Ch12 Test Bank + Answers Estimating Cash Flows on Capital - Finance Applications 5e Answer Key + Test Bank by Marcia Cornett. DOCX document preview.
Finance, 5e (Cornett)
Chapter 12 Estimating Cash Flows on Capital Budgeting Projects
1) As new capital budgeting projects arise, we must estimate
A) the float costs for financing the project.
B) when such projects will require cash flows.
C) the cost of the loan for the specific project.
D) the cost of the stock being sold for the specific project.
2) Which of these is the process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements?
A) Incremental cash flows
B) Cash flow analysis
C) Pro forma analysis
D) Substitutionary analysis
3) If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a
A) committed cost.
B) complementary cost.
C) obligated cost.
D) sunk cost.
4) Effects that arise from a new product or service that increase sales of the firm's existing products or services are referred to as
A) complementary effects.
B) substitutionary effects.
C) sunk effects.
D) marginal effects.
5) Effects that arise from a new product or service that decrease sales of the firm's existing products or services are referred to as
A) complementary effects.
B) substitutionary effects.
C) sunk effects.
D) marginal effects.
6) Concerning incremental project cash flow, which of these is a cost one would never count as an expense of the project?
A) Initial investment
B) Taxes paid
C) Operating expenses of the project
D) Financing costs
7) Which of these is used as a measure of the total amount of available cash flow from a project?
A) Free cash flow
B) Operating cash flow
C) Investment in operating capital
D) Sunk cash flow
8) Which of the following is NOT included when calculating the depreciable basis for real property?
A) Freight charges for item
B) Sales tax paid for item
C) Financing fees
D) Installation and testing fees
9) When calculating operating cash flow for a project, one would calculate it as being mathematically equal to which of the following?
A) EBIT − Interest − Taxes + Depreciation
B) EBIT − Taxes
C) EBIT + Depreciation
D) EBIT − Taxes + Depreciation
10) Which of these is the concept that a unit's sales will follow an approximate bell-shaped curve versus a steady sales life?
A) Bell curve cycle
B) Coefficient of variation
C) Product life cycle
D) NWC life cycle
11) A decrease in net working capital (NWC) is treated as a
A) cash inflow.
B) cash outflow.
C) sunk cost.
D) historical cost.
12) Which of the following is the IRS convention that requires that all property placed in service during a given period is assumed to be placed in service at the midpoint of that period?
A) Mid-point convention
B) Mid-month convention
C) Mid-quarter convention
D) Half-year convention
13) Accelerated depreciation allows firms to
A) receive less of the dollars of depreciation earlier in the asset's life.
B) receive more of the dollars of depreciation earlier in the asset's life.
C) not pay any taxes during an asset's life.
D) receive more of the dollars of depreciation later in the asset's life.
14) Section 179 allows a business, with certain restrictions, to do which of the following?
A) Offset the tax liability with the cost of the asset in the year of purchase.
B) Expense the asset immediately in the year of purchase.
C) Expense the asset using double declining balance depreciation during the life of the asset.
D) Get a government grant to purchase the asset.
15) For which situation below would one need to "smooth out" the variation in each set of cash flows so that each becomes a perpetuity?
A) Choosing between projects with differing risks
B) Choosing between independent projects
C) Choosing between alternative assets with differing lives
D) Choosing between alternative assets with equal lives
16) The best approach to convert an infinite series of asset purchases into a perpetuity is known as the
A) net working capital approach.
B) net present value approach.
C) equivalent annual cost approach.
D) equivalent annual cash flow approach.
17) One way to account for flotation costs of raising capital is to
A) adjust all the project's cash flows so that each year it will reflect the flotation costs.
B) adjust the project's initial cash flow so that it will reflect the flotation costs.
C) adjust only the project's operating cash flows to account for paying back the shareholders.
D) adjust the project's tax burden to account for the tax implications of raising capital.
18) With regard to depreciation, the time value of money concept tells us that
A) delaying the depreciation expense is always better.
B) taking the depreciation expense sooner is always better.
C) delaying the depreciation expense is sometimes better.
D) taking the depreciation expense sooner is sometimes better.
19) When looking at which of these types of projects, one must consider any cash flows that arise from surrendering old equipment before the end of its useful life?
A) Incremental projects
B) Replacement projects
C) Cost-cutting projects
D) New projects
20) Which of the following measures the operating cash flow a project produces minus the necessary investment in operating capital, and is as valid for proposed new projects as it is for the firm's current operations?
A) Free cash flow
B) Operating cash flow
C) Investment in operating capital
D) Sunk cash flow
21) Which statement is true regarding cost-cutting proposals?
A) The main benefits are from changes in sales and changes in costs.
B) The main benefits come only from changes in sales.
C) The main benefits come only from changes in costs.
D) The main benefits come from the change in sales due to the response from the cost-cutting proposal.
22) Suppose you sell a fixed asset for $90,000 when its book value is $95,000. If your company's marginal tax rate is 21 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?
A) $3,000
B) $5,000
C) $91,050
D) $90,000
23) Suppose you sell a fixed asset for $75,000 when its book value is $80,000. If your company's marginal tax rate is 21 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?
A) $5,000
B) $48,750
C) $76,050
D) $75,000
24) Your company is considering a new project that will require $10,000 of new equipment at the start of the project. The equipment will have a depreciable life of five years and will be depreciated to a book value of $3,000 using straight-line depreciation. The cost of capital is 9 percent, and the firm's tax rate is 21 percent. Estimate the present value of the tax benefits from depreciation.
A) $476
B) $924
C) $5,446
D) $1,143.56
25) Your company is considering a new project that will require $2,000,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $250,000 using straight-line depreciation. The cost of capital is 12 percent, and the firm's tax rate is 21 percent. Estimate the present value of the tax benefits from depreciation.
A) $68,250
B) $988,789
C) $175,000
D) $207,646
26) You are trying to pick the least-expensive machine for your company. You have two choices: machine A, which will cost $50,000 to purchase and which will have OCF of −$3,500 annually throughout the machine's expected life of three years; and machine B, which will cost $75,000 to purchase and which will have OCF of −$4,900 annually throughout that machine's four-year life. Both machines will be worthless at the end of their life. If you intend to replace whichever type of machine you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 14 percent, using EAC which one should you choose?
A) Machine A
B) Machine B
C) All of these choices are correct.
D) Neither machine A nor B
27) You are trying to pick the least-expensive machine for your company. You have two choices: machine A, which will cost $100,000 to purchase and which will have OCF of −$7,000 annually throughout the machine's expected life of three years; and machine B, which will cost $125,000 to purchase and which will have OCF of −$2,600 annually throughout that machine's four-year life. Both machines will be worthless at the end of their life. If you intend to replace whichever type of machine you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 15 percent, using EAC which one should you choose?
A) Machine A
B) Machine B
C) All of these choices are correct.
D) Neither machine A nor B
28) You are evaluating two different machines. Machine A costs $10,000, has a five-year life, and has an annual OCF (after-tax) of −$2,500 per year. Machine B costs $15,000, has a seven-year life, and has an annual OCF (after-tax) of −$2,000 per year. If your discount rate is 14 percent, using EAC which machine would you choose?
A) Machine A
B) Machine B
C) All of these choices are correct.
D) Neither machine A nor B
29) You are evaluating two different machines. Machine A costs $25,000, has a five-year life, and has an annual OCF (after-tax) of −$6,000 per year. Machine B costs $30,000, has a seven-year life, and has an annual OCF (after-tax) of −$5,500 per year. If your discount rate is 10 percent, using EAC which machine would you choose?
A) Machine A
B) Machine B
C) All of these choices are correct.
D) Neither machine A nor B
30) You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $100 initially, and then $150 per year in maintenance costs. Machine B costs $200 initially, has a life of three years, and requires $120 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine. Using EAC which is the better machine for the firm? The discount rate is 12 percent and tax can be ignored.
A) Machine A
B) Machine B
C) All of these choices are correct.
D) Neither machine A nor B
31) You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $20,000 initially, and then $4,000 per year in maintenance costs. Machine B costs $25,000 initially, has a life of three years, and requires $3,500 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine. Using EAC which is the better machine for the firm? The discount rate is 14 percent and tax can be ignored.
A) Machine A
B) Machine B
C) All of these choices are correct.
D) Neither machine A nor B
32) Your company has spent $200,000 on research to develop a new computer game. The firm is planning to spend $40,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $5,000. The machine has an expected life of five years, a $25,000 estimated resale value, and falls under the MACRS five-year class life. Revenue from the new game is expected to be $300,000 per year, with costs of $100,000 per year. The firm has a tax rate of 21 percent, an opportunity cost of capital of 14 percent, and it expects net working capital to increase by $50,000 at the beginning of the project. What will be the operating cash flow for year one of this project?
A) −$49,150
B) $3,150
C) $150,890
D) $159,890
33) Your firm needs a machine which costs $100,000, and requires $25,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 21 percent and a discount rate of 14 percent. What is the depreciation tax shield for this project in year 3?
A) $2,073.40
B) $3,110.10
C) $9,626.50
D) $14,810.00
34) Your firm needs a machine which costs $500,000, and requires $10,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 21 percent and a discount rate of 15 percent. What is the depreciation tax shield for this project in year 3?
A) $7,219.88
B) $24,500.00
C) $15,550.50
D) $48,132.50
35) Your firm needs a machine which costs $90,000, and requires $30,000 in maintenance for each year of its five-year life. After five years, this machine will be replaced. The machine falls into the MACRS five-year class life category. Assume a tax rate of 21 percent and a discount rate of 13 percent. What is the depreciation tax shield for this project in year 5?
A) $471.74
B) $1,347.84
C) $2,177.28
D) $6,739.20
36) Your firm needs a machine which costs $125,000, and requires $5,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 21 percent and a discount rate of 10 percent. If this machine can be sold for $15,000 at the end of year 3, what is the after-tax salvage value?
A) $9,262.50
B) $9,750.00
C) $11,692.69
D) $13,795.13
37) Your firm needs a machine which costs $60,000, and requires $15,000 in maintenance for each year of its five-year life. After five years, this machine will be replaced. The machine falls into the MACRS five-year class life category. Assume a tax rate of 21 percent and a discount rate of 10 percent. If this machine can be sold for $8,000 at the end of year 5, what is the after-tax salvage value?
A) $3,456.00
B) $4,544.00
C) $5,200.00
D) $7,045.76
38) You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $50,000. The truck falls into the MACRS three-year class, and it will be sold after three years for $5,000. Use of the truck will require an increase in NWC (spare parts inventory) of $2,000. The truck will have no effect on revenues, but it is expected to save the firm $25,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 21 percent. What will the operating cash flow for this project be during year 2?
A) $21,890
B) $22,225
C) $22,690
D) $24,417
39) You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $70,000. The truck falls into the MACRS three-year class, and it will be sold after three years for $5,000. Use of the truck will require an increase in NWC (spare parts inventory) of $10,000. The truck will have no effect on revenues, but it is expected to save the firm $32,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 21 percent. What will the operating cash flow for this project be during year 2?
A) $531
B) $885
C) $31,814
D) $50,315
40) You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $250,000. The truck falls into the MACRS three-year class, and it will be sold after three years for $50,000. Use of the truck will require an increase in NWC (spare parts inventory) of $5,000. The truck will have no effect on revenues, but it is expected to save the firm $80,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 21 percent. What will the operating cash flow for this project be during year 3?
A) $25,785
B) $70,975
C) $81,333
D) $85,025
41) You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $60,000. The truck falls into the MACRS three-year class, and it will be sold after three years for $14,000. Use of the truck will require an increase in NWC (spare parts inventory) of $3,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 21 percent. What will the operating cash flow for this project be during year 3?
A) $6,668
B) $11,114
C) $12,554
D) $17,666
42) You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $75,000. The truck falls into the MACRS three-year class, and it will be sold after three years for $13,000. Use of the truck will require an increase in NWC (spare parts inventory) of $5,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 21 percent. What will the operating cash flow for this project be during year 3?
A) $5,335
B) $8,892
C) $9,443
D) $18,133
43) You are evaluating a project for your company. You estimate the sales price to be $500 per unit and sales volume to be 2000 units in year 1; 3000 units in year 2; and 1500 units in year 3. The project has a three-year life. Variable costs amount to $300 per unit and fixed costs are $200,000 per year. The project requires an initial investment of $325,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $50,000. NWC requirements at the beginning of each year will be approximately 25 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 12 percent. What is the operating cash flow for the project in year 2?
A) $74,167
B) $192,500
C) $338,750
D) $374,500
44) You are evaluating a project for your company. You estimate the sales price to be $50 per unit and sales volume to be 5,000 units in year 1; 10,000 units in year 2; and 2,500 units in year 3. The project has a three-year life. Variable costs amount to $10 per unit and fixed costs are $75,000 per year. The project requires an initial investment of $25,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $5,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 13 percent. What change in NWC occurs at the end of year 1?
A) $13,000
B) $34,000
C) $50,000
D) $75,000
45) You are evaluating a project for your company. You estimate the sales price to be $10 per unit and sales volume to be 3,000 units in year 1; 10,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $3 per unit and fixed costs are $25,000 per year. The project requires an initial investment of $50,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $10,000. NWC requirements at the beginning of each year will be approximately 25 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 15 percent. What change in NWC occurs at the end of year 1?
A) $11,550
B) $14,875
C) $17,500
D) $23,167
46) You are evaluating a project for your company. You estimate the sales price to be $10 per unit and sales volume to be 3,000 units in year 1; 10,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $3 per unit and fixed costs are $25,000 per year. The project requires an initial investment of $50,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $10,000. NWC requirements at the beginning of each year will be approximately 25 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 15 percent. What is the operating cash flow for the project in year 2?
A) $18,700
B) $18,867
C) $39,050
D) $40,317
47) You are evaluating a project for your company. You estimate the sales price to be $25 per unit and sales volume to be 4,000 units in year 1; 7,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $10 per unit and fixed costs are $50,000 per year. The project requires an initial investment of $10,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $1,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 10 percent. What change in NWC occurs at the end of year 1?
A) $1,750
B) $7,500
C) $11,550
D) $17,500
48) You are evaluating a project for your company. You estimate the sales price to be $25 per unit and sales volume to be 4,000 units in year 1; 7,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $10 per unit and fixed costs are $50,000 per year. The project requires an initial investment of $10,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $1,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 10 percent. What is the operating cash flow for the project in year 2?
A) $34,100
B) $37,093
C) $44,150
D) $39,700
49) You are evaluating a product for your company. You estimate the sales price of the product to be $300 per unit and sales volume to be 8,000 units in year 1; 10,000 units in year 2; and 2,000 units in year 3. The project has a three-year life. Variable costs amount to $125 per unit and fixed costs are $150,000 per year. The project requires an initial investment of $225,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $25,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 14 percent. What will the year 2 free cash flow for this project be?
A) $940,710
B) $961,500
C) $1,279,750
D) $1,759,750
50) You are evaluating a product for your company. You estimate the sales price of the product to be $375 per unit and sales volume to be 500 units in year 1; 1,000 units in year 2; and 200 units in year 3. The project has a three-year life. Variable costs amount to $200 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $175,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $20,000. NWC requirements at the beginning of each year will be approximately 25 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 10 percent. What will the year 2 free cash flow for this project be?
A) $8,933
B) $22,458
C) $88,167
D) $146,500
51) You are evaluating a product for your company. You estimate the sales price of the product to be $200 per unit and sales volume to be 2,000 units in year 1; 5,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $75 per unit and fixed costs are $200,000 per year. The project requires an initial investment of $360,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $40,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 13 percent. What will the year 2 free cash flow for this project be?
A) $170,412
B) $192,500
C) $201,300
D) $520,950
52) You are evaluating a product for your company. You estimate the sales price of the product to be $50 per unit and sales volume to be 50,000 units in year 1; 75,000 units in year 2; and 10,000 units in year 3. The project has a three-year life. Variable costs amount to $15 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $275,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $25,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 9 percent. What will the year 2 free cash flow for this project be?
A) $1,556,332
B) $1,572,667
C) $1,697,667
D) $2,339,000
53) Your company is considering the purchase of a new machine. The original cost of the old machine was $100,000; it is now five years old, and it has a current market value of $40,000. The old machine is being depreciated over a 10-year life toward a zero estimated salvage value on a straight-line basis, resulting in a current book value of $50,000 and an annual depreciation expense of $10,000. The old machine can be used for six more years but has no market value after its depreciable life is over. Management is contemplating the purchase of a new machine whose cost is $80,000 and whose estimated salvage value is zero. Expected before-tax cash savings from the new machine are $13,000 a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a five-year life, and the cost of capital is 10 percent. Assume a 21 percent tax rate. What will the year 1 operating cash flow for this project be?
A) $2,200
B) $4,900
C) $11,530
D) $14,200
54) Your company is considering the purchase of a new machine. The original cost of the old machine was $75,000; it is now five years old, and it has a current market value of $35,000. The old machine is being depreciated over a 10-year life toward a zero estimated salvage value on a straight-line basis, resulting in a current book value of $37,500 and an annual depreciation expense of $7,500. The old machine can be used for six more years but has no market value after its depreciable life is over. Management is contemplating the purchase of a new machine whose cost is $80,000 and whose estimated salvage value is zero. Expected before-tax cash savings from the new machine are $15,000 a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a five-year life, and the cost of capital is 15 percent. Assume a 21 percent tax rate. What will the year 1 operating cash flow for this project be?
A) $3,940
B) $4,480
C) $13,635
D) $16,600
55) Your company is considering the purchase of a new machine. The original cost of the old machine was $25,000; it is now five years old, and it has a current market value of $10,000. The old machine is being depreciated over a 10-year life toward a zero estimated salvage value on a straight-line basis, resulting in a current book value of $12,500 and an annual depreciation expense of $2,500. The old machine can be used for six more years but has no market value after its depreciable life is over. Management is contemplating the purchase of a new machine whose cost is $20,000 and whose estimated salvage value is zero. Expected before-tax cash savings from the new machine are $3,500 a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a five-year life, and the cost of capital is 13 percent. Assume a 21 percent tax rate. What will the year 1 operating cash flow for this project be?
A) $984
B) $1,200
C) $3,080
D) $5,000
56) Your company is considering the purchase of a new machine. The original cost of the old machine was $75,000; it is now five years old, and it has a current market value of $20,000. The old machine is being depreciated over a 10-year life toward a zero estimated salvage value on a straight-line basis, resulting in a current book value of $37,500 and an annual depreciation expense of $7,500. The old machine can be used for six more years but has no market value after its depreciable life is over. Management is contemplating the purchase of a new machine whose cost is $60,000 and whose estimated salvage value is zero. Expected before-tax cash savings from the new machine are $10,000 a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a five-year life, and the cost of capital is 9 percent. Assume a 21 percent tax rate. What will the year 1 operating cash flow for this project be?
A) $3,300
B) $4,236
C) $8,845
D) $13,200
57) Suppose you sell a fixed asset for $99,000 when its book value is $129,000. If your company's marginal tax rate is 21 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?
A) $80,700
B) $105,300
C) $77,300
D) $84,800
58) Suppose you sell a fixed asset for $112,000 when its book value is $112,000. If your company's marginal tax rate is 21 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?
A) $0
B) $68,320
C) $112,000
D) $34,720
59) Your company is considering a new project that will require $100,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $25,000 using straight-line depreciation. The cost of capital is 11 percent, and the firm's tax rate is 21 percent. Estimate the present value of the tax benefits from depreciation.
A) $34,894
B) $44,169
C) $9,276
D) $16,997
60) Your company is considering a new project that will require $250,000 of new equipment at the start of the project. The equipment will have a depreciable life of eight years and will be depreciated to a book value of $10,000 using straight-line depreciation. The cost of capital is 12 percent, and the firm's tax rate is 21 percent. Estimate the present value of the tax benefits from depreciation.
A) $63,618
B) $31,296
C) $117,733
D) $86,997
61) Your company is considering a new project that will require $100,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $5,000 using straight-line depreciation. The cost of capital is 14 percent, and the firm's tax rate is 21 percent. Estimate the present value of the tax benefits from depreciation.
A) $10,406
B) $14,031
C) $15,017
D) $39,147
62) You are trying to pick the least expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $15,000 to purchase and which will have OCF of −$1,600 annually throughout the vehicle's expected life of four years as a delivery vehicle; and the Toyota Prius, which will cost $27,000 to purchase and which will have OCF of −$750 annually throughout that vehicle's expected six-year life. Both cars will be worthless at the end of their life. If you intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 10 percent, what is the EAC of the most expensive car?
A) −$6,949.40
B) −$6,332.06
C) −$7,008.27
D) −$7,371.81
63) You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $25,000, has a six-year life, and has an annual OCF (after-tax) of −$5,000 per year. The Keebler Cookie Munster costs $40,000, has a seven-year life, and has an annual OCF (after-tax) of −$500 per year. If your discount rate is 10 percent, what is each machine's EAC?
A) Pillsbury: −$11,594.9, Keebler: $8,716.22
B) Pillsbury: −$11,594.94, Keebler: −$9,145.62
C) Pillsbury: −$10,740.18, Keebler: −$9,145.62
D) Pillsbury: −$10,740.18, Keebler: −$8,716.22
64) KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is planning to spend $250,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an expected life of three years, a $75,000 estimated resale value, and falls under the MACRS seven-year class life. Revenue from the new game is expected to be $600,000 per year, with costs of $250,000 per year. The firm has a tax rate of 21 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $100,000 at the beginning of the project. What will the year 0 free cash flow for this project be?
A) −$400,000
B) −$350,000
C) −$250,000
D) −$300,000
65) KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is planning to spend $150,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an expected life of three years, a $75,000 estimated resale value, and falls under the MACRS seven-year class life. Revenue from the new game is expected to be $600,000 per year, with costs of $250,000 per year. The firm has a tax rate of 21 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $100,000 at the beginning of the project. What will the year 0 free cash flow for this project be?
A) −$250,000
B) −$150,000
C) −$200,000
D) −$300,000
66) KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is planning to spend $250,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an expected life of three years, a $75,000 estimated resale value, and falls under the MACRS seven-year class life. Revenue from the new game is expected to be $500,000 per year, with costs of $200,000 per year. The firm has a tax rate of 21 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $100,000 at the beginning of the project. What will the year 1 operating cash flow for this project be?
A) $195,000
B) $167,135
C) $246,003
D) $300,000
67) KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is planning to spend $50,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an expected life of three years, a $75,000 estimated resale value, and falls under the MACRS five-year class life. Revenue from the new game is expected to be $500,000 per year, with costs of $200,000 per year. The firm has a tax rate of 21 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $100,000 at the beginning of the project. What will the year 2 operating cash flow for this project be?
A) $243,720
B) $174,200
C) $194,200
D) $195,000
68) KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is planning to spend $50,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an expected life of three years, a $10,000 estimated resale value, and falls under the MACRS five-year class life. Revenue from the new game is expected to be $500,000 per year, with costs of $200,000 per year. The firm has a tax rate of 21 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $25,000 at the beginning of the project. What will the year 3 free cash flow for this project be?
A) $222,600
B) $197,400
C) $212,200
D) $279,980
69) KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is planning to spend $50,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an expected life of three years, a $15,000 estimated resale value, and falls under the MACRS five-year class life. Revenue from the new game is expected to be $500,000 per year, with costs of $300,000 per year. The firm has a tax rate of 21 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $55,000 at the beginning of the project. What will the year 3 free cash flow for this project be?
A) $222,670
B) $234,930
C) $252,920
D) $243,640
70) Your firm needs a computerized machine tool lathe that costs $50,000, requires $10,000 in installation, and another $12,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 21 percent and a discount rate of 12 percent. Calculate the depreciation tax shield for this project in year 1.
A) $7,199.20
B) $8,886.00
C) $4,199.58
D) $6,554.40
71) Your firm needs a computerized machine tool lathe that costs $50,000, requires $10,000 in installation, $5,000 in freight charges, and another $12,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 21 percent and a discount rate of 12 percent. Calculate the depreciation tax shield for this project in year 1.
A) $4,549.55
B) $6,886.00
C) $5,999.40
D) $21,664.50
72) Your firm needs a computerized machine tool lathe that costs $50,000, requires $10,000 in installation, $5,000 in freight charges, and another $12,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 21 percent and a discount rate of 12 percent. If the lathe can be sold for $7,000 at the end of year 3, what is the after-tax salvage value?
A) $6,499.35
B) $6,541.47
C) $5,999.45
D) $4,816.50
73) Your firm needs a computerized machine tool lathe that costs $50,000, requires $10,000 in installation, and another $12,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 21 percent and a discount rate of 12 percent. If the lathe can be sold for $7,000 at the end of year 3, what is the after-tax salvage value?
A) $6,463.66
B) $4,446.00
C) $5,927.20
D) $6,154.20
74) Your firm needs a computerized machine tool lathe that costs $50,000 and another $12,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 21 percent and a discount rate of 12 percent. If the lathe can be sold for $6,000 at the end of year 3, what is the after-tax salvage value?
A) $3,705.00
B) $4,344.50
C) $5,499.50
D) $5,518.05
75) You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $50,000. The truck falls into the MACRS three-year class, and it will be sold after three years for $20,000. Use of the truck will require an increase in NWC (spare parts inventory) of $2,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 21 percent. What will the free cash flows for this project be?
A) Year 0 Cash flow: −$50,000; Year 1 Cash flow: $18,666; Year 2 Cash flow: $20,890; Year 3 Cash flow: $28,444
B) Year 0 Cash flow: −$50,000; Year 1 Cash flow: $18,666; Year 2 Cash flow: $21,890; Year 3 Cash flow: $28,444
C) Year 0 Cash flow: −$52,000; Year 1 Cash flow: $19,300; Year 2 Cash flow: $20,467; Year 3 Cash flow: $35,933
D) Year 0 Cash flow: −$52,500; Year 1 Cash flow: $18,666; Year 2 Cash flow: $22,890; Year 3 Cash flow: $30,944
76) You are evaluating a project for The Tiff-any golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Tiff-any to be $375 per unit and sales volume to be 1,000 units in year 1, 1,400 units in year 2, and 1,325 units in year 3. The project has a three-year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $35,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 10 percent. What change in NWC occurs at the end of year 1?
A) $25,000
B) $15,000
C) $10,000
D) $17,500
77) You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $300 per unit and sales volume to be 1,000 units in year 1, 1,250 units in year 2, and 1,325 units in year 3. The project has a three-year life. Variable costs amount to $200 per unit and fixed costs are $50,000 per year. The project requires an initial investment of $150,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $25,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 10 percent. What will the free cash flow for this project be in year 2?
A) $53,000
B) $49,950
C) $102,450
D) $107,250
78) You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $300 per unit and sales volume to be 1,000 units in year 1; 1,250 units in year 2; and 1,325 units in year 3. The project has a three-year life. Variable costs amount to $200 per unit and fixed costs are $50,000 per year. The project requires an initial investment of $150,000 in assets which will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $25,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 10 percent. What will the free cash flow for this project be in year 3?
A) $142,000
B) $167,000
C) $135,175
D) $122,250
79) A new project would require an immediate increase in raw materials in the amount of $12,000. The firm expects that accounts payable will automatically increase $8,500. How much must the firm expect its investment in net working capital to change if they accept this project?
A) +$20,000
B) +$3,500
C) −$20,500
D) −$3,500
80) A new project would require an immediate increase in raw materials in the amount $17,000. The firm expects that accounts payable will automatically increase $7,000. How much must the firm expect its investment in net working capital to increase if they accept this project?
A) $17,000
B) $7,000
C) $10,000
D) $24,000
81) To correctly project cash flows, we need to consider all of the factors EXCEPT
A) use of assets or employees already employed by the firm.
B) the likely impact that the new service or product will have on the firm's existing products' costs and revenues.
C) the new product's or service's costs and revenues.
D) All of these choices are correct.
82) A financial analyst calculated that the after-tax salvage value for a machine was $10,200. The current book value of the asset is $25,000 and the firm's tax rate is 20 percent. How much could the machine be sold for today?
A) $6,500
B) $7,500
C) $11,500
D) $9,500
83) A financial analyst calculated that the after-tax salvage value for a machine was $10,200. The current book value of the asset is $12,000 and the firm's tax rate is 21 percent. How much could the machine be sold for today?
A) $6,953.07
B) $7,151.63
C) $9,721.52
D) $9,103.49
84) Which of the following statements is correct?
A) A decrease in NWC involves either a reduction in current assets, which generates cash, or an increase in current liabilities, thereby freeing up the shareholder's cash for other things.
B) A decrease in NWC involves either an increase in current assets, which generates cash, or a decrease in current liabilities, thereby freeing up the shareholder's cash for other things.
C) An example of an increase in net working capital is to buy more machines or another plant.
D) None of these choices are correct.
85) Which of the following statements is correct?
A) Most current assets are depreciated using the MACRS depreciation calculation.
B) Most large corporations use Section 179 to depreciate their assets.
C) Most businesses benefit from accelerated depreciation; therefore the straight-line depreciation method is preferred by most businesses.
D) None of these choices are correct.
86) Your company is considering a project that will cost $100. The project will generate after-tax cash flows of $37.50 per year for five years. The WACC is 10 percent and the firm's D/A ratio is 0.70. The flotation cost for equity is 6 percent, the flotation cost for debt is 3 percent, and your firm does not plan on issuing any preferred stock within its capital structure. If your firm follows the practice of incorporating flotation costs into the project's initial investment, what is the firm's flotation-adjusted cash flow in year 0?
A) −$90.16
B) −$104.06
C) −$96.25
D) −$102.72
87) Your company is considering a project that will cost $175. The project will generate after-tax cash flows of $37.50 per year for five years. The WACC is 10 percent and the firm's D/A ratio is 0.62. The flotation cost for equity is 5 percent, the flotation cost for debt is 3 percent, and your firm does not plan on issuing any preferred stock within its capital structure. If your firm follows the practice of incorporating flotation costs into the project's initial investment, what is the firm's flotation-adjusted cash flow in year 0?
A) −$90.26
B) −$88.14
C) −$196.25
D) −$181.84
88) Your company is considering a project that will cost $100. The project will generate after-tax cash flows of $37.50 per year for five years. The WACC is 10 percent and the firm's D/A ratio is 0.70. The flotation cost for equity is 6 percent, the flotation cost for debt is 3 percent, and your firm does not plan on issuing any preferred stock within its capital structure. If your firm follows the practice of incorporating flotation costs into the project's initial investment, what is the weighted average flotation cost for the firm?
A) 2.90 percent
B) 3.90 percent
C) 3.30 percent
D) 4.30 percent
89) Your company is considering a project that will cost $100. The project will generate after-tax cash flows of $37.50 per year for five years. The WACC is 10 percent and the firm's D/A ratio is 0.35. The flotation cost for equity is 5 percent, the flotation cost for debt is 2 percent, and your firm does not plan on issuing any preferred stock within its capital structure. If your firm follows the practice of incorporating flotation costs into the project's initial investment, what is the weighted average flotation cost for the firm?
A) 2.95 percent
B) 3.15 percent
C) 3.95 percent
D) 4.80 percent
90) Your company is considering a project that will cost $100. The project will generate after-tax cash flows of $37.50 per year for five years. The WACC is 10 percent and the firm's D/A ratio is 0.40. The flotation cost for equity is 3 percent, the flotation cost for debt is 2 percent, and your firm does not plan on issuing any preferred stock within its capital structure. If your firm follows the practice of incorporating flotation costs into the project's initial investment, what is the weighted average flotation cost for the firm?
A) 2.6 percent
B) 3.2 percent
C) 3.7 percent
D) 4.1 percent
91) Suppose you sell a fixed asset for $99,000 when its book value is $75,000. If your company's marginal tax rate is 39 percent, what is the gain or loss on the sale of the asset?
A) $10,300
B) $11,600
C) $14,640
D) $24,000
92) You are trying to pick the least expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $13,000 to purchase and which will have OCF of −$1,200 annually throughout the vehicle's expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $23,000 to purchase and which will have OCF of −$550 annually throughout that vehicle's expected five-year life. Both cars will be worthless at the end of their life. If you intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 12 percent, what is the difference in the EAC of the two cars?
A) $317.88
B) $310.38
C) $413.25
D) $361.13
93) You are trying to pick the least expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $13,000 to purchase and which will have OCF of −$1,200 annually throughout the vehicle's expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $23,000 to purchase and which will have OCF of −$550 annually throughout that vehicle's expected five-year life. Both cars will be worthless at the end of their life. If you intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 16 percent, what is the difference in the EAC of the two cars?
A) $381.36
B) $428.04
C) $586.07
D) $601.51
94) Due to rapid growth, a computer superstore is contemplating expanding by adding another location. Which of the following items should the financial officer NOT include in estimating the cash flow associated with this expansion?
A) The company owns the land of the future site of the new location.
B) The new location is expected to take sales away from the existing location.
C) The company spent $100,000 six months ago in a major advertising campaign that will help the new store become profitable sooner.
D) All of these choices are correct.
95) ABC Engineering just bought a new machine. All of the following are examples of incremental cash flows EXCEPT
A) interest expense on the loan used to purchase the machine.
B) installation costs on the new machine.
C) increase in costs as a result of the new machine.
D) increases in depreciation expenses as a result of the new machine.
96) Which of the following statements is correct with respect to Section 179 deductions?
A) It was designed to help small businesses.
B) It allows the firm to expense the asset immediately in the year of purchase.
C) Most businesses can expense up to $1,000,000 of property placed in service during each year.
D) All of these choices are correct.
97) ABC Engineering just purchased a new machine. All of the following are examples of incremental cash flows EXCEPT
A) freight charged to ship the machine.
B) developmental costs to determine which machine would best work with their unique process.
C) increase in electric bill to run the machine.
D) reduction in maintenance expense associated with the new machine.
98) All of the following are incremental cash flows attributable to the project EXCEPT
A) opportunity costs.
B) financing costs.
C) substitutionary effects.
D) complementary effects.
99) Equipment was purchased for $45,000 plus $2,000 in freight charges. Installation costs were $1,500 and sales tax totaled $1,000. Hiring a special consultant to provide advice during the selection of the equipment cost $3,000. What is this asset's depreciable basis?
A) $51,500
B) $49,500
C) $48,500
D) $52,500
100) Equipment was purchased for $50,000 plus $2,500 in freight charges. Installation costs were $1,500 and sales tax totaled $1,000. Hiring a special consultant to provide advice during the selection of the equipment cost $3,000. What is this asset's depreciable basis?
A) $55,000
B) $58,000
C) $57,000
D) $51,000
101) All of the following can be included in the depreciable basis of an asset EXCEPT
A) freight charges.
B) installation fees.
C) sales tax.
D) variable costs.
102) A manufacturing firm is planning on expanding its existing operations. The expansion project is significant and will require the firm to house the expansion in a different location. The firm is considering building on a lot they own across town. The lot is currently vacant and it was paid for nearly 20 years ago. Given this information, which of the following statements is correct?
A) The lot is not an incremental cash flow because it is not being utilized at this time.
B) The lot is an incremental cash flow because it represents an opportunity cost.
C) The lot is an incremental cash flow because it represents a sunk cost.
D) The lot is not an incremental cash flow because it has already been paid for.
103) A local bank is contemplating opening a new branch bank in a large superstore across town from their main office. It is estimated that the new branch will generate $20,000 after expenses each month. The manager wonders if all these revenues should be considered an incremental cash flow. Given this information, which of the following statements is correct?
A) $20,000 is generated by the new branch bank and therefore it is an incremental cash flow.
B) We would first need to assess the opportunity cost of placing a branch in a different location to answer this question.
C) Some amount less than the $20,000 is incremental because of substitutionary effects.
D) Some amount less than the $20,000 is incremental because of complementary effects.
104) A local bank is contemplating adding a new ATM to their lobby. They will need another phone line to provide communications that has a monthly cost of $50 per month. This is an example of
A) incremental cash flow.
B) sunk cost.
C) complementary costs.
D) none of the options.
105) The research chemists at MegaClean created a new cleaner that keeps car and truck tires shiny and clean for one year. They believe that this product will be highly successful and will attract customers to purchase their existing line of household cleaning products. This is an example of
A) substitutionary effect.
B) complementary effect.
C) opportunity effect.
D) sunk cost.
106) Coke is planning on marketing a new drink called Very Berry Coke which is a mixture of raspberry and blackberry flavors blended to perfection and added to the highly secret Coca-Cola formula. This new product is expected to reduce the sales of their existing product, Cherry Coke, by $10 million per year. This is an example of a
A) pro forma effect.
B) complementary effect.
C) substitutionary effect.
D) opportunity effect.
107) AB Mining Company just commissioned a firm to identify if an unused portion of their mine contains any silver or gold at a cost of $125,000. This is an example of a(n)
A) opportunity cost.
B) sunk cost.
C) incremental cash flow.
D) relevant cash flow.
108) An asset's cost plus the amounts you paid for items such as sales tax, freight charges, and installation and testing fees is referred to as the ________.
A) opportunity cost
B) sunk cost
C) asset costing reference
D) depreciable basis
109) The process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements is referred to as
A) substitute and complement.
B) pro forma analysis.
C) incremental cash flows.
D) estimation and depreciation analysis.
110) If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a(n)
A) incremental cash outflow.
B) opportunity cost.
C) sunk cost.
D) expensible item.
111) Your firm needs a machine which costs $500,000, and requires $15,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 21 percent and a discount rate of 10 percent. If this machine can be sold for $50,000 at the end of year 3, what is the after-tax salvage value?
A) $12,250.00
B) $39,769.50
C) $32,500.00
D) $47,280.50
112) Your firm needs a machine which costs $50,000, and requires $2,000 in maintenance for each year of its five-year life. After five years, this machine will be replaced. The machine falls into the MACRS five-year class life category. Assume a tax rate of 21 percent and a discount rate of 10 percent. If this machine can be sold for $3,000 at the end of year 5, what is the after-tax salvage value?
A) $1,050.00
B) $1,872.00
C) $2,905.20
D) $2,974.80
113) Equipment was purchased for $100,000 plus $1,000 in freight charges. Installation costs were $500 and sales tax totaled $7,500. Hiring a special consultant to provide advice during the selection of the equipment cost $1,000. What is this asset's depreciable basis?
A) $110,000
B) $109,000
C) $108,000
D) $107,500
114) Equipment was purchased for $250,000 plus $500 in freight charges. Installation costs were $750 and sales tax totaled $18,750. Hiring a special consultant to provide advice during the selection of the equipment cost $500. What is this asset's depreciable basis?
A) $270,500
B) $270,000
C) $269,250
D) $268,750
115) You are evaluating a project for your company. You estimate the sales price to be $100 per unit and sales volume to be 5,000 units in year 1, 10,000 units in year 2, and 2,500 units in year 3. The project has a three-year life. Variable costs amount to $50 per unit and fixed costs are $75,000 per year. The project requires an initial investment of $250,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $25,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 14 percent. What change in NWC occurs at the end of year 1?
A) $65,000
B) $70,000
C) $100,000
D) $250,000
116) You are evaluating a project for your company. You estimate the sales price to be $40 per unit and sales volume to be 2,000 units in year 1, 8,000 units in year 2, and 4,000 units in year 3. The project has a three-year life. Variable costs amount to $25 per unit and fixed costs are $20,000 per year. The project requires an initial investment of $16,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $1,000. NWC requirements at the beginning of each year will be approximately 25 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 10 percent. What change in NWC occurs at the end of year 1?
A) $16,000
B) $44,000
C) $60,000
D) $90,000
117) Your firm needs a machine which costs $50,000, and requires $2,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 21 percent and a discount rate of 10 percent. What is the depreciation tax shield for this project in year 3?
A) $1,555.05
B) $3,291.75
C) $4,813.25
D) $5,833.33
118) Your firm needs a machine which costs $20,000, and requires $1,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 21 percent and a discount rate of 9 percent. What is the depreciation tax shield for this project in year 3?
A) $622.02
B) $1,777.20
C) $3,640.00
D) $2,339.98
119) A new project would require an immediate increase in raw materials in the amount of $1,000. The firm expects that accounts payable will automatically increase $800. How much must the firm expect its investment in net working capital to change if they accept this project?
A) +$1,800
B) +$200
C) −$200
D) −$1,800
120) A new project would require an immediate increase in raw materials in the amount $6,000. The firm expects that accounts payable will automatically increase $2,000. How much must the firm expect its investment in net working capital to increase if they accept this project?
A) −$6,000
B) −$4,000
C) +$4,000
D) +$6,000
121) Suppose you sell a fixed asset for $10,000 when its book value is $2,000. If your company's marginal tax rate is 21 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?
A) $3,680
B) $8,320
C) $420
D) $6,500