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Exam 10: Making Capital Investment Decisions

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Question 61

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The operating cash flow for a project should exclude which one of the following?

A) taxes
B) variable costs
C) fixed costs
D) interest expense
E) depreciation tax shield

F) A) and B)
G) A) and C)

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Question 62

Multiple Choice

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Which one of the following statements is correct concerning bid prices?

A) The bid price is the maximum price that a firm should bid.
B) A firm can submit a bid that is higher than the computed bid price and still break even.
C) A bid price ignores taxes.
D) A bid price should be computed based solely on the operating cash flows of the project.
E) A bid price should be computed based on a zero percent required rate of return.

F) B) and D)
G) A) and B)

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Question 63

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The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's:

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 straight-line method to a zero book value over the 6-year life of the project.The company has a marginal tax rate of 32 percent.What is the annual value of the depreciation tax shield?

-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 oven is $41,000.What is the equivalent annual cost of an oven if the required rate of return is 13 percent?

Northern Railway is considering a project which will produce annual sales of $975,000 and increase cash expenses by $848,000.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 debt-free.What is the amount of the operating cash flow using the top-down approach?

Hollister & Hollister is considering a new project.The project will require $535,000 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 31 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?

Kelly's Corner Bakery purchased a lot in Oil City 6 years ago at a cost of $302,000.Today,that lot has a market value of $340,000.At the time of the purchase,the company spent $15,000 to level the lot and another $20,000 to install storm drains.The company now wants to build a new facility on that site.The building cost is estimated at $1.51 million.What amount should be used as the initial cash flow for this project?