Financial Management - Chapter 10 Making Capital Investment Decisions

Chapter 10 Making Capital Investment Decisions

 

1.

The difference between a firm's future cash flows if it accepts a project and the firm's future cash flows if it does not accept the project is referred to as the project's:    A.  incremental cash flows. B.  internal cash flows. C.  external cash flows. D.  erosion effects. E.  financing cash flows. Refer to section 10.1

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.1 Topic: Incremental cash flows

2.

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?    A.  underlying value principle B.  stand-alone principle C.  equivalent cost principle D.  salvage principle E.  fundamental principle Refer to section 10.1

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.1 Topic: Stand-along principle

3.	Which one of the following costs was incurred in the past and cannot be recouped?    A.  incremental B.  side C.  sunk D.  opportunity E.  erosion Refer to section 10.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.2 Topic: Sunk cost

4.	The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following?    A.  salvage value B.  wasted value C.  sunk cost D.  opportunity cost E.  erosion Refer to section 10.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.2 Topic: Opportunity cost

5.

Which one of the following best describes the concept of erosion?    A.  expenses that have already been incurred and cannot be recovered B.  change in net working capital related to implementing a new project C.  the cash flows of a new project that come at the expense of a firm's existing cash flows D.  the alternative that is forfeited when a fixed asset is utilized by a project E.  the differences in a firm's cash flows with and without a particular project Refer to section 10.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.2 Topic: Erosion

6.

Which one of the following best describes pro forma financial statements?    A.  financial statements expressed in a foreign currency B.  financial statements where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales C.  financial statements showing projected values for future time periods D.  financial statements expressed in real dollars, given a stated base year E.  financial statements where all accounts are expressed as a percentage of last year's values Refer to section 10.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.3 Topic: Pro forma financial statements

7.	Which one of the following is the depreciation method which allows accelerated write-offs of property under various lifetime classifications?    A.  IRR B.  ACRS C.  AAR D.  straight-line to zero E.  straight-line with salvage Refer to section 10.4

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.4 Topic: Accelerated cost recovery system

8.

The depreciation tax shield is best defined as the:    A.  amount of tax that is saved when an asset is purchased. B.  tax that is avoided when an asset is sold as salvage. C.  amount of tax that is due when an asset is sold. D.  amount of tax that is saved because of the depreciation expense. E.  amount by which the aftertax depreciation expense lowers net income. Refer to section 10.5

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.5 Topic: Depreciation tax shield

9.	The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following?    A.  yearly incremental costs B.  sunk costs C.  opportunity costs D.  erosion cost E.  equivalent annual cost Refer to section 10.6

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-04 How to evaluate the equivalent annual cost of a project. Section: 10.6 Topic: Equivalent annual cost

10.

Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets. The firm is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project?    A.  storing supplies in the same space currently used for materials storage B.  utilizing the basket manager to oversee wreath production C.  hiring additional employees to handle the increased workload should the firm accept the wreath project D.  researching the market to determine if wreath sales might be profitable before deciding to proceed E.  planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt Refer to section 10.1

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.1 Topic: Relevant cash flows

11.

Danielle's is a furniture store that is considering adding appliances to its offerings. Which of the following should be considered incremental cash flows of this project? I. utilizing the credit offered by a supplier to purchase the appliance inventory II. benefiting from increased furniture sales to appliance customers III. borrowing money from a bank to fund the appliance project IV. purchasing parts for inventory to handle any appliance repairs that might be necessary    A.  I and II only B.  III and IV only C.  I, II, and IV only D.  II, III, and IV only E.  I, II, III, and IV Refer to sections 10.1 and 10.2

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.1 and 10.2 Topic: Relevant cash flows

12.	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 Refer to section 10.1

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.1 Topic: Incremental costs

13.

Which one of the following is an example of a sunk cost?    A.  $1,500 of lost sales because an item was out of stock B.  $1,200 paid to repair a machine last year C.  $20,000 project that must be forfeited if another project is accepted D.  $4,500 reduction in current shoe sales if a store commences selling sandals E.  $1,800 increase in comic book sales if a store commences selling puzzles Refer to section 10.2

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.2 Topic: Sunk cost

14.

G & L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?    A.  opportunity B.  fixed C.  incremental D.  erosion E.  sunk Refer to section 10.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.2 Topic: Sunk cost

15.

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?    A.  providing both ketchup and mustard for its customer's use B.  repairing the roof of the hot dog stand because of water damage C.  selling fewer hot dogs because hamburgers were added to the menu D.  offering French fries but not onion rings E.  losing sales due to bad weather Refer to section 10.2

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.2 Topic: Erosion

16.

Which of the following should be included in the analysis of a new product? I. money already spent for research and development of the new product II. reduction in sales for a current product once the new product is introduced III. increase in accounts receivable needed to finance sales of the new product IV. market value of a machine owned by the firm which will be used to produce the new product    A.  I and III only B.  II and IV only C.  I, II, and III only D.  II, III, and IV only E.  I, II, III, and IV Refer to section 10.2

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.2 Topic: Incremental cash flows

17.

You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines which have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine which has the:    A.  longest life. B.  highest annual operating cost. C.  lowest annual operating cost. D.  highest equivalent annual cost. E.  lowest equivalent annual cost. Refer to section 10.6

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-04 How to evaluate the equivalent annual cost of a project. Section: 10.6 Topic: Equivalent annual cost

18.

The bid price is:    A.  an aftertax price. B.  the aftertax contribution margin. C.  the highest price you should charge if you want the project. D.  the only price you can bid if the project is to be profitable. E.  the minimum price you should charge if you want to earn a target return on investment. Refer to section 10.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-03 How to set a bid price for a project. Section: 10.6 Topic: Bid price

19.	Which one of the following will increase a bid price?    A.  a decrease in the fixed costs B.  a reduction in the net working capital requirement C.  a reduction in the firm's tax rate D.  an increase in the salvage value E.  an increase in the required rate of return Refer to section 10.6

AACSB: Analytic Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-03 How to set a bid price for a project. Section: 10.6 Topic: Bid price

20.

All of the following are related to a proposed project. Which of these should be included in the cash flow at time zero? I. purchase of $1,400 of parts inventory needed to support the project II. loan of $125,000 used to finance the project III. depreciation tax shield of $1,100 IV. $6,500 of equipment needed to commence the project    A.  I and II only B.  I and IV only C.  II and IV only D.  I, II, and IV only E.  I, II, III, and IV Refer to section 10.4

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.4 Topic: Project cash flows

21.

Changes in the net working capital requirements:    A.  can affect the cash flows of a project every year of the project's life. B.  only affect the initial cash flows of a project. C.  only affect the cash flow at time zero and the final year of a project. D.  are generally excluded from project analysis due to their irrelevance to the total project. E.  reflect only the changes in the current asset accounts. Refer to section 10.4

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.4 Topic: Net working capital

22.	Which one of the following is a project cash inflow? Ignore any tax effects.    A.  decrease in accounts payable B.  increase in inventory C.  decrease in accounts receivable D.  depreciation expense based on MACRS E.  equipment acquisition Refer to section 10.4

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.4 Topic: Project cash flows

23.

Net working capital:    A.  can be ignored in project analysis because any expenditure is normally recouped at the end of the project. B.  requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project. C.  is rarely affected when a new product is introduced. D.  can create either a cash inflow or a cash outflow at time zero of a project. E.  is the only expenditure where at least a partial recovery can be made at the end of a project. Refer to section 10.4

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.4 Topic: Net working capital

24.

The operating cash flow of a cost cutting project:    A.  is equal to the depreciation tax shield. B.  is equal to zero because there is no incremental sales. C.  can only be analyzed by projecting the sales and costs for a firm's entire operations. D.  includes any changes that occur in the current accounts. E.  can be positive even though there are no sales. Refer to section 10.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.6 Topic: Cost reduction project

25.

Pro forma statements for a proposed project should: I. be compiled on a stand-alone basis. II. include all the incremental cash flows related to the project. III. generally exclude interest expense. IV. include all project-related fixed asset acquisitions and disposals.    A.  I and II only B.  II and III only C.  I, II, and IV only D.  II, III, and IV only E.  I, II, III, and IV Refer to section 10.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.3 Topic: Pro forma statement

26.

Which one of the following statements is correct?    A.  Project analysis should only include the cash flows that affect the income statement. B.  A project can create a positive operating cash flow without affecting sales. C.  The depreciation tax shield creates a cash outflow for a project. D.  Interest expense should always be included as a cash outflow when analyzing a project. E.  The opportunity cost of a company-owned building that is going to be used in a new project should be included as a cash inflow to the project. Refer to section 10.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.6 Topic: Cost cutting project

27.

A company that utilizes the MACRS system of depreciation:    A.  will have equal depreciation costs each year of an asset's life. B.  will have a greater tax shield in year two of a project than it would have if the firm had opted for straight-line depreciation, given the same depreciation life. C.  can depreciate the cost of land, if it so desires. D.  will expense less than the entire cost of an asset. E.  cannot expense any of the cost of a new asset during the first year of the asset's life. Refer to section 10.4

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.4 Topic: MACRS depreciation

28.

Morris Motors just purchased some MACRS 5-year property at a cost of $216,000. Which one of the following will correctly give you the book value of this equipment at the end of year 2?        A.  $216,000/(1 + 0.20 + 0.32) B.  $216,000 × (1 - 0.20 - 0.32) C.  $216,000 × (0.20 + 0.32) D.  [$216,000 × (1 - 0.20)] × (1 - 0.32) E.  $216,000/[(1 + 0.20)(1 + 0.32)] Refer to section 10.4

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.4 Topic: MACRS depreciation

29.

Keyser Petroleum just purchased some equipment at a cost of $67,000. What is the proper methodology for computing the depreciation expense for year 2 if the equipment is classified as 5-year property for MACRS?        A.  $67,000 × (1 - 0.20) × 0.32 B.  $67,000/(1 - 0.20 - 0.32) C.  $67,000 × (1 + 0.32) D.  $67,000 × (1 - 0.32) E.  $67,000 × 0.32 Refer to section 10.4

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.4 Topic: MACRS depreciation

30.

The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following?    A.  depreciation tax shield B.  tax due on the salvage value of that asset C.  current year's operating cash flow D.  change in net working capital E.  MACRS depreciation for the current year Refer to section 10.4

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.4 Topic: Tax on salvage value

31.

The net book value of equipment will:    A.  remain constant over the life of the equipment. B.  vary in response to changes in the market value. C.  decrease at a constant rate when MACRS depreciation is used. D.  increase over the taxable life of an asset. E.  decrease slower under straight-line depreciation than under MACRS. Refer to section 10.4

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.4 Topic: Book value

32.

Three years ago, Knox Glass purchased a machine for a 3-year project. The machine is being depreciated straight-line to zero over a 5-year period. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (T represents the relevant tax rate)    A.  Sale price + (Sales price - Book value) × T B.  Sale price + (Sales price - Book value) × (1 - T) C.  Sale price + (Book value - Sale price) × T D.  Sale price + (Book value - Sale price) × (1 - T) E.  Sale price × (1 - T) Refer to section 10.4

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.4 Topic: Aftertax salvage value

33.	Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero?    A.  EBIT + D B.  EBIT - T C.  NI + D D.  (Sales - Costs) × (1 - D) × (1- T) E.  (Sales - Costs) × (1 - T) Refer to section 10.5

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.5 Topic: Bottom up operating cash flow

34.	The operating cash flow for a project should exclude which one of the following?    A.  taxes B.  variable costs C.  fixed costs D.  interest expense E.  depreciation tax shield Refer to section 10.5

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.5 Topic: Operating cash flow

35.

The bottom-up approach to computing the operating cash flow applies only when:    A.  both the depreciation expense and the interest expense are equal to zero. B.  the interest expense is equal to zero. C.  the project is a cost-cutting project. D.  no fixed assets are required for a project. E.  both taxes and the interest expense are equal to zero. Refer to section 10.5

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.5 Topic: Bottom-up operating cash flow

36.

The top-down approach to computing the operating cash flow:    A.  ignores noncash expenses. B.  applies only if a project increases sales. C.  applies only to cost cutting projects. D.  is equal to sales - costs - taxes + depreciation. E.  is used solely to compute a bid price. Refer to section 10.5

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.5 Topic: Top-down operating cash flow

37.	Increasing which one of the following will increase the operating cash flow assuming that the bottom-up approach is used to compute the operating cash flow?    A.  erosion effects B.  taxes C.  fixed expenses D.  salaries E.  depreciation expense Refer to section 10.5

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.5 Topic: Bottom-up operating cash flow

38.

Which one of the following statements is correct concerning bid prices?    A.  The bid price is the maximum price that a firm should bid. B.  A firm can submit a bid that is higher than the computed bid price and still break even. C.  A bid price ignores taxes. D.  A bid price should be computed based solely on the operating cash flows of the project. E.  A bid price should be computed based on a zero percent required rate of return. Refer to section 10.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-03 How to set a bid price for a project. Section: 10.6 Topic: Bid price

39.

Dan is comparing three 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. Which one of the following computational methods should Dan use as the basis for his decision?    A.  internal rate of return B.  operating cash flow C.  equivalent annual cost D.  depreciation tax shield E.  bottom-up operating cash flow Refer to section 10.6

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-04 How to evaluate the equivalent annual cost of a project. Section: 10.6 Topic: Equivalent annual cost

40.

The equivalent annual cost method is useful in determining:    A.  which one of two machines to purchase if the machines are mutually exclusive, have differing lives, and are a one-time purchase. B.  the tax shield benefits of depreciation given the purchase of new assets for a project. C.  the operating cash flows of a cost-cutting project. D.  which one of two investments to accept when the investments have different required rates of return. E.  which one of two machines should be purchased when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out. Refer to section 10.6

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-04 How to evaluate the equivalent annual cost of a project. Section: 10.6 Topic: Equivalent annual cost

41.

When using the equivalent annual cost as a basis for deciding which equipment should be purchased, the equipment under consideration must fit which two of the following criteria? I. differing productive lives II. differing manufacturers III. required replacement at end of economic life IV. differing initial cost    A.  I and II B.  I and III C.  I and IV D.  II and IIII E.  II and IV Refer to section 10.6

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-04 How to evaluate the equivalent annual cost of a project. Section: 10.6 Topic: Equivalent annual cost

42.	The equivalent annual cost considers which of the following? I. required rate of return II. operating costs III. need for replacement IV. economic life    A.  I and II only B.  II and IV only C.  II, III, and IV only D.  I, II, and IV only E.  I, II, III, and IV Refer to section 10.6

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-04 How to evaluate the equivalent annual cost of a project. Section: 10.6 Topic: Equivalent annual cost

43.

The bid price always assumes which one of the following?    A.  A project has a one-year life. B.  The aftertax net income of the project is zero. C.  The net present value of the project is zero. D.  Any assets purchased will have a positive salvage value at the end of the project. E.  Assets will be depreciated based on MACRS. Refer to section 10.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-03 How to set a bid price for a project. Section: 10.6 Topic: Bid price

44.

Which one of the following would make a project unacceptable?    A.  cash inflow for net working capital at time zero B.  requiring fixed assets that would have no salvage value C.  an equivalent annual cost that exceeds that of an alternative project D.  lack of revenue generation E.  a depreciation tax shield that exceeds the value of the interest expense Refer to section 10.6

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-04 How to evaluate the equivalent annual cost of a project. Section: 10.6 Topic: Equivalent annual cost

45.	Decreasing which one of the following will increase the acceptability of a project?    A.  sunk costs B.  salvage value C.  depreciation tax shield D.  equivalent annual cost E.  accounts payable requirement Refer to section 10.6

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-04 How to evaluate the equivalent annual cost of a project. Section: 10.6 Topic: Equivalent annual cost

46.

Dexter Smith & Co. is replacing a machine simply because it has worn out. The new machine will not affect either sales or operating costs and will not have any salvage value at the end of its 5-year life. The firm has a 34 percent tax rate, uses straight-line depreciation over an asset's life, and has a positive net income. Given this, which one of the following statements is correct?    A.  As a project, the new machine has a net present value equal to minus one times the machine's purchase price. B.  The new machine will have a zero rate of return. C.  The new machine will generate positive operating cash flows, at least in the first few years of its life. D.  The new machine will create a cash outflow when the firm disposes of it at the end of its life. E.  The new machine creates erosion effects. Refer to section 10.5

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.5 Topic: Depreciation tax shield

47.

Kelly's Corner Bakery purchased a lot in Oil City 6 years ago at a cost of $302,000. Today, that lot has a market value of $340,000. At the time of the purchase, the company spent $15,000 to level the lot and another $20,000 to install storm drains. The company now wants to build a new facility on that site. The building cost is estimated at $1.51 million. What amount should be used as the initial cash flow for this project?    A.  -$1,470,000 B.  -$1,850,000 C.  -$1,875,000 D.  -$1,925,000 E.  -$1,945,000 CF0 = -$340,000 - $1,510,000 = -$1,850,000

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.2 Topic: Relevant cash flows

48.

Sailcloth & More currently produces boat sails and is considering expanding its operations to include awnings for homes and travel trailers. The company owns land beside its current manufacturing facility that could be used for the expansion. The company bought this land 5 years ago at a cost of $319,000. At the time of purchase, the company paid $24,000 to level out the land so it would be suitable for future use. Today, the land is valued at $295,000. The company has some unused equipment that it currently owns valued at $38,000. This equipment could be used for producing awnings if $12,000 is spent for equipment modifications. Other equipment costing $490,000 will also be required. What is the amount of the initial cash flow for this expansion project?    A.  -$785,000 B.  -$823,000 C.  -$835,000 D.  -$859,000 E.  -$883,000 CF0 = -$295,000 - $38,000 - $12,000 - $490,000 = -$835,000

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.2 Topic: Relevant costs

49.

Webster & Moore paid $148,000, in cash, for a piece of equipment 3 years ago. At the beginning of last year, the company spent $21,000 to update the equipment with the latest technology. The company no longer uses this equipment in its current operations and has received an offer of $96,000 from a firm that would like to purchase it. Webster & Moore is debating whether to sell the equipment or to expand its operations so that the equipment can be used. When evaluating the expansion option, what value, if any, should the firm assign to this equipment as an initial cost of the project?    A.  $0 B.  $21,000 C.  $96,000 D.  $110,000 E.  $160,000 Relevant value = $96,000

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.2 Topic: Opportunity cost

50.

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?    A.  $146,000 B.  $275,000 C.  $413,000 D.  $623,000 E.  $680,000 Sales = (7,000 × $59) + (-3,000 × $89) = $146,000

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.2 Topic: Erosion

51.

Mason Farms purchased a building for $689,000 eight years ago. Six years ago, repairs were made to the building which cost $136,000. The annual taxes on the property are $11,000. The building has a current market value of $840,000 and a current book value of $494,000. The building is totally paid for and solely owned by the firm. If the company decides to use this building for a new project, what value, if any, should be included in the initial cash flow of the project for this building?    A.  $494,000 B.  $582,000 C.  $840,000 D.  $865,000 E.  $953,000 Opportunity cost = $840,000

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.2 Topic: Opportunity cost

52.

You own a house that you rent for $1,100 a month. The maintenance expenses on the house average $200 a month. The house cost $219,000 when you purchased it 4 years ago. A recent appraisal on the house valued it at $239,000. If you sell the house you will incur $14,000 in real estate fees. The annual property taxes are $4,000. You are deciding whether to sell the house or convert it for your own use as a professional office. What value should you place on this house when analyzing the option of using it as a professional office?    A.  $211,800 B.  $221,000 C.  $225,000 D.  $235,000 E.  $239,000 Opportunity cost = $239,000 - $14,000 = $225,000

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project. Section: 10.2 Topic: Opportunity cost