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79) Dog Up! Franks is looking at a new sausage system with an installed cost of $411,500. This
cost will be depreciated straight-line to zero over the project's seven-year life, at the end of which
the sausage system is expected to be sold for $35,000 cash. No bonus depreciation will be taken.
The sausage system will save the firm $129,400 per year in pretax operating costs, and the
system requires an initial investment in net working capital of $22,500. All of the net working
capital will be recovered at the end of the project. The tax rate is 23 percent and the discount rate
is 13.2 percent. What is the net present value of this project?
A) $105,391.14
B) $107,820.59
C) $51,507.41
D) $40,441.14
E) $84,117.64
80) Alt's is contemplating the purchase of a new $218,000 computer-based order entry system.
The system will be depreciated straight-line to zero over the system's five-year life. No bonus
depreciation will be taken. The system will be worth $20,000 at the end of five years. The
company will save $73,500 before taxes per year in order processing costs and will reduce
working capital by $18,600 on Day 1. The net working capital will return to its original level
when the project ends. The tax rate is 21 percent. What is the internal rate of return for this
project?
A) 13.37 percent
B) 21.49 percent
C) 18.21 percent
D) 20.12 percent
E) 13.58 percent
81) PGH Inc. is considering a new seven-year expansion project with an initial fixed asset
investment of $3.87 million. The fixed asset will be depreciated straight-line to zero over its
seven-year tax life, after which time it will be worthless. No bonus depreciation will be taken.
The project is estimated to generate $2,103,000 in annual sales, with costs of $1,065,000. The
tax rate is 21 percent and the required return is 14.6 percent. What is the net present value of this
project?
A) $32,155.56
B) $71,841.16
C) $134,098.28
D) −$52,171.66
E) $95,008.04
82) Jefferson & Sons is evaluating a project that will increase annual sales by $198,600 and
annual cash costs by $94,500. The project will initially require $187,000 in fixed assets that will
be depreciated straight-line to a zero book value over the four-year life of the project. No bonus
depreciation will be taken. The applicable tax rate is 22 percent. What is the operating cash flow
for this project?
A) $97,851
B) $89,920
C) $91,483
D) $86,480
E) $46,620
83) Marie's Fashions is considering a project that will require $39,000 in net working capital and
$68,000 in fixed assets. The project is expected to produce annual sales of $78,500 with
associated cash costs of $41,000. The project has a four-year life. The company uses straight-line
depreciation to a zero book value over the life of the project. Ignore bonus depreciation. The tax
rate is 25 percent. What is the operating cash flow for this project?
A) $33,325
B) $27,580
C) $32,545
D) $25,760
E) $32,375
84) Webster's has sales of $798,000 and a profit margin of 6.8 percent. The annual depreciation
expense is $82,600. What is the amount of the operating cash flow if the company has no long-
term debt?
A) $54,264
B) −$28,336
C) $22,160
D) $136,864
E) $104,760
85) Hot and Cold has annual sales of $847,000, annual depreciation of $47,000, and net working
capital of $43,000. The tax rate is 21 percent and the profit margin is 7.3 percent. The firm has
no interest expense. What is the amount of the operating cash flow?
A) $14,831
B) $108,831
C) $121,220
D) $168,480
E) $155,831
86) Houston's is considering a project that will produce incremental annual sales of $361,000 and
increase cash expenses by $198,000. If the project is implemented, taxes will increase from
$31,000 to $47,000. The company is debt-free. What is the amount of the operating cash flow
using the top-down approach?
A) $172,000
B) $147,000
C) $122,000
D) $138,000
E) $163,000
87) A project has projected sales of $76,400, cash expenses of $42,900, depreciation of $3,730,
taxes of $7,200, and an initial cash requirement of $2,200 for working capital. What is the
amount of the operating cash flow using the top-down approach?
A) $22,570
B) $30,030
C) $28,300
D) $26,300
E) $24,570
88) A proposed expansion project is expected to increase sales by $74,300 and increase cash
expenses by $46,900. The project will require $52,800 of fixed assets that will be depreciated
using straight-line depreciation to a zero book value over the five-year life of the project. The
store has a marginal tax rate of 23 percent. What is the operating cash flow of the project using
the tax shield approach? Ignore bonus depreciation.
A) $11,114.40
B) $17,916.60
C) $23,526.80
D) $22,800.10
E) $14,098.20
89) Corner Market is considering adding a new product line that is expected to increase annual
sales by $418,000 and cash expenses by $337,000. The initial investment will require $390,000
in fixed assets that will be depreciated using the straight-line method to a zero book value over
the six-year life of the project. Ignore bonus depreciation. The company has a marginal tax rate
of 21 percent. What is the annual value of the depreciation tax shield?
A) $13,650
B) $13,160
C) $27,300
D) $163,800
E) $136,500
90) A two-year project has sales of $582,960, cash costs of $411,015, and depreciation expense
of $68,109. The tax rate is 24 percent and the discount rate is 12 percent. What amount should be
used as the annual depreciation tax shield when computing the project's operating cash flow?
Ignore bonus depreciation.
A) $23,606.67
B) $16,346.16
C) $47,213.34
D) $26,210.01
E) $46,676.30
91) A project requires the purchase of $587,000 of equipment that will be depreciated straight-
line to a zero book value over the four-year life of the project. The equipment can be scraped at
the end of the project for 33 percent of its original cost. Annual sales from this project are
estimated at $625,000 with cash expenses of $487,000. Net working capital equal to 12 percent
of sales will be required to support the project. The required return is 13 percent and the tax rate
is 21 percent. What is the cash flow in Year 2 of the project? Ignore bonus depreciation.
A) $91,080
B) −$55,670
C) $139,838
D) $105,560
E) −$5,775
92) Kwik Dogs is considering the installation of a new cooker that will cut annual operating
costs by $11,900. The system will cost $38,900 and will be depreciated to zero using straight-
line depreciation over its five-year life. What is the amount of the earnings before interest and
taxes for this project? Ignore bonus depreciation.
A) $19,680
B) $4,120
C) $5,525
D) –$4,120
E) –$19,680
93) Colors and More is considering replacing the equipment it uses to produce crayons. The
equipment would cost $1.03 million, have a 12-year life, and lower manufacturing costs by an
estimated $280,000 a year. The equipment will be depreciated using straight-line depreciation
over its expected life to a book value of zero. Ignore bonus depreciation. The required rate of
return is 13 percent and the tax rate is 23 percent. What is the annual operating cash flow?
A) $156,947.92
B) $128,150.00
C) $266,441.67
D) $235,341.67
E) $155,616.67
94) Gateway Communications is considering a project with an initial fixed asset cost of $2.168
million which will be depreciated straight-line to a zero book value over the 10-year life of the
project. Ignore bonus depreciation. At the end of the project the equipment will be sold for an
estimated $495,000. The project will not directly produce any sales but will reduce operating
costs by $634,000 a year. The tax rate is 21 percent. The project will require $128,000 of net
working capital which will be recouped when the project ends. What is the net present value at
the required rate of return of 14.3 percent?
A) $668,019.24
B) $701,414.14
C) $652,108.10
D) $570,475.57
E) $657,345.35
95) You are working on a bid to build two city parks a year for the next three years. This project
requires the purchase of $249,000 of equipment that will be depreciated using straight-line
depreciation to a zero book value over the three-year project life. Ignore bonus depreciation. The
equipment can be sold at the end of the project for $115,000. You will also need $18,000 in net
working capital for the duration of the project. The fixed costs will be $37,000 a year and the
variable costs will be $148,000 per park. Your required rate of return is 14 percent and your tax
rate is 21 percent. What is the minimal amount you should bid per park? (Round your answer to
the nearest $100)
A) $212,500
B) $208,400
C) $214,300
D) $214,100
E) $208,200
96) You are working on a bid to build two apartment buildings a year for the next three years.
This project requires the purchase of $847,000 of equipment that will be depreciated using
straight-line depreciation to a zero book value over the project's life. Ignore bonus depreciation.
The equipment can be sold at the end of the project for $415,000. You will also need $165,000 in
net working capital over the life of the project. The fixed costs will be $528,000 a year and the
variable costs will be $1,640,000 per building. Your required rate of return is 16 percent for this
project and your tax rate is 24 percent. What is the minimal amount, rounded to the nearest $100,
you should bid per building?
A) $4,158,400
B) $4,489,500
C) $2,065,700
D) $2,780,600
E) $2,244,800
97) ALUM Inc. uses high-tech equipment to produce specialized products. Each one of its
machines costs $1,243,000 to purchase plus an additional $78,000 a year to operate. The
machines have a five-year life after which they are worthless. What is the equivalent annual cost
of one these machines if the required return is 16.5 percent?
A) −$462,061.04
B) −$427,109.10
C) −$335,803.37
D) −$395,666.67
E) −$556,947.08
98) Country Breads uses specialized ovens to bake its bread. One oven costs $249,000 and lasts
about 15 years before it needs to be replaced. The annual operating cost per oven is $34,300.
What is the equivalent annual cost of an oven if the required rate of return is 14 percent?
A) −$74,839.43
B) −$48,349.72
C) −$82,800.19
D) −$50,560.08
E) −$28,729.77
99) Precision Dyes is analyzing two machines to determine which one it should purchase. The
company requires a rate of return of 15 percent and uses straight-line depreciation to a zero book
value over the life of its equipment. Ignore bonus depreciation. Machine A has a cost of
$462,000, annual aftertax cash outflows of $46,200, and a four-year life. Machine B costs
$898,000, has annual aftertax cash outflows of $16,500, and has a seven-year life. Whichever
machine is purchased will be replaced at the end of its useful life. Which machine should the
company purchase and how much less is that machine's EAC as compared to the other
machine's?
A) A; $24,321.02
B) A; $17,404.04
C) B; $16,791.08
D) B; $23,156.82
E) B; $17,521.94
100) A five-year project has an initial fixed asset investment of $613,600, an initial net working
capital investment of $22,200, and an annual operating cash flow of –$76,540. The fixed asset is
fully depreciated over the life of the project and has no salvage value. The net working capital
will be recovered when the project ends. The required return is 11.7 percent. What is the project's
equivalent annual cost, or EAC?
A) −$248,092.76
B) −$182,309.18
C) −$147,884.01
D) −$235,490.58
E) −$242,212.22
101) Heer Enterprises needs someone to supply it with 130,000 cartons of machine screws per
year to support its manufacturing needs over the next four years, and you've decided to bid on
the contract. It will cost you $765,000 to install the equipment necessary to start production;
you'll depreciate this cost straight-line to zero over the project's life. You estimate that in four
years, this equipment can be salvaged for $375,000. Your fixed production costs will be
$190,000 per year, and your variable production costs should be $8.20 per carton. You also need
an initial investment in net working capital of $59,500, all of which will be recovered when the
project ends. Your tax rate is 22 percent and you require a return of 14.5 percent. What bid price
per carton should you submit?
A) $12.04
B) $10.56
C) $11.37
D) $11.03
E) $11.81
102) Chapman Machine Shop is considering a four-year project to improve its production
efficiency. Buying a new machine for $390,000 is estimated to result in $135,000 in annual
pretax cost savings. The press falls in the MACRS five-year class, and it will have a pretax
salvage value at the end of the project of $198,000. The MACRS rates are .2, .32, .192, .1152,
.1152, and .0576 for Years 1 to 6, respectively. Ignore bonus depreciation. The press also
requires an initial investment in inventory of $8,000, along with an additional $1,500 in
inventory for each succeeding year of the project. The inventory will return to its original level
when the project ends. The shop's tax rate is 21 percent and its discount rate is 16 percent.
Should the firm buy and install the machine? Why or why not?
A) Yes; The net present value is $47,048.86.
B) No; The net present value is −$36,329.09.
C) No; The net present value is $56,652.88.
D) Yes; The net present value is $44,319.97.
E) Yes; The net present value is $56,329.09.
103) EDP is trying to decide between two different conveyor belt systems. System A costs
$438,000, has a six-year life, and requires $83,000 in pretax annual operating costs. System B
costs $369,000, has a five-year life, and requires $92,000 in pretax annual operating costs. Both
systems are to be depreciated straight-line to zero over their lives and will have a zero salvage
value. Whichever system is chosen, it will not be replaced when it wears out. The tax rate is 23
percent and the discount rate is 14.2 percent. Which system should the firm choose and why?
A) A; The net present value is −$398,516.
B) B; The net present value is −$553,041.
C) A; The net present value is −$547,836.
D) B; The net present value is −$608,222.
E) B: The net present value is −$490,696.
104) Consider a project to supply 70 million postage stamps annually for the next five years.
You have an idle parcel of land available that cost $279,000 five years ago; if the land were sold
today, it would net you $310,000, aftertax. You estimate the land can be sold for $400,000 after
taxes in five years. You will need to install $1,867,000 in new manufacturing plant and
equipment to actually produce the stamps; this plant and equipment will be depreciated straight-
line to zero over the project's five-year life. Ignore bonus depreciation. The equipment can be
sold for $950,000 at the end of the project. You will also need $32,000 in initial net working
capital for the project, and an additional investment of $5,000 every year starting with Year 1.
All net working capital will be recovered when the project ends. Your production costs are .21
cents per stamp, and you have fixed costs of $440,000 per year. Assume the tax rates are
suddenly increased such that a tax rate of 35 percent is once again applicable, and your required
return on this project is 14 percent. What bid price per stamp should you submit?
A) $.01992
B) $.02264
C) $.01667
D) $.01619
E) $.02192
