If Morgan Tool & Die Co. acquires a new turret lathe, the lathe will cost $80,000, transportation $6,000

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

The Board of Directors of Waste Free Chemicals is considering the acquisition of a new chemical processor

The Board of Directors of Waste Free Chemicals is considering the acquisition of a new chemical processor. The processor is priced at $600,000 but would require $60,000 in transportation costs and $40,000 for installation. The processor will have a useful life of 10 years. The project will require Waste Free to increase its investment in accounts receivable by $80,000 and will also require an additional investment in inventory of $150,000. The firm's marginal tax rate is 40 percent. How much is the initial cash outlay of the processor?

A) $700,000

B) $850,000

C) $930,000

D) $1,040,000

The introduction of a new product at Elia Pharmaceuticals will require a $450,000 increase in inventory, a $730,000 increase in Accounts Receivable, and a $180,000 increase in Accounts Payable.  Introduction of the product will also require a $700,000 expenditure for advertising.  The increase in net working capital required for the introduction of this product is

A) $1,180,000.

B) $1,000,000.

C) $1,360,000.

D) $1,700,000.

Which of the following cash flows are NOT considered in the calculation of the initial outlay for a capital investment proposal?

A) Training expense

B) Working capital investments

C) Installation costs of an asset

D) Before-tax selling price of old machine

SpaceTech is considering a new project with the following projections for Year 2.

                Year 2 Projections

                EBIT                                                               $400,000

                Interest Expense                                        $20,000

                Depreciation Expense                              $40,000

                Tax Rate                                                       40%

                Incremental Net Working

                Capital Needs                                            $200,000 

A) $130,000

B) $180,000

C) $230,000

D) $280,000

In year 3 of project Gamma. sales were $3,000,0000, cost of goods sold $1,500,000, other cash costs were $400,000, depreciation was $600,000 and interest expense was $250,000. The company's marginal tax rate is 35%. Compute operating cash flow for year 3 of project Gamma.

A) $925,000

B) $675,000

C) $500,000

D) $325,000

The Director of Capital Budgeting of Capital Assets Corp. is considering the acquisition of a new high speed

The Director of Capital Budgeting of Capital Assets Corp. is considering the acquisition of a new high speed photocopy machine. The photocopy machine is priced at $85,000 and would require $2,000 in transportation costs and $4,000 for installation. The equipment will have a useful life of 5 years. The proposal will require that Capital Assets Corp. send a technician for training at a cost of $5,000. The firm's marginal tax rate is 40 percent. How much is the initial cash outlay of the photocopy machine?

A) $64,000

B) $77,000

C) $81,000

D) $96,000

Jefferson Corporation is considering an expansion project. The necessary equipment could be purchased for $15 million and shipping and installation costs are another $500,000. The project will also require an initial $2 million investment in net working capital. The company's tax rate is 40%. What is the project's initial investment outlay (in millions)?

A) $15.0

B) $15.5

C) $17.0

D) $17.5

In the fourth and final year of a project, SVC expects operating cash flow of $440,000. The project required an $80,000 investment in working capital at the beginning. Of that amount, $60,000 will be recovered in year 4. Machinery associated with the project will be sold for exactly its undepreciated value of $15,000. Total free cash flow for the fourth year is

A) $75,000.

B) $1,500,000.

C) $515,000.

D) $535,000.

Wright's Warehouse has the following projections for Year 1 of a capital budgeting project.

                Year 1 Incremental Projections:

                Sales                                                              $200,000

                Variable Costs                                            $120,000

                Fixed Costs                                                 $40,000

                Depreciation Expense                             $20,000

                Tax Rate                                                       40%

Calculate the operating cash flow for Year 1.

A) $12,000

B) $32,000

C) $52,000

D) $72,000

Burr Habit Corporation is considering a new product line. The company currently manufactures several lines

Burr Habit Corporation is considering a new product line. The company currently manufactures several lines of snow skiing apparel. The new products, insulated ski shorts, are expected to generate sales less cost of goods sold of $1 million per year for the next five years. They expect that during this five year period, they will lose about $250,000 per year in sales less cost of goods sold on their existing lines of longer ski pants as a result of the introduction of the new product line. The new line will require no additional equipment or space in the plant and can be produced in the same manner as the existing apparel products. The new project will, however, require that the company spend an additional $80,000 per year on insurance in case customers sue for frostbite. Also, a new marketing director would be hired to oversee the line at $45,000 per year in salary and benefits. Because of the different construction of the shorts, an increase in inventory of 3,800 would be required initially. If the marginal tax rate is 30%, compute the incremental after tax cash flows per year for years 1-5.

A) $434,500 per year

B) $625,000 per year

C) $187,500 per year

D) $437,500 per year

Famous Danish Corp. is replacing an old cookie cutter with a new one. The cookie cutter is being sold for $25,000 and it has a net book value of $75,000. Assume that Famous Danish is in the 34% income tax bracket. How much will Famous Danish net from the sale?

A) $61,000

B) $55,000

C) $75,000

D) $42,000

Regal Enterprises is considering the purchase of a new embroidering machine. It is expected to generate additional sales of $400,000 per year. The machine will cost $295,000, plus $3,000 to install it. The embroiderer will save $12,000 in labor expense each year. Regal is in the 34% income tax bracket. The machine will be depreciated on a straight-line basis over five years (it has no salvage value). The embroiderer will require annual operating expenses of $136,000. What is the annual operating cash flow that the machine will generate?

A) $316,954

B) $124,000

C) $202,424

D) $165,816

Woodstock Inc. expects to own a building for five years, then sell it for $1,500,000 net of taxes, sales commissions and other selling costs. Woodstock's cost of capital is 11%. How much will the sale of the building contribute to the NPV of the project?

A) $890,177

B) $1,351,351

C) $1,500,000

D) $2,527,587

Which of the following would cause free cash flow to differ from operating cash flow when an investment project is terminated?

A) Sale of assets

B) Recovery of net working capital

C) Income taxes

D) All of the above

Which of the following should be considered in the estimation of free cash flows?

A) Cash generated from the sale of a project

B) Recovery of net working capital

C) Operating cash flow

D) All of the above

ABC already spent $85,000 on a feasibility study for a machine that will produce a new product.

ABC already spent $85,000 on a feasibility study for a machine that will produce a new product. The machine will cost $2,575,000. Required modifications will cost $375,000. ABC will need to invest $75,000 for additional inventory. The machine has an IRS approved useful life of 7 years; it is presumed to have no salvage value. It will only be operated for 3 years, after which it will be sold for $600,000. What is the depreciable cost basis of the machine?

A) $3,025,000

B) $2,950,000

C) $2,575,000

D) $2,350,000

ABC already spent $85,000 on a feasibility study for a machine that will produce a new product. The machine will cost $2,575,000. Required modifications will cost $375,000. ABC will need to invest $75,000 for additional inventory. The machine has an IRS approved useful life of 7 years; it is presumed to have no salvage value. It will only be operated for 3 years, after which it will be sold for $600,000. What is the total investment amount required for the project?

A) $3,025,000

B) $2,950,000

C) $2,575,000

D) $2,350,000

ABC will purchase a machine that will cost $2,575,000. Required modifications will cost $375,000. ABC will need to invest $75,000 for additional inventory. The machine has an IRS approved useful life of 7 years; it is presumed to have no salvage value. ABC plans to depreciate the machine by using the straight-line method. The machine is expected to increase ABC's sales revenues by $1,890,000 per year; operating costs excluding depreciation are estimated at $454,600 per year. Assume that the firm's tax rate is 40%. What is the annual operating cash flow?

A) $922,464

B) $1,126,287

C) $813,563

D) $1,029,811

ABC purchased a machine for $2,575,000. Required modifications will cost $375,000. ABC will need to invest $75,000 for additional inventory. The machine has an IRS approved useful life of 7 years; it is presumed to have no salvage value. It will only be operated for 3 years, after-which it will be sold for $600,000. ABC plans to depreciate the machine by using the straight-line method. Assume that the firm's tax rate is 40%. What is the termination (non-operating) cash flow from the machine in year three?

A) $900,623

B) $1,109,286

C) $1,298,114

D) $879,247

Delta Inc. is considering the purchase of a new machine which is expected to increase sales by $10,000

Use the following information to answer the following question(s).

Delta Inc. is considering the purchase of a new machine which is expected to increase sales by $10,000 in addition to increasing non-depreciation expenses by $3,000 annually. Due to the sales increase, Delta will need to increase working capital by $1,000 at the beginning of the project. Delta will depreciate the machine using the straight-line method over the project's five year life to a salvage value of zero. The machine's purchase price is $20,000. The firm has a marginal tax rate of 34 percent, and its required rate of return is 12 percent.

The machine's initial cash outflow is

A) $20,000.

B) $21,000.

C) $27,000.

D) $23,000.

The machine's incremental after-tax cash inflow for year 1 is

A) $6,420.

B) $7,980.

C) $8,620.

D) $5,980.

The machine's after-tax incremental cash flow in year five is

A) $6,980.

B) $5,980.

C) $7,120.

D) $8,620.

The machine's NPV is

A) $1,556.56.

B) $2,556.56.

C) $1,123.99.

D) $2,123.99.

The machine's IRR is

A) less than 0.

B) greater than 12 percent.

C) less than 12 percent.

D) equal to 12 percent.

XYZ, Inc. is considering adding a product line that would utilize floor space in their manufacturing plant which is currently used for storage. XYZ will need to rent new storage space elsewhere. The floor space would be considered a(n)

A) variable cost.

B) opportunity cost.

C) sunk cost.

D) irrelevant cash flow.

Which of the following is included in the calculation of the initial outlay for a capital investment?

A) Investment in working capital

B) A feasibility study conducted the previous year.

C) Installation

D) A and C but not B

Which of the following would decrease after-tax operating cash flows? A decrease in

A) depreciation expense.

B) interest expense.

C) incremental sales.

D) both A and C.

If the federal income tax rate were increased, the impact of the tax increase on acceptable investment proposals

If the federal income tax rate were increased, the impact of the tax increase on acceptable investment proposals would be to (ignore the impact of the tax change on the cost of capital)

A) decrease the tax shelter from depreciation.

B) decrease net present value but the internal rate of return would stay the same.

C) increase net present value because the tax shelter from interest and depreciation becomes more valuable.

D) decrease both net present value. and internal rate of return.

Which of the following would increase the net working capital for a project? An increase in

A) accounts receivable.

B) fixed assets.

C) accounts payable.

D) common stock.

Which of the following should be included in the initial outlay?

A) Shipping and installation costs

B) Increased working capital requirements

C) Cost of employee training associated specifically with the asset being evaluated

D) All of the above

Depreciation expenses affect capital budgeting analysis by increasing

A) taxes paid.

B) incremental cash flows.

C) the initial outlay.

D) working capital.

Which of the following is included in the terminal cash flow?

A) The expected salvage value of the asset

B) Tax impacts from selling assets

C) Recapture of any working capital

D) All of the above

A firm purchased an asset with a 5-year life for $90,000, and it cost $10,000 for shipping and installation. According to the current tax laws the cost basis of the asset at time of purchase is

A) $100,000.

B) $95,000.

C) $80,000.

D) $70,000.