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Exam 9: Making Capital Investment Decisions

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Question 31

Multiple Choice

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A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as which type of cost?

A) Fixed
B) Forgotten
C) Variable
D) Opportunity
E) Sunk

F) D) and E)
G) B) and C)

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Question 32

Multiple Choice

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Six years ago, Global Exporters paid cash for a new packaging machine that cost $287,000. Three years ago, the firm spent $2,900 on repairs and modifications to the machine. The machine is now fully depreciated and has just sat idly in a back corner of the shop for the past 7 months. The estimated value of the machine today is $124,500. The firm is considering using this machine in a new project. If it does so, what value should be assigned to this machine and included in the initial costs of the new project?

A) $0
B) $2,900
C) $124,500
D) $127,400
E) $143,500

F) B) and E)
G) D) and E)

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Question 33

Multiple Choice

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Jamie is analyzing the estimated net present value of a project under various what if scenarios. The type of analysis that Jamie is doing is best described as:

Outdoor Sports is considering adding a miniature golf course to its facility. The course would cost $138,000, would be depreciated on a straight line basis over its 5-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $72,000 a year with $24,000 of that amount being variable cost. The fixed cost would be $11,600. In addition, the firm anticipates an additional $14,000 in revenue from its existing facilities if the golf course is added. The project will require $3,000 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 12 percent and a tax rate of 34 percent?

Lakeside Rides is adding a new roller coaster to its amusement park. The firm expects this addition to increase its overall ticket sales and increase attendance at its park. In particular, the firm expects to sell more tickets for its current roller coaster and experience extremely high demand for its new coaster. Sales for its boat ride are expected to decline but food and beverage sales are expected to increase significantly. Which of the following are considered side effects associated with the new roller coaster? I. ticket sales for the new roller coaster II) change in ticket sales for the existing coaster III) change in ticket sales for the boat ride IV) change in food and beverage sales

A 9-year project is expected to generate annual revenues of $114,500, variable costs of $73,600, and fixed costs of $14,000. The annual depreciation is $3,500 and the tax rate is 34 percent. What is the annual operating cash flow?

Glass Blowers, Inc. has a new project in mind that will increase accounts receivable by $18,000, decrease accounts payable by $6,000, increase fixed assets by $36,000, and decrease inventory by $11,000. What is the amount the firm should use as the initial cash flow attributable to net working capital when it analyzes this project?

A proposed project will increase a firm's accounts payables. This increase is generally:

You are analyzing a project and have developed the following estimates: unit sales = 3,100, price per unit = $211, variable cost per unit = $115, fixed costs = $164,000. The depreciation is $59,000 a year and the tax rate is 35 percent. What effect would the sale of one more unit have on the operating cash flow?

Hi Fliers is considering making and selling custom kites in two sizes. The small kites would be priced at $9 and the large kites would be $24. The variable cost per unit is $5 and $11, respectively. Jill, the owner, feels that she can sell 2,600 of the small kites and 1,700 of the large kites each year. The fixed costs would only be $2,100 a year and the tax rate is 34 percent. What is the annual operating cash flow if the annual depreciation expense is $900?

You are analyzing a project and have developed the following estimates: unit sales = 2,600, price per unit = $56, variable cost per unit = $39, fixed costs = $24,700. The depreciation is $15,800 a year and the tax rate is 33 percent. What effect would a decrease of $1 in the variable cost per unit have on the operating cash flow?

Nu Tek is comprised of four separate operating divisions. For this year, the firm has decided to allocate capital funds using a soft rationing approach. Which one of the following applies to this situation?

A pro forma financial statement is a financial statement that:

A debt-free firm has net income of $128,400, taxes of $46,200, and depreciation of $21,300. What is the operating cash flow?

Which of the following are cash inflows from net working capital? I. increase in accounts payable II) increase in inventory III) decrease in accounts receivable IV) decrease in fixed assets

Which one of the following is a correct value to use if you are conducting a best case scenario analysis?

Scenario analysis:

You are analyzing a project and have developed the following estimates. The depreciation is $19,800 a year and the tax rate is 34 percent. What is the best case operating cash flow?

You are analyzing a project and have developed the following estimates: unit sales = 1,320, price per unit = $79, variable cost per unit = $43, fixed costs = $24,900. The depreciation is $11,300 a year and the tax rate is 35 percent. What effect would an increase of $1 in the selling price have on the operating cash flow?

The opportunities that a manager has to modify a project once it has started are called: