finance data bank
54. Cool Comfort currently sells 300 Class A spas, 450
Class C spas, and 200 deluxe model spas each year. The firm is considering
adding a midclass spa and expects that if it does it can sell 375 of them.
However, if the new spa is added, Class A sales are expected to decline to 225
units while the Class C sales are expected to decline to 200. The sales of the
deluxe model will not be affected. Class A spas sell for an average of $12,000
each. Class C spas are priced at $6,000 and the deluxe model sells for $17,000
each. The new midrange spa will sell for $8,000. What is the value of the
erosion?
A. $600,000
B. $1,200,000
C. $1,800,000
D. $2,400,000
E. $3,900,000
55. Jefferson & Sons is evaluating a project that
will increase annual sales by $138,000 and annual costs by $94,000. The project
will initially require $110,000 in fixed assets that will be depreciated
straightline to a zero book value over the 4year life of the project. The
applicable tax rate is 32 percent. What is the operating cash flow for this
project?
A. $11,220
B. $29,920
C. $38,720
D. $46,480
E. $46,620
56. Marie's Fashions is considering a project that
will require $28,000 in net working capital and $87,000 in fixed assets. The
project is expected to produce annual sales of $75,000 with associated costs of
$57,000. The project has a 5year life. The company uses straightline
depreciation to a zero book value over the life of the project. The tax rate is
30 percent. What is the operating cash flow for this project?
A. $1,520
B. $580
C. $420
D. $15,680
E. $17,820
57. The Beach House has sales of $784,000 and a profit
margin of 11 percent. The annual depreciation expense is $14,000. What is the
amount of the operating cash flow if the company has no longterm debt?
A. $68,760
B. $72,240
C. $86,240
D. $100,240
E. $101,760
58. The Pancake House has sales of $1,642,000,
depreciation of $27,000, and net working capital of $218,000. The firm has a
tax rate of 35 percent and a profit margin of 6 percent. The firm has no
interest expense. What is the amount of the operating cash flow?
A. $98,520
B. $125,520
C. $147,480
D. $268,480
E. $343,520
59. Northern Railway is considering a project which
will produce annual sales of $975,000 and increase cash expenses by $859,000.
If the project is implemented, taxes will increase from $141,000 to $154,000
and depreciation will increase from $194,000 to $272,000. The company is
debtfree. What is the amount of the operating cash flow using the topdown
approach?
A. $25,000
B. $103,000
C. $157,000
D. $181,000
E. $209,000
60. BiLo Traders is considering a project that will
produce sales of $28,000 and increase cash expenses by $17,500. If the project
is implemented, taxes will increase by $3,000. The additional depreciation
expense will be $1,600. An initial cash outlay of $1,400 is required for net
working capital. What is the amount of the operating cash flow using the
topdown approach?
A. $4,500
B. $5,900
C. $6,100
D. $7,500
E. $8,900
61. A proposed expansion project is expected to
increase sales of JL Ticker's Store by $35,000 and increase cash expenses by
$21,000. The project will cost $24,000 and be depreciated using straightline
depreciation to a zero book value over the 4year life of the project. The
store has a marginal tax rate of 30 percent. What is the operating cash flow of
the project using the tax shield approach?
A. $5,600
B. $7,800
C. $11,600
D. $13,300
E. $14,600
62. The Lumber Yard is considering adding a new
product line that is expected to increase annual sales by $238,000 and cash
expenses by $184,000. The initial investment will require $96,000 in fixed
assets that will be depreciated using the straightline method to a zero book
value over the 6year life of the project. The company has a marginal tax rate
of 32 percent. What is the annual value of the depreciation tax shield?
A. $5,120
B. $13,160
C. $25,840
D. $32,560
E. $41,840
63. Bernie's Beverages purchased some fixed assets
classified as 5year property for MACRS. The assets cost $87,000. What will the
accumulated depreciation be at the end of year three?
A. $13,520
B. $25,056
C. $38,241
D. $48,759
E. $61,944
64. You just purchased some equipment that is
classified as 5year property for MACRS. The equipment cost $147,000. What will
the book value of this equipment be at the end of 4 years should you decide to
resell the equipment at that point in time?
A. $8,467.20
B. $25,401.60
C. $42,336.00
D. $121,598.40
E. $138,532.80
65. Peterborough Trucking just purchased some fixed
assets that are classified as 3year property for MACRS. The assets cost
$9,800. What is the amount of the depreciation expense in year 3?
A. $537.52
B. $1,347.17
C. $1,451.38
D. $1,929.11
E. $2,177.56
66. Crafter's Supply purchased some fixed assets 2
years ago at a cost of $38,700. It no longer needs these assets so it is going
to sell them today for $25,000. The assets are classified as 5year property
for MACRS. What is the net cash flow from this sale if the firm's tax rate is
30 percent?
A. $13,122.20
B. $18,576.00
C. $20,843.68
D. $23,072.80
E. $25,211.09
67. You own some equipment that you purchased 4 years
ago at a cost of $216,000. The equipment is 5year property for MACRS. You are
considering selling the equipment today for $75,500. Which one of the following
statements is correct if your tax rate is 35 percent?
A. The tax due on the sale is $26,425.
B. The book value today is $178,675.20.
C. The accumulated depreciation to date is $37,324.80.
D. The taxable amount on the sale is $37,324.80.
E. The aftertax salvage value is $62,138.68.
68. Edward's Manufactured Homes purchased some
machinery 2 years ago for $319,000. These assets are classified as 5year
property for MACRS. The company is replacing this machinery today with newer
machines that utilize the latest in technology. The old machines are being sold
for $140,000 to a foreign firm for use in its production facility in South
America. What is the aftertax salvage value from this sale if the tax rate is
35 percent?
A. $135,408
B. $140,000
C. $142,312
D. $144,592
E. $146,820
69. Bruno's Lunch Counter is expanding and expects
operating cash flows of $26,000 a year for 4 years as a result. This expansion
requires $39,000 in new fixed assets. These assets will be worthless at the end
of the project. In addition, the project requires $3,000 of net working capital
throughout the life of the project. What is the net present value of this
expansion project at a required rate of return of 16 percent?
A. $18,477.29
B. $21,033.33
C. $28,288.70
D. $29,416.08
E. $32,409.57
70. Jasper Metals is considering installing a new
molding machine which is expected to produce operating cash flows of $73,000 a
year for 7 years. At the beginning of the project, inventory will decrease by
$16,000, accounts receivables will increase by $21,000, and accounts payable
will increase by $15,000. All net working capital will be recovered at the end
of the project. The initial cost of the molding machine is $249,000. The
equipment will be depreciated straightline to a zero book value over the life
of the project. The equipment will be salvaged at the end of the project
creating a $48,000 aftertax cash flow. At the end of the project, net working
capital will return to its normal level. What is the net present value of this
project given a required return of 14.5 percent?
A. $77,211.20
B. $79,418.80
C. $82,336.01
D. $84,049.74
E. $87,925.54
71. A project will produce an operating cash flow of
$14,600 a year for 8 years. The initial fixed asset investment in the project
will be $48,900. The net aftertax salvage value is estimated at $11,000 and
will be received during the last year of the project's life. What is the net
present value of the project if the required rate of return is 12
percent?
A. $23,627.54
B. $28,070.26
C. $34,627.54
D. $39,070.26
E. $41,040.83
72. Kwik ‘n Hot Dogs is considering the installation
of a new computerized pressure cooker that will cut annual operating costs by
$23,000. The system will cost $39,900 to purchase and install. This system is
expected to have a 4year life and will be depreciated to zero using
straightline depreciation. What is the amount of the earnings before interest
and taxes for this project?
A. $10,525
B. $13,025
C. $15,525
D. $16,900
E. $19,400
73. Colors and More is considering replacing the
equipment it uses to produce crayons. The equipment would cost $1.37 million,
have a 12year life, and lower manufacturing costs by an estimated $304,000 a
year. The equipment will be depreciated using straightline depreciation to a
book value of zero. The required rate of return is 15 percent and the tax rate
is 35 percent. What is the net income from this proposed project?
A. $18,508.75
B. $40,211.24
C. $66,441.67
D. $123,391.67
E. $136,709.48
74. Gateway Communications is considering a project
with an initial fixed asset cost of $2.46 million which will be depreciated
straightline to a zero book value over the 10year life of the project. At the
end of the project the equipment will be sold for an estimated $300,000. The
project will not directly produce any sales but will reduce operating costs by
$725,000 a year. The tax rate is 35 percent. The project will require $45,000
of inventory which will be recouped when the project ends. Should this project
be implemented if the firm requires a 14 percent rate of return? Why or why
not?
A. No; The NPV is $172,937.49.
B. No; The NPV is $87,820.48.
C. Yes; The NPV is $251,860.34
D. Yes; The NPV is $387,516.67
E. Yes; The NPV is $466,940.57
75. You are working on a bid to build two city parks a
year for the next three years. This project requires the purchase of $180,000
of equipment that will be depreciated using straightline depreciation to a
zero book value over the 3year project life. The equipment can be sold at the
end of the project for $34,000. You will also need $20,000 in net working
capital for the duration of the project. The fixed costs will be $16,000 a year
and the variable costs will be $168,000 per park. Your required rate of return
is 15 percent and your tax rate is 34 percent. What is the minimal amount you
should bid per park? (Round your answer to the nearest $100)
A. $72,500
B. $128,600
C. $154,300
D. $189,100
E. $217,600
76. You are working on a bid to build two apartment
buildings a year for the next 5 years for a local college. This project
requires the purchase of $750,000 of equipment that will be depreciated using
straightline depreciation to a zero book value over the project's life. The
equipment can be sold at the end of the project for $325,000. You will also
need $140,000 in net working capital over the life of the project. The fixed
costs will be $628,000 a year and the variable costs will be $1,298,000 per
building. Your required rate of return is 14.5 percent for this project and
your tax rate is 35 percent. What is the minimal amount, rounded to the nearest
$100, you should bid per building?
A. $1,423,700
B. $1,489,500
C. $1,733,000
D. $2,780,600
E. $3,465,900
77. Automated Manufacturers uses hightech equipment
to produce specialized aluminum products for its customers. Each one of these
machines costs $1,480,000 to purchase plus an additional $49,000 a year to
operate. The machines have a 6year life after which they are worthless. What
is the equivalent annual cost of one these machines if the required return is
16 percent?
A. $450,657
B. $427,109
C. $301,586
D. $295,667
E. $256,947
78. Champion Bakers uses specialized ovens to bake its
bread. One oven costs $689,000 and lasts about 4 years before it needs to be
replaced. The annual operating cost per over is $41,000. What is the equivalent
annual cost of an oven if the required rate of return is 13 percent?
A. $272,638
B. $248,313
C. $232,407
D. $200,561
E. $196,210

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