41.
When using the equivalent annual cost as a basis for deciding which
equipment should be purchased, the equipment under consideration must
fit which two of the following criteria?
I. differing productive lives
II. differing manufacturers
III. required replacement at end of economic life
IV. differing initial cost
42.
The equivalent annual cost considers which of the following?
I. required rate of return
II. operating costs
III. need for replacement
IV. economic life
43.
The bid price always assumes which one of the following?
44.
Which one of the following would make a project unacceptable?
45.
Decreasing which one of the following will increase the acceptability of a
project?
46.
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?
47.
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?
48.
Sailcloth & More currently produces boat sails and is considering expanding
its operations to include awnings for homes and travel trailers. The
company owns land beside its current manufacturing facility that could be
used for the expansion. The company bought this land 5 years ago at a cost
of $319,000. At the time of purchase, the company paid $24,000 to level out
the land so it would be suitable for future use. Today, the land is valued at
$295,000. The company has some unused equipment that it currently owns
valued at $38,000. This equipment could be used for producing awnings if
$12,000 is spent for equipment modifications. Other equipment costing
$490,000 will also be required. What is the amount of the initial cash flow
for this expansion project?
49.
Webster & Moore paid $148,000, in cash, for a piece of equipment 3 years
ago. At the beginning of last year, the company spent $21,000 to update the
equipment with the latest technology. The company no longer uses this
equipment in its current operations and has received an offer of $96,000
from a firm that would like to purchase it. Webster & Moore is debating
whether to sell the equipment or to expand its operations so that the
equipment can be used. When evaluating the expansion option, what value,
if any, should the firm assign to this equipment as an initial cost of the
project?
50.
The Fluffy Feather sells customized handbags. Currently, it sells 18,000
handbags annually at an average price of $89 each. It is considering adding
a lower-priced line of handbags that sell for $59 each. The firm estimates it
can sell 7,000 of the lower-priced handbags but will sell 3,000 less of the
higher-priced handbags by doing so. What is the amount of the sales that
should be used when evaluating the addition of the lower-priced
handbags?
51.
Mason Farms purchased a building for $689,000 eight years ago. Six years
ago, repairs were made to the building which cost $136,000. The annual
taxes on the property are $11,000. The building has a current market value
of $840,000 and a current book value of $494,000. The building is totally
paid for and solely owned by the firm. If the company decides to use this
building for a new project, what value, if any, should be included in the
initial cash flow of the project for this building?
52.
You own a house that you rent for $1,100 a month. The maintenance
expenses on the house average $200 a month. The house cost $219,000
when you purchased it 4 years ago. A recent appraisal on the house valued
it at $239,000. If you sell the house you will incur $14,000 in real estate
fees. The annual property taxes are $4,000. You are deciding whether to sell
the house or convert it for your own use as a professional office. What value
should you place on this house when analyzing the option of using it as a
professional office?
53.
Nelson Mfg. owns a manufacturing facility that is currently sitting idle. The
facility is located on a piece of land that originally cost $159,000. The facility
itself cost $1,390,000 to build. As of now, the book value of the land and the
facility are $159,000 and $458,000, respectively. The firm owes no debt on
either the land or the facility at the present time. The firm received a bid of
$1,700,000 for the land and facility last week. The firm’s management
rejected this bid even though they were told that it is a reasonable offer in
today’s market. If the firm was to consider using this land and facility in a
new project, what cost, if any, should it include in the project analysis?
54.
Cool Comfort currently sells 300 Class A spas, 450 Class C spas, and 200
deluxe model spas each year. The firm is considering adding a mid-class
spa and expects that if it does it can sell 375 of them. However, if the new
spa is added, Class A sales are expected to decline to 225 units while the
Class C sales are expected to decline to 200. The sales of the deluxe model
will not be affected. Class A spas sell for an average of $12,000 each. Class
C spas are priced at $6,000 and the deluxe model sells for $17,000 each.
The new mid-range spa will sell for $8,000. What is the value of the
erosion?
55.
Jefferson & Sons is evaluating a project that will increase annual sales by
$145,000 and annual cash costs by $94,000. The project will initially require
$110,000 in fixed assets that will be depreciated straight-line to a zero book
value over the 4-year life of the project. The applicable tax rate is 32
percent. What is the operating cash flow for this project?
56.
Marie’s Fashions is considering a project that will require $28,000 in net
working capital and $87,000 in fixed assets. The project is expected to
produce annual sales of $75,000 with associated cash costs of $57,000. The
project has a 5-year life. The company uses straight-line depreciation to a
zero book value over the life of the project. The tax rate is 30 percent. What
is the operating cash flow for this project?
57.
The Beach House has sales of $784,000 and a profit margin of 8 percent.
The annual depreciation expense is $14,000. What is the amount of the
operating cash flow if the company has no long-term debt?
58.
The Pancake House has sales of $1,642,000, depreciation of $27,000, and
net working capital of $218,000. The firm has a tax rate of 35 percent and a
profit margin of 6 percent. The firm has no interest expense. What is the
amount of the operating cash flow?
59.
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?
60.
Bi–Lo Traders is considering a project that will produce sales of $28,000
and increase cash expenses by $17,500. If the project is implemented, taxes
will increase by $3,000. The additional depreciation expense will be $1,600.
An initial cash outlay of $1,400 is required for net working capital. What is
the amount of the operating cash flow using the top-down approach?