Colors and More is considering replacing the equipment it uses to produce crayons. The
equipment would cost $1.37 million, have a 12-year life, and lower manufacturing costs
by an estimated $304,000 a year. The equipment will be depreciated using straight-line
depreciation to a book value of zero. The required rate of return is 15 percent and the
tax rate is 35 percent. What is the net income from this proposed project?
Which of the following will increase the operating cycle?
I. increasing the inventory turnover rate
II. increasing the payables period
III. decreasing the receivable turnover rate
IV. decreasing the inventory level
A. I only
B. III only
C. II and IV only
D. I and IV only
E. II and III only
Dexter Smith & Co. is replacing a machine simply because it has worn out. The new
machine will not affect either sales or operating costs and will not have any salvage
value at the end of its 5-year life. The firm has a 34 percent tax rate, uses straight-line
depreciation over an asset's life, and has a positive net income. Given this, which one of
the following statements is correct?
A. As a project, the new machine has a net present value equal to minus one times the
machine's purchase price.
B. The new machine will have a zero rate of return.
C. The new machine will generate positive operating cash flows, at least in the first few
years of its life.
D. The new machine will create a cash outflow when the firm disposes of it at the end
of its life.