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?
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?
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?
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?
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?
95. ABC Engineering just bought a new machine. All of the following are examples of
incremental cash flows EXCEPT:
96. Which of the following statements is correct with respect to Section 179 deductions?
97. ABC Engineering just purchased a new machine. All of the following are examples of
incremental cash flows EXCEPT:
98. All of the following are incremental cash flows attributable to the project EXCEPT:
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?
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?
101. All of the following can be included in the depreciable basis of an asset EXCEPT:
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?
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?
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:
12–92
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:
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 dollars per year. This is an example of a: