d

1.

a. b. c. d. e. c . a. b. c. d. e. c ).

Kurts Kabinets is looking at a project that will require $80,000 in fixed assets and another $ 0,000 in net working capital. !he project is expected to produce sales of $110,000 with associated costs of $"0,000. !he project has a #$%ear life. !he co&pan% uses straight$line depreciation to a 'ero book (alue o(er the life of the project. !he tax rate is )* percent. +hat is the operating cash flow for this project, $",000 $1),000 $ ",000 $)),000 $#0,000 -eters .oats has sales of $"/0,000 and a profit &argin of * percent. !he annual depreciation expense is $80,000. +hat is the a&ount of the operating cash flow if the co&pan% has no long$ter& debt, $)#,000 $8/,#00 $118,000 $1 0,#00 $1 ),000 1onnies 2offee 3ouse is considering a project which will produce sales of $/,000 and increase cash expenses b% $ ,*00. 4f the project is i&ple&ented, taxes will increase b% $1,)00. !he additional depreciation expense will be $1,000. 5n initial cash outla% of $ ,000 is required for net working capital. +hat is the a&ount of the operating cash flow using the top$down approach, $ 00 $1,*00 $ , 00 $),*00 $#, 00 5 project will increase sales b% $/0,000 and cash expenses b% $*1,000. !he project will cost $#0,000 and be depreciated using straight$line depreciation to a 'ero book (alue o(er the #$%ear life of the project. !he co&pan% has a &arginal tax rate of )* percent. +hat is the operating cash flow of the project using the tax shield approach, $*,8*0 $8,/*0 $0,)*0 $0,"00 $10,)*0

a. b. c. d. e. c #.

a. b. c. d. e. d 8.

6ou are working on a bid to build four cabins a %ear for the next three %ears for a local ca&pground. !his project requires the purchase of $//,000 of equip&ent which will be depreciated using straight$line depreciation to a 'ero book (alue o(er the three %ears. !he equip&ent can be sold at the end of the project for $#0,000. 6ou will also need $1/,000 in net working capital o(er the life of the project. !he fixed costs will be $18,000 a %ear and the (ariable costs will be $88,000 per cabin. 6our required rate of return is 1# percent for this project and %our tax rate is )# percent. +hat is the &ini&al a&ount, rounded to the nearest $*00, that %ou should bid per cabin, a. $0*,000

b. c. d. e.

$0*,*00 $0",000 $08,*00 $11*,000

!he +olfs 7en 8utdoor 9ear is considering replacing the equip&ent it uses to produce tents. !he equip&ent would cost $1.# &illion and lower &anufacturing costs b% an esti&ated $ 1*,000 a %ear. !he equip&ent will be depreciated using straight$line depreciation to a book (alue of 'ero. !he life of the equip&ent is 8 %ears. !he required rate of return is 1) percent and the tax rate is )# percent. +hat is the net inco&e fro& this proposed project, a. $1),/00 b. $ /,#00 c. $) ,#00 d. $#0,000 e. $*),/00 a /. 6ou are working on a bid to build three pla%grounds a %ear for the next two %ears. !his project requires the purchase of $#8,000 of equip&ent which will be depreciated using straight$line depreciation to a 'ero book (alue o(er the two %ears. !he equip&ent can be sold at the end of the project for $)0,000. 6ou will also need $10,000 in net working capital o(er the life of the project. !he fixed costs will be $1*,000 a %ear and the (ariable costs will be $/*,000 per pla%ground. 6our required rate of return is 1 percent for this project and %our tax rate is )* percent. +hat is the &ini&al a&ount, rounded to the nearest $*00, that %ou should bid per pla%ground, $"/,000 $"8,000 $"8,*00 $8#,*00 $8*,000 :ackson ; <ons uses packing &achines to prepare their product for shipping. 8ne &achine costs $1)/,000 and lasts about # %ears before it needs replaced. !he operating cost per &achine is $/,000 a %ear. +hat is the equi(alent annual cost of one packing &achine if the required rate of return is 1 percent, =1ound %our answer to whole dollars> $)8,**/ $*0,""/ $"0,01 $101,00/ $1*#, # +alks <oftl%, 4nc. sells custo&i'ed shoes. 2urrentl%, the% sell 10,000 pairs of shoes annuall% at an a(erage price of $/8 a pair. !he% are considering adding a lower$priced line of shoes which sell for $#0 a pair. +alks <oftl% esti&ates the% can sell *,000 pairs of the lower$priced shoes but will sell 1,000 less pairs of the higher$priced shoes b% doing so. +hat is the a&ount of the sales that should be used when e(aluating the addition of the lower$priced shoes, $1"",000 $ #*,000 $)1),000 $"80,000 $8*",000

*.

a. b. c. d. e. b ".

a. b. c. d. e. a 8.

a. b. c. d. e.

0.

a. b. c. d. e. b

6ou own a house that %ou rent for $1, 00 a &onth. !he &aintenance expenses on the house a(erage $ 00 a &onth. !he house cost $80,000 when %ou purchased it se(eral %ears ago. 5 recent appraisal on the house (alued it at $ 10,000. !he annual propert% taxes are $*,000. 4f %ou sell the house %ou will incur $ 0,000 in expenses. 6ou are deciding whether to sell the house or con(ert it for %our own use as a professional office. +hat (alue should %ou place on this house when anal%'ing the option of using it as a professional office, $80,000 $1 0,000 $18*,000 $100,000 $ 10,000

10. :a&ies ?otor 3o&e <ales currentl% sells 1,000 2lass 5 &otor ho&es, ,*00 2lass 2 &otor ho&es, and #,000 pop$up trailers each %ear. :a&ie is considering adding a &id$ range ca&per and expects that if she does so she can sell 1,*00 of the&. 3owe(er, if the new ca&per is added, :a&ie expects that her 2lass 5 sales will decline to 0*0 units while the 2lass 2 ca&pers decline to , 00. !he sales of pop$ups will not be affected. 2lass 5 &otor ho&es sell for an a(erage of $1 *,000 each. 2lass 2 ho&es are priced at $)0,*00 and the pop$ups sell for $*,000 each. !he new &id$range ca&per will sell for $#",000. +hat is the erosion cost, a. $/, *0,000 b. $18,100,000 c. $*),"*0,000 d. $0),1*0,000 e. $118,"80,*00 11. !hornle% ?achines is considering a )$%ear project with an initial cost of $/18,000. !he project will not directl% produce an% sales but will reduce operating costs b% $ /*,000 a %ear. !he equip&ent is depreciated straight$line to a 'ero book (alue o(er the life of the project. 5t the end of the project the equip&ent will be sold for an esti&ated $/0,000. !he tax rate is )# percent. !he project will require $ ),000 in extra in(entor% for spare parts and accessories. <hould this project be i&ple&ented if !hornle%s requires a 0 percent rate of return, +h% or wh% not, a. no@ !he A-B is $$ ,/#/.00. b. %es@ !he A-B is $ ",)*#.00. c. %es@ !he A-B is $) ,*0)."8. d. %es@ !he A-B is $#),10/.*#. e. %es@ !he A-B is $10/,88#.#0.

1 . Cotties .outique needs to &aintain 0 percent of its sales in net working capital. Cotties is considering a )$%ear project which will increase sales fro& their current le(el of $110,000 to $1)0,000 the first %ear and $1#*,000 a %ear for the following two %ears. +hat a&ount should be included in the project anal%sis for the last %ear of the project in regards to the net working capital, a. $$)*,000 b. $$",000 c. $0 d. $",000 e. $)*,000