公司理财 题库 Chap010 

EQUIVALENT ANNUAL COST

e 46. The equivalent annual cost method is useful in determining: a. the annual operating cost of a machine if the annual maintenance is performed versus when the maintenance is not performed as recommended. b. the tax shield benefits of depreciation given the purchase of new assets for a project. c. operating cash flows for cost-cutting projects of equal duration. d. which one of two machines to acquire given equal machine lives but unequal machine costs. e. which one of two machines to purchase when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.

III. PROBLEMS

RELEVANT CASH FLOWS

d 47. Marshall’s & Co. purchased a corner lot in Eglon City five years ago at a cost of $640,000. The lot was recently appraised at $810,000. At the time of the purchase, the company spent $50,000 to grade the lot and another $4,000 to build a small building on the lot to house a parking lot attendant who has overseen the use of the lot for daily commuter parking. The company now wants to build a new retail store on the site. The building cost is estimated at $1.2 million. What amount should be used as the initial cash flow for this building project? a. $1,200,000 b. $1,840,000 c. $1,890,000 d. $2,010,000 e. $2,060,000

RELEVANT CASH FLOWS

e 48. Jamestown Ltd. 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 ten years ago at a cost of $250,000. Today, the land is valued at $425,000. The grading and excavation work necessary to build on the land will cost $15,000. The company currently has some unused equipment which it currently owns valued at $60,000. This equipment could be used for producing awnings if $5,000 is spent for equipment modifications. Other equipment costing $780,000 will also be required. What is the amount of the initial cash flow for this expansion project? a. $800,000 b. $1,050,000 c. $1,110,000 d. $1,225,000 e. $1,285,000

RELEVANT CASH FLOWS

b 49. Wilbert’s, Inc. paid $90,000, in cash, for a piece of equipment three years ago. Last year, the company spent $10,000 to update the equipment with the latest technology. The company no longer uses this equipment in their current operations and has received an offer of $50,000 from a firm who would like to purchase it. Wilbert’s is debating whether to sell the equipment or to expand their operations such that the equipment can be used. When evaluating the expansion option, what value, if any, should Wilbert’s assign to this equipment as an initial cost of the project? a. $40,000 b. $50,000 c. $60,000 d. $80,000 e. $90,000

RELEVANT CASH FLOWS

a 50. Walks Softly, Inc. sells customized shoes. Currently, they sell 10,000 pairs of shoes annually at an average price of $68 a pair. They are considering adding a lower-priced line of shoes which sell for $49 a pair. Walks Softly estimates they can sell 5,000 pairs of the lower-priced shoes but will sell 1,000 less pairs of the higher-priced shoes by doing so. What is the amount of the sales that should be used when evaluating the addition of the lower-priced shoes? a. $177,000 b. $245,000 c. $313,000 d. $789,000 e. $857,000

OPPORTUNITY COST

c 51. Your firm purchased a warehouse for $335,000 six years ago. Four years ago, repairs were made to the building which cost $60,000. The annual taxes on the property are $20,000. The warehouse has a current book value of $268,000 and a market value of $295,000. The warehouse is totally paid for and solely owned by your firm. If the company decides to assign this warehouse to a new project, what value, if any, should be included in the initial cash flow of the project for this building? a. $0 b. $268,000 c. $295,000 d. $395,000 e. $515,000

OPPORTUNITY COST

d 52. You own a house that you rent for $1,200 a month. The maintenance expenses on the house average $200 a month. The house cost $89,000 when you purchased it several years ago. A recent appraisal on the house valued it at $210,000. The annual property taxes are $5,000. If you sell the house you will incur $20,000 in expenses. 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. $89,000 b. $120,000 c. $185,000 d. $190,000 e. $210,000

OPPORTUNITY COST

c 53. Big Joe’s owns a manufacturing facility that is currently sitting idle. The facility is located on a piece of land that originally cost $129,000. The facility itself cost $650,000 to build. As of now, the book value of the land and the facility are $129,000 and $186,500, respectively. Big Joe’s received an offer of $590,000 for the land and facility last week. They rejected this offer even though they were told that it is a reasonable offer in today’s market. If Big Joe’s were to consider using this land and facility in a new project, what cost, if any, should they include in the project analysis? a. $0 b. $315,500 c. $590,000 d. $650,000 e. $779,000

EROSION COST

b 54. Jamie’s Motor Home Sales currently sells 1,000 Class A motor homes, 2,500 Class C motor homes, and 4,000 pop-up trailers each year. Jamie is considering adding a mid- range camper and expects that if she does so she can sell 1,500 of them. However, if the new camper is added, Jamie expects that her Class A sales will decline to 950 units while the Class C campers decline to 2,200. The sales of pop-ups will not be affected. Class A motor homes sell for an average of $125,000 each. Class C homes are priced at $39,500 and the pop-ups sell for $5,000 each. The new mid-range camper will sell for $47,900. What is the erosion cost? a. $6,250,000 b. $18,100,000 c. $53,750,000 d. $93,150,000 e. $118,789,500

OCF

e 55. Ernie’s Electrical is evaluating a project which will increase sales by $50,000 and costs by $30,000. The project will cost $150,000 and be depreciated straight-line to a zero book value over the 10 year life of the project. The applicable tax rate is 34 percent. What is the operating cash flow for this project? a. $3,300 b. $5,000 c. $8,300 d. $13,300 e. $18,300

OCF

d 56. Kurt’s Kabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital. The project is expected to produce sales of $110,000 with associated costs of $70,000. The project has a 4-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 35 percent. What is the operating cash flow for this project? a. $7,000 b. $13,000 c. $27,000 d. $33,000 e. $40,000

BOTTOM-UP OCF

c 57. Peter’s Boats has sales of $760,000 and a profit margin of 5 percent. The annual depreciation expense is $80,000. What is the amount of the operating cash flow if the company has no long-term debt? a. $34,000 b. $86,400 c. $118,000 d. $120,400 e. $123,900

BOTTOM-UP OCF

d 58. Le Place has sales of $439,000, depreciation of $32,000, and net working capital of $56,000. The firm has a tax rate of 34 percent and a profit margin of 6 percent. The firm has no interest expense. What is the amount of the operating cash flow? a. $49,384 b. $52,616 c. $54,980 d. $58,340 e. $114,340

TOP-DOWN OCF

b 59. Ben’s Border Café is considering a project which will produce sales of $16,000 and increase cash expenses by $10,000. If the project is implemented, taxes will increase from $23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. What is the amount of the operating cash flow using the top-down approach? a. $4,000 b. $4,500 c. $6,000 d. $7,500 e. $8,500

TOP-DOWN OCF

c 60. Ronnie’s Coffee House is considering a project which will produce sales of $6,000 and increase cash expenses by $2,500. If the project is implemented, taxes will increase by $1,300. The additional depreciation expense will be $1,000. An initial cash outlay of $2,000 is required for net working capital. What is the amount of the operating cash flow using the top-down approach? a. $200 b. $1,500 c. $2,200 d. $3,500 e. $4,200

TAX SHIELD OCF

c 61. A project will increase sales by $60,000 and cash expenses by $51,000. The project will cost $40,000 and be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project. The company has a marginal tax rate of 35 percent. What is the operating cash flow of the project using the tax shield approach? a. $5,850 b. $8,650 c. $9,350 d. $9,700 e. $10,350

DEPRECIATION TAX SHIELD

a 62. A project will increase sales by $140,000 and cash expenses by $95,000. The project will cost $100,000 and be depreciated using the straight-line method to a zero book value over the 4-year life of the project. The company has a marginal tax rate of 34 percent. What is the value of the depreciation tax shield? a. $8,500 b. $17,000 c. $22,500 d. $25,000 e. $37,750