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Exam 9: Making Capital Investment Decisions

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Question 21

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JL & Co.is contemplating the purchase of a new $428,000 computer-based order entry system.The system will be depreciated straight-line to zero over the project's six-year life.The pretax resale value is $215,000.The system will save $148,000 before taxes per year in order processing costs and will reduce working capital by $46,000 at the beginning of the project.Working capital will revert back to normal at the end of the project.If the tax rate is 34 percent,what is the IRR for this project?

A) 15.51 percent
B) 22.79 percent
C) 25.32 percent
D) 31.08 percent
E) 14.20 percent

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Question 22

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The analysis of a new project should exclude:

A) tax effects
B) erosion effects.
C) side effects.
D) sunk costs.
E) opportunity costs.

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Question 23

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The Outpost currently sells short leather jackets for $369 each.The firm is considering selling long coats also.The long coats would sell for $719 each and the company expects to sell 820 a year.If the company decides to carry the long coat,management feels that the annual sales of the short jacket will decline from 1,120 to 1,040 units.Variable costs on the jacket are $228 and $435 on the long coat.The fixed costs for this project are $23,100,depreciation is $10,400 a year,and the tax rate is 34 percent.What is the projected operating cash flow for this project?

Forecasting risk is best defined as:

Contingency planning focuses on the:

Which one of the following refers to the option to expand into related businesses in the future?

Which one of the following terms refers to the best option that was foregone when a particular investment is selected?

What is the Year 2 depreciation on equipment costing $148,315 if it is classified as five-year property for MACRS purposes? The MACRS allowance percentages are as follows,commencing with Year 1: 20.00,32.00,19.20,11.52,11.52,and 5.76 percent.

An asset used in a three-year project falls in the three-year MACRS class for tax purposes.The MACRS percentage rates tarting with Year 1 are: 33.33,44.45,14.81,and 7.41.The asset has an acquisition cost of $2.6 million and will be sold for $1.1 million at the end of the project.If the tax rate is 34 percent,what is the aftertax salvage value of the asset?

Hunter's Lodge purchased $612,000 of equipment four years ago.The equipment is seven-year MACRS property.The firm is selling this equipment today for $174,500.What is the aftertax cash flow from this sale if the tax rate is 34 percent? The ACRS allowance percentages are as follows,commencing with Year 1:14.29,24.49,17.49,12.49,8.93,8.92,8.93,and 4.46 percent.

Phil's Dinor purchased some new equipment two years ago for $32,600.Today,it is selling this equipment for $22,000.What is the aftertax cash flow from this sale if the tax rate is 35percent? The applicable MACRS allowance percentages are as follows,commencing with Year 1:20.00,32.00,19.20,11.52,11.52,and 5.76 percent.

Which one of the following is a correct value to use if you are conducting a best-case scenario analysis?

A pro forma financial statement is a financial statement that:

Classic Cars is considering a project that requires $311,250 of fixed assets that are classified as five-year property for ACRS.What is the book value of these assets at the end of Year 3? The MACRS allowance percentages are as follows,commencing with Year 1:20.00,32.00,19.20,11.52,11.52,and 5.76 percent.

Cinram Machines has the following estimates for its new gear assembly project: price = $1,870 per unit; variable costs = $949 per unit; fixed costs = $1.4 million; quantity = 42,000 units.Suppose the company believes all of its estimates are accurate only to within ± 3 percent.What value should the company use for its total variable costs when performing its best-case scenario analysis?

A project has projected values of: unit sales = 1,650,price per unit = $19,variable cost per unit = $7,fixed costs per year = $4,700.The depreciation is $1,100 a year and the tax rate is 34 percent.What effect would a decrease of $1 in the variable cost per unit have on the operating cash flow?

Dismal Outlook is unable to obtain financing for any new projects under any circumstances.This company is faced with:

Consider a three-year project with the following information: initial fixed asset investment = $347,600; straight-line depreciation to zero over the three-year life; zero salvage value; price per unit = $49.99; variable costs per unit = $30.82; fixed costs per year = $187,000; quantity sold per year = 65,500 units; tax rate = 35 percent.How sensitive is OCF to an increase of one unit in the quantity sold?

Ed owns a store that caters primarily to men.Each of the answer options represents an item related to a planned store expansion.Each of these items should be included in the expansion analysis with the exception of the cost:

Lake City Plastics currently produces plastic plates and silverware.The company is considering expanding its product offerings to include plastic serving trays.All of the following are relevant costs to this project with the exception of: