Chapter 09 - Making Capital Investment Decisions
109. We are evaluating a project that costs $1.68 million, has a 5-year life, and has no salvage value. Assume depreciation is straight-line to zero over the life of the project. Sales are
projected at 82,000 units per year. Price per unit is $43.29, variable cost per unit is $22.18, and fixed costs are $623,000 per year. The tax rate is 34 percent, and we require a 10 percent return on this project. What is the sensitivity of NPV to a 100 unit change in the sales figure? A. $3,998.40 B. $4,609.18 C. $4,897.20 D. $5,281.55 E. $5,557.12
110. Boyertown Industrial Tools is considering a 3-year project to improve its production efficiency. Buying a new machine press for $611,000 is estimated to result in $193,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $162,000. The press also requires an initial investment in spare parts inventory of $19,000, along with an additional $2,000 in inventory for each succeeding year of the project. If the tax rate is 35 percent and the discount rate is 12 percent, should the company buy and install the machine press? Why or why not?
Table 9.7 Modified ACRS depreciation allowances A. Yes; the NPV is $51,613 B. Yes: the NPV is $45,607 C. No; the NPV is -$22,311 D. No; the NPV is -$52,918 E. No; the NPV is -$74,945
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Chapter 09 - Making Capital Investment Decisions
111. Consider a 3-year project with the following information: initial fixed asset investment = $770,000; straight-line depreciation to zero over the 3-year life; zero salvage value; price = $34.99; variable costs = $23.16; fixed costs = $245,000; quantity sold = 94,500 units; tax rate = 35 percent. How sensitive is OCF to an increase of one unit in the quantity sold? A. $7.69 B. $8.38 C. $8.67 D. $9.97 E. $11.83
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Chapter 09 - Making Capital Investment Decisions
Chapter 09 Making Capital Investment Decisions Answer Key
Multiple Choice Questions
1. Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as which one of the following? A. Eroded cash flows B. Deviated projections C. Incremental cash flows D. Directly impacted flows E. Assumed flows Refer to section 9.1.
Bloom's: Knowledge Difficulty: Basic
Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment. Section: 9.1
Topic: Incremental cash flows
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Chapter 09 - Making Capital Investment Decisions
2. Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows? A. Forecast assumption principle B. Base assumption principle C. Fallacy principle D. Erosion principle E. Stand-alone principle Refer to section 9.1.
Bloom's: Knowledge Difficulty: Basic
Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment. Section: 9.1
Topic: Stand-alone principle
3. 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
Refer to section 9.1.
Bloom's: Knowledge Difficulty: Basic
Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment. Section: 9.1 Topic: Sunk cost
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Chapter 09 - Making Capital Investment Decisions
4. Which one of the following terms refers to the best option that was foregone when a particular investment is selected? A. Side effect B. Erosion C. Sunk cost
D. Opportunity cost E. Marginal cost Refer to section 9.2.
Bloom's: Knowledge Difficulty: Basic
Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment. Section: 9.2
Topic: Opportunity cost
5. Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project? A. Opportunity cost B. Sunk cost C. Erosion
D. Replicated flows E. Pirated flows Refer to section 9.2.
Bloom's: Knowledge Difficulty: Basic
Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment. Section: 9.2 Topic: Erosion
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