978-0133423822 Chapter 12 Part 3

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26) Burr Habit Corporation is considering a new product line. The company currently

manufactures several lines of snow skiing apparel. The new products, insulated ski shorts,

are expected to generate sales less cost of goods sold of $1 million per year for the next

ive years. They expect that during this ive year period, they will lose about $250,000 per

year in sales less cost of goods sold on their existing lines of longer ski pants as a result of

the introduction of the new product line. The new line will require no additional equipment

or space in the plant and can be produced in the same manner as the existing apparel

products. The new project will, however, require that the company spend an additional

$80,000 per year on insurance in case customers sue for frostbite. Also, a new marketing

director would be hired to oversee the line at $45,000 per year in salary and beneits.

Because of the diferent construction of the shorts, an increase in inventory of 3,800 would

be required initially. If the marginal tax rate is 30%, compute the incremental after tax cash

lows per year for years 1-5.

A) $434,500 per year

B) $625,000 per year

C) $187,500 per year

D) $437,500 per year

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

27) Regal Enterprises is considering the purchase of a new embroidering machine. It is

expected to generate additional sales of $400,000 per year. The machine will cost

$295,000, plus $3,000 to install it. The embroiderer will save $12,000 in labor expense

each year. Regal is in the 34% income tax bracket. The machine will be depreciated on a

straight-line basis over ive years (it has no salvage value). The embroiderer will require

annual operating expenses of $136,000. What is the annual operating cash low that the

machine will generate?

A) $316,954

B) $124,000

C) $202,424

D) $165,816

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

28) Woodstock Inc. expects to own a building for ive years, then sell it for $1,500,000 net

of taxes, sales commissions and other selling costs. Woodstock’s cost of capital is 11%. How

much will the sale of the building contribute to the NPV of the project?

A) $890,177

B) $1,351,351

C) $1,500,000

D) $2,527,587

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

29) Which of the following would cause free cash low to difer from operating cash low

when an investment project is terminated?

A) Sale of assets

B) Recovery of net working capital

C) Income taxes

D) All of the above

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

30) Which of the following should be considered in the estimation of free cash lows?

A) Cash generated from the sale of a project

B) Recovery of net working capital

C) Operating cash low

D) All of the above

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

31) The Director of Capital Budgeting of Capital Assets Corp. is considering the acquisition

of a new high speed photocopy machine. The photocopy machine is priced at $85,000 and

would require $2,000 in transportation costs and $4,000 for installation. The equipment

will have a useful life of 5 years. The proposal will require that Capital Assets Corp. send a

technician for training at a cost of $5,000. The irm’s marginal tax rate is 40 percent. How

much is the initial cash outlay of the photocopy machine?

A) $64,000

B) $77,000

C) $81,000

D) $96,000

Question Status: Revised

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

32) Jeferson Corporation is considering an expansion project. The necessary equipment

could be purchased for $15 million and shipping and installation costs are another

$500,000. The project will also require an initial $2 million investment in net working

capital. The company’s tax rate is 40%. What is the project’s initial investment outlay (in

millions)?

A) $15.0

B) $15.5

C) $17.0

D) $17.5

Question Status: Revised

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

33) In the fourth and inal year of a project, SVC expects operating cash low of $440,000.

The project required an $80,000 investment in working capital at the beginning. Of that

amount, $60,000 will be recovered in year 4. Machinery associated with the project will be

sold for exactly its undepreciated value of $15,000. Total free cash low for the fourth year

A) $75,000.

B) $1,500,000.

C) $515,000.

D) $535,000.

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

34) Wright’s Warehouse has the following projections for Year 1 of a capital budgeting

project.

Year 1 Incremental Projections:

Sales $200,000

Variable Costs $120,000

Fixed Costs $40,000

Depreciation Expense $20,000

Tax Rate 40%

Calculate the operating cash low for Year 1.

A) $12,000

B) $32,000

C) $52,000

D) $72,000

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

35) SpaceTech is considering a new project with the following projections for Year 2.

Year 2 Projections

EBIT $400,000

Interest Expense $20,000

Depreciation Expense $40,000

Tax Rate 40%

Incremental Net Working

Capital Needs $200,000

A) $130,000

B) $180,000

C) $230,000

D) $280,000

Question Status: Revised

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

36) In year 3 of project Gamma. sales were $3,000,0000, cost of goods sold $1,500,000,

other cash costs were $400,000, depreciation was $600,000 and interest expense was

$250,000. The company’s marginal tax rate is 35%. Compute operating cash low for year 3

of project Gamma.

A) $925,000

B) $675,000

C) $500,000

D) $325,000

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

37) The Board of Directors of Waste Free Chemicals is considering the acquisition of a new

chemical processor. The processor is priced at $600,000 but would require $60,000 in

transportation costs and $40,000 for installation. The processor will have a useful life of 10

years. The project will require Waste Free to increase its investment in accounts receivable

by $80,000 and will also require an additional investment in inventory of $150,000. The

irm’s marginal tax rate is 40 percent. How much is the initial cash outlay of the processor?

A) $700,000

B) $850,000

C) $930,000

D) $1,040,000

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

38) The introduction of a new product at Elia Pharmaceuticals will require a $450,000

increase in inventory, a $730,000 increase in Accounts Receivable, and a $180,000 increase

in Accounts Payable. Introduction of the product will also require a $700,000 expenditure

for advertising. The increase in net working capital required for the introduction of this

product is

A) $1,180,000.

B) $1,000,000.

C) $1,360,000.

D) $1,700,000.

Question Status: New question

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

39) Which of the following cash lows are NOT considered in the calculation of the initial

outlay for a capital investment proposal?

A) Training expense

B) Working capital investments

C) Installation costs of an asset

D) Before-tax selling price of old machine

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

40) If Morgan Tool & Die Co. acquires a new turret lathe, the lathe will cost $80,000,

transportation $6,000, installation $7,500. Installing the new lathe will allow Morgan to

reduce its inished goods inventory by $10,000. For capital budgeting purposes, the initial

investment required for the new lathe is

A) $83,500.

B) $87,500.

C) $93,500.

D) $103,500.

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

41) A project under consideration by Bizet Co. will require the purchase of machinery for

$50,000 and additional inventory for $15,000. Accounts receivable will increase by $12,000

and accounts payable by $14,000. Liability insurance will increase by $2,500 per year and

utilities expense by $1,500 per year. What is the investment in working capital required by

this project?

A) $77,000

B) $41,000

C) $13,000

D) $4,000

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

42) When an old asset is sold for exactly its depreciated value, the only taxable income is

the diference between the initial cost of the machine and the selling price.

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

43) Because installation costs of a new asset are a current cash expense, they are excluded

from the initial outlay.

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

44) The capital budgeting decision-making process involves estimating the expected

incremental cash lows of a proposal and comparing the present value of these cash lows

to the project’s cost.

Question Status: Revised

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

45) Working capital for a project includes investment in ixed assets.

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

46) It is not necessary to consider depreciation in estimating cash lows for a new capital

project.

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

47) The initial outlay of an asset does not include installation costs.

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

48) The depreciation method used in capital budgeting is irrelevant because any

depreciation not taken during the life of the project will add to the book value when assets

are sold.

Question Status: New question

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

49) Additional cash needed to ill increased working capital requirements should be

included in the initial cost of a product when analyzing an investment.

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

50) By examining cash lows, we are correctly able to analyze the timing of the beneits.

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

51) Accounting proits represents free cash lows that are available for reinvestment.

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

52) The hardest step in capital budgeting analysis is estimating the cash lows of a project.

Question Status: Revised

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

53) A marketing survey completed last year to determine a project’s feasibility would be

included as part of the project’s initial cash outlow.

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

54) It is possible for after-tax operating cash lows to be positive when accounting income

is negative.

Question Status: New question

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

55) Sales captured from the irm’s competitors can be relevant to the capital-budgeting

decision.

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

56) Clean-up and restoration costs required by government regulations are negative cash

lows associated with a project’s termination.

Question Status: New question

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

57) LaVigne Wineries is purchasing a new wine press. The equipment will cost $250,000.

Transportation and installation will cost another $35,000. Because of increased production,

inventories will increase by $15,000. The press will be depreciated using the straight line

method to a book value of $0.00 over its useful life of 7 years. Compute depreciation for

each year of the project.

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

58) Cape Cod Cranberry Products is evaluating the introduction of a new line of juice

drinks consisting of cranberry juice blended with sweeter juices such as apple or grape. In

the irst year the product line is introduced, sales are forecasted at $2,000,000, Cost of

Goods Sold at $1,200,000, other cash expenses at $300,000, depreciation expense at

$800,000. The company has many other proitable product lines. It’s marginal tax rate is

35%. Compute operating cash low for the irst year.

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value

59) Marguerite’s Florist is considering the purchase of a new delivery van. It will cost

$25,000 plus another $3,000 to have it painted in the company‘s characteristic loral motif.

The van will be depreciated over 5 years using MACRS percentages and a half year

convention. Compute depreciation for the second year in the life of the van.

Question Status: Previous edition

Objective: 12.2 Calculate and forecast project cash lows for expansion type projects.

Keywords: incremental cash lows

Principles: Principle 3: Cash Flows Are the Source of Value