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Exam 7: Making Capital Investment Decisions

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Question 31

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A project will increase sales by €140,000 and cash expenses by €95,000.The project will cost €100,000 and be depreciated using the straight-line method to a zero book value over the 4-year Life of the project.The company has a marginal tax rate of 34%.What is the value of the Depreciation tax shield?

A) €8,500
B) €17,000
C) €22,500
D) €25,000
E) €37,750

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

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Question 32

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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 will be depreciated straight-line to a zero book value over the 7- Year life of the project.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 amount of the after-tax salvage value of the equipment?

A) €47,600
B) €72,000
C) €95,200
D) €144,000
E) €184,800

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

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Question 33

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Margarite's Enterprises is considering a new project.The project will require €325,000 for new non- current assets, €160,000 for additional inventory and €35,000 for additional trade receivables. Short-term debt is expected to increase by €100,000 and long-term debt is expected to increase by €300,000.The project has a 5-year life.The non-current assets will be depreciated straight-line to a Zero book value over the life of the project.At the end of the project, the non-current 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 €430,000. The tax rate is 35% and the required rate of return is 15%.What is the amount of the earnings before Interest and taxes for the first year of this project?

A project will increase sales by €60,000 and cash expenses by €51,000.The project will cost €40,000 and be depreciated using straight-line depreciation to a zero book value over the 4-year Life of the project.The company has a marginal tax rate of 35%.What is the operating cash flow of The project using the tax shield approach?

Bruno SpA is analyzing two machines to determine which one it should purchase.The company requires a 14% rate of return and uses straight-line depreciation to a zero book value.Machine A Has a cost of €290,000, annual operating costs of €8,000, and a 3-year life.Machine B costs €180,000, has annual operating costs of €12,000, and has a 2-year life.Whichever machine is Purchased will be replaced at the end of its useful life.Which machine should Bruno's purchase and Why? (Round your answer to whole euros.)

A pro-forma financial statement is one that:

Sun Lee's Furniture just purchased some non-current assets.The assets cost €24,000.What is the amount of the depreciation expense for the third year if the 20% reducing balance method is used?

Ronnie's Coffee House is considering a project which will produce sales of €6,000 and increase cash expenses by €2,500.If the project is implemented, taxes will increase by €1,300.The Additional depreciation expense will be €1,000.An initial cash outlay of €2,000 is required for net Working capital.What is the amount of the operating cash flow using the top-down approach?

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

The bottom-up approach to computing the operating cash flow applies only when:

The pro-forma income statement for a cost reduction project:

Toni's Tools is comparing machines to determine which one to purchase.The machines sell for differing prices, have differing operating costs, differing machine lives, and will be replaced when Worn out.These machines should be compared using:

Thornley Machines is considering a 3-year project with an initial cost of €618,000.The project will not directly produce any sales but will reduce operating costs by €265,000 a year.The equipment Is depreciated straight-line to a zero book value over the life of the project.At the end of the project The equipment will be sold for an estimated €60,000.The tax rate is 34%.The project will require €23,000 in extra inventory for spare parts and accessories.Should this project be implemented if Thornley's requires a 9% rate of return? Why or why not?

Margarite's Enterprises is considering a new project.The project will require €325,000 for new non- current assets, €160,000 for additional inventory and €35,000 for additional trade receivables. Short-term debt is expected to increase by €100,000 and long-term debt is expected to increase by €300,000.The project has a 5-year life.The non-current assets will be depreciated straight-line to a Zero book value over the life of the project.At the end of the project, the non-current 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 €430,000. 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?

Kurt's Kabinets is looking at a project that will require €80,000 in non-current 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 company uses straight-line Depreciation to a zero book value over the life of the project.The tax rate is 35%.What is the Operating cash flow for this project?

Tool Makers NV uses tool and die machines to produce equipment for other firms.The initial cost of one customized tool and die machine is €850,000.This machine costs €10,000 a year to operate. Each machine has a life of 3 years before it is replaced.What is the equivalent annual cost of this Machine if the required return is 9%? (Round your answer to whole euros.)

Which one of the following will decrease net working capital of a firm?

One purpose of identifying all of the incremental cash flows related to a proposed project is to:

All of the following are anticipated effects of a proposed project.Which of these should be included in the initial project cash flow related to net working capital? I.An inventory decrease of €5,000. II.An increase in trade receivables of €1,500. III.An increase in non-current assets of €7,600. IV.A decrease in trade payables of €2,100.

Interest rates or rates of return on investments that have been adjusted for the effects of inflation are called _____ rates.