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Exam 10: Making Capital Investment Decisions

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Question 81

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Nu Look needs to maintain 15% of its sales in net working capital. The store manager is considering a 3-year project which is expected to increase sales from the current level of $1.1 million to $1.3 Million the first year and $1.5 million a year for the following two years. What amount should be Included in the project analysis as the net working capital cash flow for year 3? Assume that all Accounts are restored to their original values at the end of year 3.

A) -$20,000
B) $0
C) $20,000
D) $30,000
E) $60,000

F) A) and C)
G) B) and E)

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Question 82

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The annual annuity stream of payments with the same present value as a project's costs is called the project's:

A) Incremental cost.
B) Sunk cost.
C) Opportunity cost.
D) Erosion cost.
E) Equivalent annual cost.

F) C) and D)
G) B) and C)

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Question 83

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Louie's Leisure Products is considering a project which will require the purchase of $1.4 million in new equipment. The equipment belongs in a 20% CCA class. Louie's expects to sell the equipment At the end of the project for 20% of its original cost. Annual sales from this project are estimated at $1) 2 million. Net working capital equal to 20% of sales will be required to support the project. All of The net working capital will be recouped at the end of the project. The firm desires a minimal 14% Rate of return on this project. The tax rate is 34%. What is the recovery amount attributable to net working capital at the end of the project?

The operating cash flow of a firm is equal to net income plus depreciation provided that:

Which of the following is the best definition for depreciation (CCA) tax shield?

Kurt's Kabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital. The project is expected to produce sales of $110,000 with associated costs Of $70,000. The project has a 4-year life. The project belongs in a 50% CCA class, and the tax rate Is 35%. What is the operating cash flow in the first year for this project?

The equivalent annual cost method is useful in determining:

Given the following information and assuming straight-line depreciation to zero, what is the payback period for this project? Initial investment = $500,000; life = five years; cost savings = $160,000 per year; salvage value = $30,000 in year 5; tax rate = 34%; discount rate = 13%.

What is the stand-alone principle? Why is it important to the analysis of capital projects in a corporation such as Bombardier?

Land can be depreciated for tax purposes.

A new project is expected to have the following effects on the financial statements of a firm. The effect of a reduction in accounts payable should be included in the net working capital requirements for the project.

A project will produce operating cash flows of $45,000 a year for four years. During the life of the project, inventory will be lowered by $30,000 and accounts receivable will increase by $15,001. Accounts payable will decrease by $10,001. The project requires the purchase of equipment at an Initial cost of $120,001. The equipment will be depreciated straight-line to a zero book value over The life of the project. The equipment will be salvaged at the end of the project creating a $25,000 After-tax cash flow. At the end of the project, net working capital will return to its normal level. What Is the net present value of this project given a required return of 14%?

You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $400 and sales volume to be 1,000 units in year 1, 1,250 units in year 2, and 1,325 units in year 3. The project has a three year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires An initial investment of $165,000 which is depreciated straight-line to zero over the three year Project life. The actual market value of the initial investment at the end of year 3 is $35,001. Initial Net working capital investment is $75,000 and NWC will maintain a level equal to 20% of sales each Year thereafter. The tax rate is 34% and the required return on the project is 10%. Given the $75,000 initial investment in NWC, what change occurs for NWC during year 1?

Jackson Enterprises is preparing a pro forma statement for next year. It estimates sales at 12,840 units with a selling price of $43.01. Variable costs are estimated at $21 a unit. $868,000 of fixed Assets is being depreciated straight-line to zero over seven years. Annual fixed costs are $104,660 And annual interest payments are $11,051. The tax rate is 35%. The net income is _____ and the Operating cash flow is ______.

Margarite's Enterprises is considering a new project. The project will require $325,000 for new fixed assets, $160,000 for additional inventory and $35,000 for additional accounts receivable. Accounts payable is expected to increase by $100,000 and long-term debt is expected to increase By $300,001. The project has a 5-year life. The fixed assets will belong in a 30% CCA class. At the End of the project, the fixed assets can be sold for 25% of their original cost. The net working Capital returns to its original level at the end of the project. The project is expected to generate Annual sales of $554,000 and costs of $430,001. The tax rate is 35% and the required rate of return Is 15%. What is the cash flow recovery from net working capital at the end of this project?

Using the tax shield approach, calculate OCF given the following information: Sales $885,000; Costs $670,000; Depreciation $120,000. Tax rate is 35%.

Should financing costs be included as an incremental cash flow in capital budgeting analysis? Why or why not?

An increase in which one of the following will increase the operating cash flow?

Yorktown Ltd. 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 ten years ago at a cost Of $250,000. Today, the land is valued at $425,000. The grading and excavation work necessary to Build on the land will cost $15,001. The company currently has some unused equipment which it Currently owns valued at $60,000. This equipment could be used for producing awnings if $5,000 Is spent for equipment modifications. Other equipment costing $780,000 will also be required. What is the amount of the initial cash flow for this expansion project?

Provide a definition of stand-alone principle.