# finance data bank

Question # 00005285 Posted By: spqr Updated on: 12/13/2013 02:07 PM Due on: 12/15/2013
Subject Finance Topic Finance Tutorials:
Question

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 straight-line 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 4-year life. Machine B costs \$1,127,000, has annual operating costs of \$19,500, and has a 5-year 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 6-year 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. Short-term debt is expected to increase by \$165,000. The project has a 6-year life. The fixed assets will be depreciated straight-line 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. Short-term debt is expected to increase by \$165,000. The project has a 6-year life. The fixed assets will be depreciated straight-line 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. Short-term debt is expected to increase by \$165,000. The project has a 6-year life. The fixed assets will be depreciated straight-line 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. Short-term debt is expected to increase by \$165,000. The project has a 6-year life. The fixed assets will be depreciated straight-line 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 straight-line to a zero book value over the 7-year 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 straight-line to a zero book value over the 7-year 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 straight-line to a zero book value over the 7-year 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 tax-shield 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 straight-line to zero over its 11-year tax life. The asset is to be used in a 7-year 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 6-year expansion project that requires an initial fixed asset investment of \$5.994 million. The fixed asset will be depreciated straight-line to zero over its 6-year 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 5-year expansion project that requires an initial fixed asset investment of \$2.484 million. The fixed asset will be depreciated straight-line to zero over its 5-year 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 4-year expansion project that requires an initial fixed asset investment of \$3 million. The fixed asset will be depreciated straight-line to zero over its 4-year 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 straight-line to zero over the project's 7-year 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 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year 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 one-time 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 4-year 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

Tutorials for this Question
1. ## Solution: accounts data bank

Tutorial # 00005107 Posted By: spqr Posted on: 12/13/2013 10:23 PM
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