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Exam 10: Making Capital Investment Decisions

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Question 61

Multiple Choice

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Consider an asset that costs $176,000 and is depreciated straight-line to zero over its 11-year tax life.The asset is to be used in a 7-year project; at the end of the project,the asset can be sold for $22,000.The relevant tax rate is 30 percent.What is the aftertax cash flow from the sale of this asset?

A) $31,800
B) $32,600
C) $33,300
D) $34,100
E) $34,600

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

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Question 62

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The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

A) sunk
B) total
C) variable
D) incremental
E) fixed

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

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Question 63

Multiple Choice

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The net book value of equipment will:

Keyser Mining is considering a project that will require the purchase of $980,000 in new equipment.The equipment will be depreciated straight-line to a zero book value over the 7-year life of the project.The equipment can be scraped at the end of the project for 5 percent of its original cost.Annual sales from this project are estimated at $420,000.Net working capital equal to 20 percent of sales will be required to support the project.All of the net working capital will be recouped.The required return is 16 percent and the tax rate is 35 percent.What is the amount of the aftertax salvage value of the equipment?

Consider a project to supply 60,800,000 postage stamps to the U.S.Postal Service for the next 5 years.You have an idle parcel of land available that cost $760,000 five years ago; if the land were sold today,it would net you $912,000,aftertax.The land can be sold for $1,500,000 after taxes in 5 years.You will need to install $2,356,000 in new manufacturing plant and equipment to actually produce the stamps; this plant and equipment will be depreciated straight-line to zero over the project's 5-year life.The equipment can be sold for $456,000 at the end of the project.You will also need $469,000 in initial net working capital for the project,and an additional investment of $38,000 in every year thereafter.All net working capital will be recovered when the project ends.Your production costs are 0.38 cents per stamp,and you have fixed costs of $608,000 per year.Your tax rate is 31 percent and your required return on this project is 11 percent.What bid price per stamp should you submit?

A company that utilizes the MACRS system of depreciation:

Which one of the following best describes the concept of erosion?

The Fluffy Feather sells customized handbags.Currently,it sells 18,000 handbags annually at an average price of $89 each.It is considering adding a lower-priced line of handbags that sell for $59 each.The firm estimates it can sell 7,000 of the lower-priced handbags but will sell 3,000 less of the higher-priced handbags by doing so.What is the amount of the sales that should be used when evaluating the addition of the lower-priced handbags?