If Morgan Tool & Die Co. acquires a new turret lathe, the lathe will cost $80,000, transportation $6,000, installation $7,500. Installing the new lathe will allow Morgan to reduce its finished goods inventory by $10,000. For capital budgeting purposes, the initial investment required for the new lathe is
A) $83,500.
B) $87,500.
C) $93,500.
D) $103,500.
A project under consideration by Bizet Co. will require the purchase of machinery for $50,000 and additional inventory for $15,000. Accounts receivable will increase by $12,000 and accounts payable by $14,000. Liability insurance will increase by $2,500 per year and utilities expense by $1,500 per year. What is the investment in working capital required by this project?
A) $77,000
B) $41,000
C) $13,000
D) $4,000
When an old asset is sold for exactly its depreciated value, the only taxable income is the difference between the initial cost of the machine and the selling price.
Answer: FALSE
Because installation costs of a new asset are a current cash expense, they are excluded from the initial outlay.
Answer: FALSE
The capital budgeting decision-making process involves estimating the expected incremental cash flows of a proposal and comparing the present value of these cash flows to the project's cost.
Answer: TRUE
Working capital for a project includes investment in fixed assets.
Answer: FALSE
It is not necessary to consider depreciation in estimating cash flows for a new capital project.
Answer: FALSE
The initial outlay of an asset does not include installation costs.
Answer: FALSE
The depreciation method used in capital budgeting is irrelevant because any depreciation not taken during the life of the project will add to the book value when assets are sold.
Answer: FALSE
Additional cash needed to fill increased working capital requirements should be included in the initial cost of a product when analyzing an investment.
Answer: TRUE
By examining cash flows, we are correctly able to analyze the timing of the benefits.
Answer: TRUE
Accounting profits represents free cash flows that are available for reinvestment.
Answer: FALSE
The hardest step in capital budgeting analysis is estimating the cash flows of a project.
Answer: TRUE
A marketing survey completed last year to determine a project's feasibility would be included as part of the project's initial cash outflow.
Answer: FALSE
It is possible for after-tax operating cash flows to be positive when accounting income is negative.
Answer: TRUE
Sales captured from the firm's competitors can be relevant to the capital-budgeting decision.
Answer: TRUE
Clean-up and restoration costs required by government regulations are negative cash flows associated with a project's termination.
Answer: TRUE
