T D Cep Cepre reci ciat atio ion n D Taxes axes ///. ///. >et >et /ncom /ncomee D Ceprec Ceprecia iati tion on /9. %al %ales es F os osts ts&& %Taxes D Cepreciation& %1-Taxes& a. / and /// onl b. // and /9 onl c. // and /// onl d. /$ // ///$ an and /9 /9 onl e. //$ // ///$ an and /9 onl Difficulty level: Medium
)OTTOM+#P OCF b "". The bottom-up approach approach to computing the the operating cash flow applies applies onl when' a. both the depreciat depreciation ion expense expense and and the interest interest expense expense are equal equal to :ero. b. the interest expense expense is equal to :ero. c. the the pro proje ject ct is a ccos ostt-cu cutt ttin ing g pro proje ject ct.. d. no fixed fixed assets assets are requir required ed for the proje project. ct. e. taxes taxes are are ignor ignored ed and and the the inter interest est expens expensee is equa equall to :ero :ero.. Difficulty level: Medium TOP+DO!N OCF a "(. "(. The The top top-d -dow own n appr approa oach ch to comp comput utin ing g the the ope opera rati ting ng cash cash flow flow'' a. igno ignore ress all all nonc noncas ash h item items. s. b. applies onl if a project project produces sales. c. can onl onl be used used if the the entir entiree cash cash flows flows of a firm firm are are inclu included ded.. d. is equal equal to sale saless - cos costs ts - taxes taxes D depre deprecia ciatio tion. n. e. includ includes es the intere interest st expens expensee relat related ed to to a projec project. t. Difficulty level: Medium TA' SHIED d "). #n increase increase in which which one of the followin following g will increase increase the operating operating cash flow8 a. emp mplloee salaries b. office rent c. buil build ding ing main mainttenan enance ce d. equ equipme ipmen nt dep deprec reciat iation ion e. equipment re rental Difficulty level: Easy TA' SHIED c "*. "*. Tax shie shield ld refe refers rs to a red reduc ucti tion on in taxe taxess cre creat ated ed b' b' a. a re reduction in in sa sales. b. an increase in interest interest expense. c. noncash expenses. d. a pro proje ject ct’’s inc incre remen menta tall exp expen ense ses. s. e. opportu rtunit co costs. Difficulty level: Easy COST+C#TTIN( c "+. # projec projectt which which is desi designe gned d to to impr improve ove the manufa manufactu cturin ring g effi efficie cienc nc of a firm firm but but will will generate no additional sales is referred to as a%n& _____ project. a. sun! cost b. opportunit c. cost-cutting d. revenue-cutting e. revenue-generating
Difficulty level: Easy E"#I$AENT E"#I$AENT ANN#A COST c "4. Toni’ oni’s Tool Toolss is is comp compari aring ng machin machines es to determ determine ine which which one to purcha purchase. se. The machines sell for differing prices$ have differing operating costs$ differing machine lives$ and will be replaced when worn out. These machines should be compared using' a. net net pre prese sen nt va value lue on onl. l. b. both net present value value and the internal rate of of return. c. thei theirr eff effec ecti tive ve annu annual al cost costs. s. d. the the depr deprec ecia iati tion on tax tax shi shiel eld d app appro roac ach. h. e. the the repl replac acem emen entt par parts ts appr approa oach ch.. Difficulty level: Medium E"#I$AENT E"#I$AENT ANN#A COST e "5. "5. The The equ equiv ival alen entt annu annual al cost cost meth method od is usef useful ul in dete determi rmini ning ng'' a. the annua annuall operatin operating g cost cost of a machine machine if if the annual annual mainten maintenance ance is perform performed ed versus versus when the maintenance is not performed as recommended. b. the tax shield benefits benefits of depreciation given given the purchase of new assets assets for a project. c. operat operating ing cash cash flow flowss for costcost-cut cuttin ting g projec projects ts of equal equal dura duratio tion. n. d. which one of of two machines machines to to acquire acquire given equal machine machine lives lives but but unequal unequal machine machine costs. e. which one of two two machine machiness to purchase purchase when when the machines machines are mutua mutuall ll exclusive exclusive$$ have different machine lives$ and will be replaced once the are worn out. Difficulty level: Medium III. III. PRO) PRO)E EMS MS REE$ANT CASH FO!S d (6. arsha arshall’ ll’ss G o. purcha purchased sed a corn corner er lot lot in ?glon ?glon it it five five ears ears ago at a cost cost of =*(6$666. The lot was recentl appraised at =416$666. #t the time of the purchase$ the compan spent =)6$666 to grade the lot and another =($666 to build a small building on the lot to house a par!ing lot attendant who has overseen the use of the lot for dail commuter par!ing. The compan now wants to build a new retail store on the site. The building cost is is estimated at =1.2 million. million. 7hat amount should should be used as the initial initial cash flow for this building project8 a. =1$266$666 b. =1$4(6$666 c. =1$456$666 d. =2$616$666 e. =2$6*6$666 Difficulty level: Medium REE$ANT CASH FO!S e (1. Hamest Hamestown own Itd. Itd. curr current entl l produc produces es boat boat sails sails and is consid consideri ering ng expand expanding ing its operations to include awnings for homes and travel trailers. The compan owns land beside its current manufacturing manufacturing facilit that that could be used for the the expansion. The compan bought this land ten ears ago at a cost of =2)6$666. Toda$ the land is
a. b. c. d. e.
valued at =(2)$666. The grading and excavation wor! necessar to build on the land will cost =1)$666. The compan currentl has some unused equipment which it currentl owns valued at =*6$666. This equipment could be used for producing awnings if =)$666 is spent for equipment modifications. 0ther equipment costing =+46$666 will also be required. 7hat is the amount of the initial cash flow for this expansion project8 =466$666 =1$6)6$666 =1$116$666 =1$22)$666 =1$24)$666
Difficulty level: Medium REE$ANT CASH FO!S b (2. 7ilbert’s 7ilbert’s$$ /nc. paid =56$666$ in cash$ for a piece of of equipment three ears ago. ago. Iast ear$ the compan spent =16$666 to update the equipment with the latest technolog. technolog. The compan no longer uses this equipment in their current operations and has received an offer of =)6$666 from a firm who would li!e to purchase it. 7ilbert’s 7ilbert’s is debating whether to sell the equipment or to expand their operations such that the equipment can be used. 7hen evaluating the expansion option$ what value$ if an$ should 7ilbert’s assign to this equipment as an initial cost of the project8 a. =(6$666 b. =)6$666 c. =*6$666 d. =46$666 e. =56$666 Difficulty level: Easy REE$ANT CASH FO!S a (". 7al!s al!s oftl oftl $ /nc. /nc. sell sellss custo customi: mi:ed ed shoe shoes. s. urr urrent entl l$$ the the sell sell 16$66 16$666 6 pairs pairs of shoe shoess annuall at an average price of =*4 a pair. The are considering adding a lower-priced line of shoes which sell for =(5 a pair. pair. 7al!s 7al!s oftl estimates the can sell )$666 pairs of the lower-priced shoes but will sell 1$666 less pairs of the higher-priced shoes b doing so. 7hat is the amount of the sales that should be used when evaluating the addition of the lower-priced shoes8 a. =1++$666 b. =2()$666 c. ="1"$666 d. =+45$666 e. =4)+$666 Difficulty level: Medium OPPORT#NIT& COST c ((.
a. b. c. d. e.
compan decides to assign this warehouse to a new project$ what value$ if an$ should be included in the initial initial cash flow of the the project for this building8 building8 =6 =2*4$666 =25)$666 ="5)$666 =)1)$666
Difficulty level: Easy OPPORT#NIT& COST d ().
a. b. c. d. e.
for =(+$566. 7hat is the erosion cost8 =*$2)6$666 =14$166$666 =)"$+)6$666 =5"$1)6$666 =114$+45$)66
Difficulty level: Medium OCF e (4. ?rnie’ ?rnie’ss ?lect ?lectric rical al is is evalu evaluati ating ng a projec projectt which which will will incre increase ase sales sales b b =)6$6 =)6$666 66 and and costs b ="6$666. The project will cost =1)6$666 and be depreciated straight-line to a :ero boo! value over the 16 ear life of the project. The applicable tax rate is "(B. 7hat is the operating cash flow for this project8 a. ="$"66 b. =)$666 c. =4$"66 d. =1"$"66 e. =14$"66 Difficulty level: Medium OCF d (5. Kurt’ Kurt’ss Kabin Kabinets ets is loo!in loo!ing g at a proje project ct that that will will requi require re =46$ =46$666 666 in fixed fixed asse assets ts and and another =26$666 in net wor!ing capital. The project is expected to produce sales of =116$666 =116$666 with associated costs of =+6$666. The project has a (-ear life. The compan uses straight-line depreciation to a :ero boo! value over the life of the project. The tax rate is ")B. 7hat is the operating cash flow for this project8 a. =+$666 b. =1"$666 c. =2+$666 d. =""$666 e. =(6$666 Difficulty level: Medium )OTTOM+#P OCF c )6. )6. ;ete ;eter’ r’ss @oat @oatss has has sale saless of =+* =+*6$ 6$66 666 6 and and a pro profi fitt marg margin in of of )B. )B. The The ann annua uall depreciation expense is =46$666. 7hat is the amount of the operating cash flow if the compan has no long-term debt8 a. ="($666 b. =4*$(66 c. =114$666 d. =126$(66 e. =12"$566 Difficulty level: Medium )OTTOM+#P OCF d )1. Ie ;lace ;lace has has sale saless o off =("5$ =("5$666 666$$ depre deprecia ciatio tion n of of ="2$6 ="2$666$ 66$ and net wor!in wor!ing g capi capital tal of
a. b. c. d. e.
=)*$666. The firm has a tax rate of "(B and a profit margin of *B. The firm has no interest expense. 7hat is the amount of the operating cash flow8 =(5$"4( =)2$*1* =)($546 =)4$"(6 =11($"(6
Difficulty level: Medium TOP+DO!N OCF b )2. @en’s @order @order afL is considering a project project which will produce produce sales of =1*$666 and and increase cash expenses b =16$666. /f the project is implemented$ taxes will increase from =2"$666 to =2($)66 and depreciation depreciation will increase from =($666 to =)$)66. 7hat is the amount of the operating cash flow using the top-down approach8 a. =($666 b. =($)66 c. =*$666 d. =+$)66 e. =4$)66 Difficulty level: Medium TOP+DO!N OCF c )". 3onnie 3onnie’’s of offee fee Jouse Jouse is consid consideri ering ng a proj project ect which which will will prod produce uce sales sales of =*$666 =*$666 and increase cash expenses b =2$)66. /f the project is implemented$ taxes will increase b =1$"66. The additional depreciation expense will be =1$666. #n initial cash outla of =2$666 is required for net wor!ing capital. 7hat is the amount of the operating cash flow using the top-down approach8 a. =266 b. =1$)66 c. =2$266 d. ="$)66 e. =($266 Difficulty level: Medium TA' SHIED OCF c )(. # projec projectt will will increa increase se sales sales b b =*6$ =*6$666 666 and cash cash expen expenses ses b =)1 =)1$66 $666. 6. The projec projectt will cost =(6$666 and be depreciated using straight-line depreciation to a :ero boo! value over the (-ear life of the project. The compan has a marginal tax rate of ")B. 7hat is the operating cash flow of the project using the tax shield approach8 a. =)$4)6 b. =4$*)6 c. =5$")6 d. =5$+66 e. =16$")6 Difficulty level: Medium
DEPRECIATION TA' SHIED a )). # projec projectt will will increa increase se sales sales b b =1(6 =1(6$66 $666 6 and and cash cash expe expense nsess b b =5)$ =5)$666 666.. The The proj project ect will cost =166$666 and be depreciated using the straight-line method to a :ero boo! value over the (-ear life of the project. The compan has a marginal tax rate of "(B. 7hat is the value of the depreciation tax shield8 a. =4$)66 b. =1+$666 c. =22$)66 d. =2)$666 e. ="+$+)6 Difficulty level: Medium MACRS DEPRECIATION d )*. un Iee’ Iee’s urni urnitur turee just just purc purchas hased ed some some fixed fixed asse assets ts clas classif sified ied as )-e )-ear ar prop propert ert for for #3. The assets cost =2($666. 7hat is the amount of the depreciation expense for the third ear8
#3 )-ear propert
=2$"6( =2$)6+ =2$+*) =($*64 =($466
Difficulty level: Easy MACRS DEPRECIATION a )+.
#3 )-ear propert
=15$(*4.46 =26$246.26 =2+$6(6.66
d. e.
=(4$1"1.26 =(4$*+2.66
Difficulty level: Medium MACRS DEPRECIATION d )4. Iihen Iiheng’ g’ss ? ?nte nterpr rprise isess just just purc purchas hased ed some some fixed fixed assets assets that that are are clas classi sifie fied d as "-ear "-ear propert for #3. The assets assets cost =1$566. 7hat is the amount of the the depreciation expense for ear 28
#3 "-ear propert
=)*2.5" =*"".2+ =+15.*+ =4((."* =1$(++.*"
Difficulty level: Medium MACRS DEPRECIATION b )5. 3;G#$ /nc. purchased some fixed assets assets four ears ago at a cost of of =15$466. The no longer need these assets so are going to sell them toda at a price of ="$)66. The assets are classified as )-ear propert for #3. 7hat is the current boo! value of these assets8 #3 )-ear propert
a. b. c. d. e.
#3 )-ear propert
Difficulty level: Medium SA$A(E $A#E d *1. 3onnie 3onnie’’s ust ustom om ars ars purc purchas hased ed some some fixed fixed assets assets two ears ears ago for ="5 ="5$66 $666. 6. The assets are classified as )-ear propert for #3. 3onnie is considering selling these assets now so he can bu some newer fixed assets which utili:e the latest in technolog. technolog. 3onnie has been offered =15$666 for his old assets. assets. 7hat is the net cash flow from the salvage value if the tax rate is "(B8 #3 )-ear propert
#3 )-ear propert
" ( ) * a. b. c. d. e.
15.26B 11.)2B 11.)2B ).+*B
="+$6"* ="4$446 =(*$164 =(+$++6 =)"$452
Difficulty level: Medium PRO*ECT NP$ d *". # projec projectt is expect expected ed to to creat createe oper operati ating ng cash cash flows flows of =22 =22$)6 $)66 6 a ear ear for for three three ear ears. s. The initial cost of the fixed assets is =)6$666. These assets will be worthless at the end of the project. #n additional ="$666 of net wor!ing capital will be required throughout the life of the project. 7hat is the project’s net present value if the required rate of return is 16B8 a. =2$264.11 b. =2$5)(.1+ c. =($"6*.65 d. =)$264.11 e. =)$5)(.1+ Difficulty level: Medium PRO*ECT NP$ c *(. # projec projectt will will produc producee opera operatin ting g cash cash flows flows of of =()$6 =()$666 66 a ear ear for four four ears ears.. Curi Curing ng the life of the project$ inventor will be lowered b ="6$666 and accounts receivable will increase b =1)$666. #ccounts paable will decrease b =16$666. The project requires the purchase of equipment at an initial cost of =126$666. The equipment will be depreciated straight-line straight-line to a :ero boo! value value over the life of the project. project. The equipment will be salvaged at the end of the project creating a =2)$666 after-tax cash flow. flow. #t the end of the project$ net wor!ing capital will return to its normal level. 7hat is the net present value of this project given a required return of 1(B8 a. ="$(4".(4 b. =1*$11+.6) =1*$11+.6) c. =2+$5)4.** d. ="2$6"+.4* e. =(5$4+*.62 Difficulty level: Challenge PRO*ECT NP$ a *). # projec projectt will will produc producee an operat operating ing cash cash flow flow of =+$" =+$"66 66 a ear ear for for three three ears. ears. The initial cash investment in the project will be =11$*66. The net after-tax salvage value is estimated at ="$)66 and will be received during the last ear of the project’s life. 7hat is the net present value of the project if the required rate of return is 11B8 a. =4$+54.25 b. =5$45*.4+
c. d. e.
=16$6+2.+2 =1"$")".(1 =26$"54.25
Difficulty level: Medium COST+C#TTIN( c **. att’ att’ss ;lac ;lacee is consid consideri ering ng the instal installat lation ion of a new compu computer ter sste sstem m that that will will cut annual operating costs b =11$666. The sstem will cost =(4$666 to purchase and install. This sstem is expected to have a )-ear life and will be depreciated to :ero using straight-line depreciation. 7hat is the amount of the earnings before interest and taxes for this project8 a. -=5$*66 b. =1$666 c. =1$(66 d. =11$666 e. =26$*66 Difficulty level: Medium COST+C#TTIN( b *+. The 7olf’s 7olf’s Cen 0utdoor Eear Eear is considering replacing replacing the equipment it uses uses to produce tents. The The equipment would cost cost =1.( million and lower lower manufacturing costs costs b an estimated =21)$666 =21)$666 a ear. ear. The equipment will will be depreciated using straight-line depreciation to a boo! value of :ero. The life of the equipment is 4 ears. The required rate of return is 1"B and the tax rate is "(B. 7hat is the net income from this proposed project8 a. =1"$*66 b. =2*$(66 c. ="2$(66 d. =(6$666 e. =)"$*66 Difficulty level: Medium COST+C#TTIN( b *4. Thornle achines is is considering a "-ear project project with an initial cost of =*14$666. The project will not directl produce an sales but will reduce operating costs b =2*)$666 a ear. The equipment is depreciated straight-line to a :ero boo! value over the life of the project. #t the end of the project the equipment will be sold for an estimated =*6$666. The tax rate is "(B. The project will require =2"$666 in extra inventor for spare parts and accessories. hould this project be implemented if Thornle’s Thornle’s requires a 5B rate of return8 7h or wh not8 a. noM noM Th The >;9 >;9 is -=2 -=2$* $*(* (*.6 .66 6. b. esM The >;9 is =2+$")(.66. c. esM esM The The >;9 >;9 is ="2$ ="2$)5 )5". ".+4 +4.. d. esM esM The The >;9 >;9 is =("$ =("$16 16*. *.)( )(.. e. esM esM The The >;9 >;9 is =15* =15*$4 $44( 4(.( .(6. 6.
Difficulty level: Challenge E"#I$AENT E"#I$AENT ANN#A COST c *5. Tool a!ers a!ers$$ /nc. /nc. uses uses tool tool and and die die machi machines nes to produc producee equi equipme pment nt for other other firm firms. s. The initial cost of one customi:ed tool and die machine is =4)6$666. This machine costs =16$666 a ear to operate. ?ach machine has a life of " ears before it is replaced. 7hat is the equivalent annual cost of this machine if the required return is 5B8 %3ound our answer to whole dollars& a. ="2)$+5+ b. ="(6$662 c. ="()$+5+ d. ="(+$*(4 e. =")1$*15 Difficulty level: Challenge E"#I$AENT E"#I$AENT ANN#A COST b +6. Hac!son G ons uses pac!ing pac!ing machines to prepare their their product for shipping. shipping. 0ne machine costs =1"*$666 and lasts about ( ears before it needs replaced. The operating cost per machine is =*$666 a ear. 7hat is the equivalent annual cost of one pac!ing machine if the required required rate of return is 12B8 12B8 %3ound our answer to whole dollars& a. ="4$))* b. =)6$++* c. =+5$612 d. =161$66* e. =1)($22( Difficulty level: Challenge E"#I$AENT E"#I$AENT ANN#A COST d +1. @runo’ @runo’s$ s$ /nc. /nc. is anal: anal:ing ing two machin machines es to to dete determi rmine ne whic which h one one the the sho should uld purcha purchase. se. The compan requires a 1(B rate of return and uses straight-line depreciation to a :ero boo! value. achine # has a cost of =256$666$ annual operating costs of =4$666$ and a "-ear life. achine @ costs =146$666$ has annual operating costs of =12$666$ and has a 2-ear life. 7hichever machine is purchased will be replaced at the end of its useful life. 7hich machine should @runo’s purchase and wh8 %3ound our answer to whole dollars& a. machin machinee #M #M becau because se it it will will save save the the compa compan n abou aboutt =4$*6 =4$*66 6 a ear ear b. machine #M because it will save save the compan about =1"2$512 =1"2$512 a ear c. machin machinee @M beca because use it will will save save the the compa compan n abou aboutt =266$ =266$666 666 a ear ear d. machin machinee @M becau because se it will will save save the the compa compan n abou aboutt =11$* =11$*66 66 a ear ear e. machin machinee @M beca because use its equiva equivalen lentt annua annuall cost cost is is =155 =155$+) $+)5 5 Difficulty level: Challenge NET !OR%IN( CAPITA b +2. Ka’s Ka’s >autique is considering considering a project which will will require additional additional inventor of =124$666 and will also increase accounts paable b =()$666 as suppliers are willing
a. b. c. d. e.
to finance part of these purchases. #ccounts receivable are currentl =46$666 and are expected to increase b 16B if this project is accepted. 7hat is the initial project cash flow needed for net wor!ing capital8 =+)$666 =51$666 =55$666 =1"*$666 =141$666
Difficulty level: Medium NET !OR%IN( CAPITA d +". Iottie Iottie’’s @out @outiqu iquee need needss to to main maintai tain n 26B 26B of its sales sales in net wor!in wor!ing g capi capital tal.. Iottie’s Iottie’s is considering a "-ear project which will increase sales from their current level of =116$666 to =1"6$666 the first ear and =1()$666 a ear for the following two ears. 7hat amount should be included in the project analsis for the last ear of the project in regards to the net wor!ing capital8 a. -=")$666 b. -=+$666 c. =6 d. =+$666 e. =")$666 Difficulty level: Medium NET !OR%IN( CAPITA b +(. Heff’s tereo ound is is expanding its product product offerings to reach reach a wider range of customers. The expansion project includes increasing the floor inventor b =1)6$666 and increasing its debt to suppliers b )6B of that amount. The compan will also spend =266$666 for a building contractor to expand the si:e of the showroom. #s part of the expansion plan$ plan$ the compan will be be offering credit to its its customers and thus expects accounts receivable to rise b =2)$666. or the project analsis$ what amount should be used as the initial cash flow for net wor!ing capital8 a. =+)$666 b. =166$666 c. =12)$666 d. =1)6$666 e. =1+)$666 Difficulty level: Medium #se t,is in-omation to ans/e 01estions 23 t,o1g, 28.
argarite’s argarite’s ?nterprises is considering a new project. The project will require ="2)$666 for new fixed assets$ =1*6$666 for additional inventor and =")$666 for additional accounts receivable. hort-term debt is expected to increase b =166$666 and longterm debt is expected to increase b ="66$666. The project has a )-ear life. The fixed assets will be depreciated straight-line to a :ero boo! value over the life of the project. #t the end of the project$ project$ the fixed assets can be sold sold for 2)B of their
original cost. The net wor!ing capital returns to its original level at the end of the project. The project project is expected to generate generate annual sales of =))($666 and costs of =("6$666. The tax rate is ")B and the required r equired rate of return is 1)B. REE$ANT COSTS b +). 7hat is the initial initial cost of this project8 project8 a. ="2)$666 b. =(26$666 c. =(2)$666 d. =)26$666 e. =*26$666 Difficulty level: Medium E)IT b +*. 7hat is the amount of the the earnings before interest interest and taxes for the first first ear of this project8 a. ="4$)66 b. =)5$666 c. =*+$666 d. =+*$)66 e. =1)5$666 Difficulty level: Medium AFTER+TA' SA$A(E $A#E c ++. 7hat 7hat is is the the amount amount of the the afte afterr-tax tax cash cash flow flow from from the the sale sale of the fixed fixed asse assets ts at the the end of this project8 %3ound our answer to whole dollars& a. =24$("4 b. ="+$514 c. =)2$41" d. =*6$665 e. =41$2)6 Difficulty level: Medium RECO$ER& OF NET !OR%IN( CAPITA a +4. 7hat 7hat is is the the cash cash flow flow recove recover r from from net net wor!in wor!ing g capi capital tal at the end of this this proj project ect88 a. =5)$666 b. =1(+$412 c. =15)$666 d. =2(+$412 e. =25)$666 Difficulty level: Medium #se t,is in-omation to ans/e 01estions 24 t,o1g, 85.
Iouie’s Iouie’s Ieisure ;roducts is considering a project which will require the purchase of =1.( million in new equipment. The equipment will be depreciated straight-line to a
:ero boo! value over the +-ear life of the project. Iouie’s expects to sell the equipment at the end of the project for 26B of its original cost. #nnual sales from this project are estimated at =1.2 million. >et wor!ing capital equal to 26B of sales will be required to support the project. #ll of the net wor!ing capital will be recouped at the end of the project. The firm desires a minimal 1(B rate of return on this project. The tax rate is "(B. DEPRECIATION TA' SHIED b +5. 7hat is the value of the the depreciation tax shield shield in ear 2 of the project8 project8 a. ="($666 b. =*4$666 c. =1"2$666 d. =266$666 e. =2*4$666 Difficulty level: Medium AFTER+TA' SA$A(E $A#E e 46. 46. 7hat 7hat is is the the amoun amountt of of the the afte afterr-ta tax x ssal alva vage ge valu valuee of of the the equi equipm pmen ent8 t8 a. =(+$*66 b. =+2$666 c. =5)$266 d. =1(($666 e. =14($466 Difficulty level: Medium CHAN(E IN NET !OR%IN( CAPITA d 41. 7hat 7hat is is the the recover recover amou amount nt attrib attributa utable ble to net net wor! wor!ing ing capita capitall at at the the end of the the project8 a. =))$266 b. =41$*66 c. =1)5$*66 d. =2(6$666 e. =(2($466 Difficulty level: Medium I$. ESSA&S OPERATIN( CASH FO! 42. This chapter chapter introduced introduced three new methods for calculating calculating project project operating operating cash flow %0&. ,nder what circumstances is each method appropriate8
Three additional formulations formulations of OCF provided in this chapter are the bottom-up, top-down, and tax-shield approaches. The first is useful when the analyst has prepared pro forma income statements for a project (since OCF is eual to net income plus depreciation!. The top-down approach approach defines OCF as sales minus costs minus taxes, and is useful if one has reliable estimates of the relevant dollar costs (perhaps in a situation where fixed and variable costs are the focus of the analysis!. Finally, the tax-shield approach separately
illustrates the project benefits associated with after-tax "ross profit (revenue "ains and#or cost reductions! and with the depreciation tax shield. E"#I$AENT E"#I$AENT ANN#A COST 4". 7hen is it appropriate to use the equivalent equivalent annual cost %?#& methodolog$ methodolog$ and how do ou ma!e a decision using it8
The $%C should be used to evaluate two or more mutually exclusive projects with different lives that will be replicated essentially forever. The mana"er should choose the project whose $%C is lowest, that is, the least ne"ative $%C value. FINANCIN( COSTS 4(. hould hould financing financing costs costs be included included as an incremental incremental cash cash flow in capital capital budgeti budgeting ng analsis8
Financin" costs are are not an incremental incremental cash flow for capital capital bud"etin" purposes. purposes. Financin" Financin" costs are a direct conseuence of how the project is financed, not whether the project is economically viable. Financin" costs are embedded in the reuired rate of return used to discount project cash flows.
SOLUTIONS TO TEST BANK PROBLEMS Chapter 8 40. CF0 = $810,000 + $1,200,000 = $2,010,000 41. CF0 = $425,000 + $15,000 + $60,000 + $5,000 + $780,000 = $1,285,000 42. CF0 = $50,000 43. Sales = (5,000 $49) - (1,000 $68) = $177,000 44. Opportunity co cost = $295,00 ,000 45. 45. Oppo Opport rtun unit ity y cos costt = $210 $210,00 ,000 0 - $20, $20,00 000 0 = $190 $190,0 ,000 00 46. CF0 = $590,000 47. Erosion cost = [(1,000 - 950) $125,000] + [(2,500 - 2,200) $39,500] = $18,100,000 48. Tax = .34 [$50,000 - 30,000 - ($150,000 10)] = $1,700; OCF = $50,000 $30,000 - $1,700 = $18,300 49. Tax = .35 [$110,000 - 70,000 - ($80,000 4)] = $7,000; OCF = $110,000 $70,000 - $7,000 = $33,000 50. OCF = ($760,000 .05) + $80,000 = $118,000 51. OCF = ($439,000 .06) + $32,000 = $58,340 52. 52. OCF OCF = $16, $16,00 000 0 - $10, $10,00 000 0 - ($24 ($24,5 ,500 00 - $23 $23,00 ,000) 0) = $4, $4,50 500 0 53. 53. OCF = $6, $6,00 000 0 - $2,50 2,500 0 - $1,300 ,300 = $2 $2,200 ,200 54. OCF = [($60,000 - $51,000) (1 -.35)] + [($40,000 4) .35] = $9,350 55. 55. Depre eprecciat iation ion tax tax sh shield ield = ($ ($100, 100,00 000 0 4) .34 = $8,500 56. 56. Depre eprecciat iation ion fo for ye year 3 = $2 $24,000 ,000 .1920 = $4,608 57. 57. Book Book valu valuee at at the the end end of of yea yearr 3 = $67 $67,6 ,600 00 – [$6 [$67, 7,60 600 0 (.20 + .32 + .192)] = $19,468.80 58. 58. Depre eprecciat iation ion for for ye year 2 = $1,9 $1,90 00 .4444 = $844.36 59. 59. Book Book valu valuee at at the the end end of of yea yearr 3 = $19 $19,8 ,800 00 – [$1 [$19, 9,80 800 0 (.20 + .32 + .192 + .1152)] = $3,421.44 60. Tax = $82,500 - [$135,000 (1 - .2 - .32 - .192)] .34 = $14,830.80 61. 61. Book Bo ok valu valuee at at the the end end of year year 2 = $39, $39,00 000 0 (1 - .2 - .32) = $18,720 Tax on sale = ($19,000 - $18,720) .34 = $95.20 After-tax cash flow = $19,000 - $95.20 = $18,904.80 62. 62. Book Bo ok valu valuee at at the the end end of year year 4 = $225 $225,0 ,000 00 (1 - .2 - .32 - .192 - .1152) = $38,880 Tax on sale = ($50,000 - $38,880) .35 = $3,892 After-tax cash flow = $50,000 - $3,892 = $46,108 =22$)66 =22$)66 =22$)66 ="$666 >;9 =)6$666 ="$666 63. = %1 .16&1 %1.16& 2 %1 .16& " $5,208.11 CF0 C01 F01 C02
-$53,000 $22,500 2 $25,500
F02 I = 10% NPV CPT $5,208.11
1
64.
CF0 = $30,000 - $15,000 - $10,000 - $120,000 = -$115,000 C04 = $45,000 -$30,000 + $15,000 + $10,000 + $25,000 = $65,000 =()$666 =()$666 =()$666 =*)$666 >;9 =11)$666 = $27,958.66 1 2 " %1 .1(& %1.1(& %1 .1(& %1 .1(&( CF0 C01 F01 C02 F02 I = 14% NPV CPT $27,958.66
65.
>;9
=11$*66
CF0 C01 F01 C02 F02 I = 11% NPV CPT $8,798.29
-$115,000 $45,000 3 $65,000 1
=+$"66 1
%1 .11&
=+$"66 %1.11&
2
=+$"66 ="$)66 %1 .11&"
= $8,798.29
-$11,600 $7,300 2 $10,800 1
66. 66.
Earn Earnin ings gs befo before re inte intere rest st and and tax taxes es = $11 $11,0 ,000 00 – ($4 ($48, 8,00 000 0 5) = $1,400
67. 67.
Annual nual depre epreci ciat atiion = $1, $1,40 400 0,000 ,000 8 = $175,000 Net income = ($215,000 - $175,000) (1 - .34) = $26,400
68.
CF0 = -$618,000 + (-$23,000) = -$641,000 Annual depreciation = $618,000 3 = $206,000 Taxes = ($265,000 - $206,000) .34 = $20,060 OCF = $265,000 – $20,060 = $244,940 C03 = $244,940 + [$60,000 (1 - .34)] + $23,000 = $307,540 =2(($5(6 =2(($5(6 ="6+$)(6 >;9 =*(1$666 = $27,354.00 %1 .65&1 %1.65& 2 %1 .65&" CF0 C01 F01
-$641,000 $244,940 2
C02 F02 I = 9% NPV CPT $27,354.00 69.
$307,540 1
>;9 >; 9 =4)6 $666
=16$666 %1 .65 &1
=16$666 %1 .65 & 2
1 1 N%1 .65& " =4+)$"12 .5) ?# .65
=16$666 %1.65 &"
= -$875,312.95
; EAC = $345,796.55 = $345,797
(rounded)
70.
>;9 =1"*$666
=*$666 %1 .12&1
=*$666 %1 .12& 2
=*$666 %1 .12&"
=*$666 = -$154,224.10 %1 .12& (
1 1 N%1 .12& ( =1)($22(.16 ?# ; EAC = $50,775.88 = $50,776 (rounded) .12
71.
>;9#
=256$666
=4$666 %1 .1(&1
=4$666 %1 .1(& 2
=4$666 = -$308,573.06 %1 .1(&"
1 1 N%1 .1(& " ="64$)+".6* ?# # ; EAC = $132,912.13 = $132,912 .1( (rounded) =12$666 =12$666 >;9@ =146$666 = -$199,759.93 1 %1 .1(& %1 .1(& 2
1 1 N%1 .1(& 2 .1(
=155 $+)5 .5" ?#
; EAC = $121,312.15 = $121,312
(rounded) Machine B lowers the annual cost of the equipment by about $11,600, which is $132,912 less $121,312. 72. 72. 73. 73. 74. 74. 75. 76. 76. 77. 78. 79. 79. 80. 80. 81.
NWC NWC requ requir irem emen entt = $12 $128, 8,00 000 0 - $45 $45,0 ,000 00 + ($80 ($80,0 ,000 00 .10) = $91,000 NWC rec reco overy very = ($1 ($145 45,0 ,00 00 - $11 $110, 0,00 000 0) .20 = $7,000 Init Initia iall NWC NWC requ requir irem emen entt = $150 $150,0 ,000 00 - (.5 (.50 0 $150,000) + $25,000 = $100,000 Initia Initiall cash cash outf outflow low = $325 $325,00 ,000 0 + $160,0 $160,000 00 + $35,0 $35,000 00 - $100,0 $100,000 00 = $420,0 $420,000 00 EBIT EBIT = $554 $554,0 ,000 00 - $43 $430, 0,00 000 0 - ($32 ($325, 5,00 000 0 5) = $59,000 After-ta -tax sa salvage va value = .25 $325,000 (1-.35) = $52,812.50 = $52,813 (rounded) Net workin working g capi capital tal recove recovery ry = $160,0 $160,000 00 + $35, $35,000 000 - $100 $100,00 ,000 0 = $95,00 $95,000 0 Depr Deprec ecia iati tion on tax tax shie shield ld = $1,4 $1,400 00,0 ,000 00 7 .34 = $68,000 Afte Afterr-ta tax x salv salvag agee valu valuee = $1,4 $1,400 00,0 ,000 00 .20 (1-.34) = $184,800 NWC recapture = .20 $1,200,000 = $240,000
