finance data bank
79. Precision Tool is analyzing two machines to
determine which one it should purchase. The company requires a 15 percent rate
of return and uses straightline depreciation to a zero book value over the
life of its equipment. Machine A has a cost of $892,000, annual operating costs
of $26,300, and a 4year life. Machine B costs $1,127,000, has annual operating
costs of $19,500, and has a 5year life. Whichever machine is purchased will be
replaced at the end of its useful life. Precision Tool should purchase Machine
_____ because it lowers the firm's annual cost by approximately _______ as
compared to the other machine.
A. A; $16,965.
B. A; $17,404
C. B; $16,965
D. B; $17,404
E. B; $17,521
80. The Buck Store is considering a project that will
require additional inventory of $216,000 and will increase accounts payable by
$181,000. Accounts receivable are currently $525,000 and are expected to
increase by 9 percent if this project is accepted. What is the project's
initial cash flow for net working capital?
A. $82,250
B. $12,250
C. $12,250
D. $36,250
E. $44,250
81. The Card Shoppe needs to maintain 23 percent of
its sales in net working capital. Currently, the shoppe is considering a 6year
project that will increase sales from its current level of $387,000 to $421,000
the first year and to $465,000 a year for the following 5 years of the project.
What amount should be included in the project analysis for net working capital
in year 6 of the project?
A. $17,940
B. $2,990
C. $0
D. $2,990
E. $17,940
82. Home Furnishings Express is expanding its product
offerings to reach a wider range of customers. The expansion project includes
increasing the floor inventory by $430,000 and increasing its debt to suppliers
by 70 percent of that amount. The company will also spend $450,000 for a
building contractor to expand the size of its showroom. As part of the
expansion plan, the company will be offering credit to its customers and thus
expects accounts receivable to rise by $90,000. For the project analysis, what
amount should be used as the initial cash flow for net working capital?
A. $39,000
B. $70,000
C. $156,000
D. $219,000
E. $391,000
83. Hollister & Hollister is considering a new
project. The project will require $522,000 for new fixed assets, $218,000 for
additional inventory, and $39,000 for additional accounts receivable.
Shortterm debt is expected to increase by $165,000. The project has a 6year
life. The fixed assets will be depreciated straightline to a zero book value
over the life of the project. At the end of the project, the fixed assets can
be sold for 20 percent of their original cost. The net working capital returns
to its original level at the end of the project. The project is expected to
generate annual sales of $875,000 with costs of $640,000. The tax rate is 34
percent and the required rate of return is 14 percent. What is the project's
cash flow at time zero?
A. $536,000
B. $614,000
C. $720,000
D. $779,000
E. $944,000
84. Hollister & Hollister is considering a new
project. The project will require $522,000 for new fixed assets, $218,000 for
additional inventory, and $39,000 for additional accounts receivable.
Shortterm debt is expected to increase by $165,000. The project has a 6year
life. The fixed assets will be depreciated straightline to a zero book value
over the life of the project. At the end of the project, the fixed assets can
be sold for 20 percent of their original cost. The net working capital returns
to its original level at the end of the project. The project is expected to
generate annual sales of $875,000 and costs of $640,000. The tax rate is 34
percent and the required rate of return is 14 percent. What is the amount of
the earnings before interest and taxes for the first year of this
project?
A. $97,680
B. $130,000
C. $148,000
D. $217,320
E. $235,000
85. Hollister & Hollister is considering a new
project. The project will require $522,000 for new fixed assets, $218,000 for
additional inventory, and $39,000 for additional accounts receivable.
Shortterm debt is expected to increase by $165,000. The project has a 6year
life. The fixed assets will be depreciated straightline to a zero book value
over the life of the project. At the end of the project, the fixed assets can
be sold for 20 percent of their original cost. The net working capital returns
to its original level at the end of the project. The project is expected to
generate annual sales of $875,000 and costs of $640,000. The tax rate is 34
percent and the required rate of return is 14 percent. What is the amount of
the aftertax cash flow from the sale of the fixed assets at the end of this
project?
A. $35,496
B. $68,904
C. $104,400
D. $287,615
E. $344,520
86. Hollister & Hollister is considering a new
project. The project will require $522,000 for new fixed assets, $218,000 for
additional inventory, and $39,000 for additional accounts receivable.
Shortterm debt is expected to increase by $165,000. The project has a 6year
life. The fixed assets will be depreciated straightline to a zero book value
over the life of the project. At the end of the project, the fixed assets can
be sold for 20 percent of their original cost. The net working capital returns
to its original level at the end of the project. The project is expected to
generate annual sales of $875,000 and costs of $640,000. The tax rate is 34
percent and the required rate of return is 14 percent. What is the cash flow
recovery from net working capital at the end of this project?
A. $14,000
B. $75,000
C. $92,000
D. $344,000
E. $422,000
87. Keyser Mining is considering a project that will
require the purchase of $980,000 in new equipment. The equipment will be
depreciated straightline to a zero book value over the 7year life of the
project. The equipment can be scraped at the end of the project for 5 percent
of its original cost. Annual sales from this project are estimated at $420,000.
Net working capital equal to 20 percent of sales will be required to support
the project. All of the net working capital will be recouped. The required
return is 16 percent and the tax rate is 35 percent. What is the value of the
depreciation tax shield in year 4 of the project?
A. $49,000
B. $52,200
C. $68,600
D. $71,400
E. $76,500
88. Keyser Mining is considering a project that will
require the purchase of $980,000 in new equipment. The equipment will be
depreciated straightline to a zero book value over the 7year life of the
project. The equipment can be scraped at the end of the project for 5 percent
of its original cost. Annual sales from this project are estimated at $420,000.
Net working capital equal to 20 percent of sales will be required to support
the project. All of the net working capital will be recouped. The required
return is 16 percent and the tax rate is 35 percent. What is the amount of the
aftertax salvage value of the equipment?
A. $17,150
B. $31,850
C. $118,800
D. $237,600
E. $343,000
89. Keyser Mining is considering a project that will
require the purchase of $980,000 in new equipment. The equipment will be
depreciated straightline to a zero book value over the 7year life of the
project. The equipment can be scraped at the end of the project for 5 percent
of its original cost. Annual sales from this project are estimated at $420,000.
Net working capital equal to 20 percent of sales will be required to support
the project. All of the net working capital will be recouped. The required
return is 16 percent and the tax rate is 35 percent. What is the recovery
amount attributable to net working capital at the end of the project?
A. $21,000
B. $54,600
C. $84,000
D. $178,000
E. $196,000
Essay Questions
90. In a single sentence, explain how you can determine which cash flows should be included in the analysis of a project.
91. What is the formula for the taxshield approach to OCF? Explain the two key points the formula illustrates.
92. What is the primary purpose of computing the equivalent annual costs when comparing two machines? What is the assumption that is being made about each machine?
93. Assume a firm sets its bid price for a project at the minimum level as computed using the discounted cash flow method. Given this, what do you know about the net present value and the internal rate of return on the project as bid?
94. Can the initial cash flow at time zero for a project ever be a positive value? If yes, give an example. If no, explain why not.
95. How can two firms arrive at two different bid prices when bidding for the same job and given the same bid specifications?
Multiple Choice Questions
96. Winnebagel Corp. currently sells 28,200 motor
homes per year at $42,300 each, and 11,280 luxury motor coaches per year at
$79,900 each. The company wants to introduce a new portable camper to fill out
its product line. It hopes to sell 19,740 of these campers per year at $11,280
each. An independent consultant has determined that if Winnebagel introduces
the new campers, it should boost the sales of its existing motor homes by 4,700
units per year, and reduce the sales of its motor coaches by 1,222 units per
year. What is the amount that should be used as the annual sales figure when
evaluating this project?
A. $297,613,400
B. $301,002,300
C. $314,141,800
D. $323,839,400
E. $327,289,500
97. Consider the following income statement:
What is the amount of the depreciation tax shield?
A. $23,607
B. $24,192
C. $24,598
D. $26,211
E. $26,919
98. Consider an asset that costs $176,000 and is
depreciated straightline to zero over its 11year tax life. The asset is to be
used in a 7year project; at the end of the project, the asset can be sold for
$22,000. The relevant tax rate is 30 percent. What is the aftertax cash flow
from the sale of this asset?
A. $31,800
B. $32,600
C. $33,300
D. $34,100
E. $34,600
99. Phone Home, Inc. is considering a new 6year
expansion project that requires an initial fixed asset investment of $5.994
million. The fixed asset will be depreciated straightline to zero over its
6year tax life, after which time it will be worthless. The project is
estimated to generate $5,328,000 in annual sales, with costs of $2,131,200. The
tax rate is 31 percent. What is the operating cash flow for this project?
A. $1,894,318
B. $2,211,407
C. $2,515,482
D. $2,663,021
E. $2,848,315
100. Phone Home, Inc. is considering a new 5year
expansion project that requires an initial fixed asset investment of $2.484
million. The fixed asset will be depreciated straightline to zero over its
5year tax life, after which time it will be worthless. The project is
estimated to generate $2,208,000 in annual sales, with costs of $883,200. The
tax rate is 32 percent and the required return on the project is 11 percent.
What is the net present value for this project?
A. $1,432,155
B. $1,433,059
C. $1,434,098
D. $1,434,217
E. $1,435,008
101. Phone Home, Inc. is considering a new 4year
expansion project that requires an initial fixed asset investment of $3
million. The fixed asset will be depreciated straightline to zero over its
4year tax life, after which time it will have a market value of $231,000. The
project requires an initial investment in net working capital of $330,000, all
of which will be recovered at the end of the project. The project is estimated
to generate $2,640,000 in annual sales, with costs of $1,056,000. The tax rate
is 31 percent and the required return for the project is 15 percent. What is
the net present value for this project?
A. $714,056
B. $733,970
C. $741,335
D. $742,208
E. $744,595
102. Dog Up! Franks is looking at a new sausage system
with an installed cost of $397,800. This cost will be depreciated straightline
to zero over the project's 7year life, at the end of which the sausage system
can be scrapped for $61,200. The sausage system will save the firm $122,400 per
year in pretax operating costs, and the system requires an initial investment
in net working capital of $28,560. All of the net working capital will be
recovered at the end of the project. The tax rate is 33 percent and the
discount rate is 9 percent. What is the net present value of this
project?
A. $41,311
B. $7,820
C. $81,507
D. $98,441
E. $118,821
103. Your firm is contemplating the purchase of a new
$1,628,000 computerbased order entry system. The system will be depreciated
straightline to zero over its 5year life. It will be worth $158,400 at the
end of that time. You will save $633,600 before taxes per year in order
processing costs and you will be able to reduce working capital by $115,764
(this is a onetime reduction). The net working capital will return to its
original level when the project ends. The tax rate is 35 percent. What is the
internal rate of return for this project?
A. 11.78 percent
B. 13.49 percent
C. 18.21 percent
D. 21.65 percent
E. 23.58 percent
104. A 4year project has an initial asset investment
of $306,600, and initial net working capital investment of $29,200, and an
annual operating cash flow of $46,720. The fixed asset is fully depreciated
over the life of the project and has no salvage value. The net working capital
will be recovered when the project ends. The required return is 15 percent.
What is the project's equivalent annual cost, or EAC?
A. $158,491
B. $152,309
C. $147,884
D. $145,509
E. $142,212

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