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Exam 10: Making Capital Investment Decisions

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Question 91

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Erosion costs are defined as the cash flows of a new project that:

A) Are related to the deterioration of the project's fixed assets.
B) Come at the expense of a firm's existing projects.
C) Are related to the taxes incurred because of the incremental income produced by the project.
D) Result from a competitor's loss of market share due to the new project's implementation.
E) Result from the loss of market value for those assets which are utilized by the project.

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Question 92

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A gas station owner expands floor space to make room for a convenience store would likely NOT cause erosion.

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Question 93

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If a firm wishes to recapture 100% of its net working capital investment in a project, the firm will have to collect all of the accounts receivables related to the project.

If the corporate tax rate were to increase, one would expect a firm's depreciation tax shield to be which of the following, all else the same?

When we employ ________________ we are evaluating a project on the basis of its incremental cash flows, thereby ignoring the other cash flows of the firm.

The money spent to obtain a patent on the new product design would normally be included in the final cash flow of a project that entailed the development and sale of a new product.

Joel's Shop needs to maintain 15% of its sales in net working capital. Joel's is considering a 4-year project which will increase sales from their current level of $130,000 to $150,000 the first year and To $165,000 a year for the following three years. What amount should be included in the project Analysis for net working capital in year four of the project?

Which of the following is true regarding project evaluation?

Your firm needs a computerized line-boring machine which costs $80,000, and requires $20,000 in maintenance for each year of its three year life. After three years, the salvage value will be zero. The machine falls into the Class 10 equipment category (CCA rate 30%) . Assume a tax rate of 34% And a discount rate of 10%. Assume the machine can be sold for $10,000 at the end of year 1. Compute the present value of the Pre-tax salvage value at the end of year 3.

Downtown Candies is considering replacing the equipment it uses to make chocolate candy bars. The equipment would cost $721,000 and lower manufacturing costs by an estimated $170,000 a Year. The equipment belongs in a 30% CCA class. The required rate of return is 14% and the tax rate Is 35%. What is the increase in net income for the second year from this proposed project?

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 present value of the CCA tax shield for this project?

A project requires an initial fixed asset investment of $600,000, which will be depreciated straight- line to zero over the six-year life of the project. The pre-tax salvage value of the fixed assets at the End of the project is estimated to be $50,001. Projected sales volume for each year of the project is Shown below. The sale price is $50 per unit for the first three years, and $45 per unit for years 4 Through 1. A $30,000 initial investment in net working capital is required, with additional Investments equal to 7.5% of annual sales for each year of the project. Variable costs are $35 per Unit, and fixed costs are $50,000 per year. The firm has a tax rate of 34% and a required return on Investment of 12%. What are the additions to NWC during year 4 of the project?

Which of the following is the best definition for sunk cost?

Project cash flows will increase when:

To fully understand the effects of a proposed project, a recap of net working capital requirements should be developed as part of the project's pro forma statements.

The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called (the) _______________________.

The bottom-up approach is used for calculating OCF, if the only information from the statement of comprehensive income items known to you are net income and depreciation.

Pro forma statements for a proposed project should be compiled on a stand-alone basis.

Two construction firms are asked to provide bids on building an apartment complex. Both are given an identical set of blueprints to use as the basis for their bid. Explain how it is that the two firms might come up with completely different bid prices.

Depreciation causes operating cash flow to differ from net income.