Financial Management Chapter 10 Answer Key

101. Your firm needs a computerized line-boring machine which costs $80,000, and requires $20,000 in maintenance for each year of its three year life. After three years, the salvage value will be zero. The machine falls into the Class 10 equipment category (CCA rate 30%). Assume a tax rate of 34% and a discount rate of 10%. Compute the annual after-tax maintenance cost. A. $10,000 B. $12,250 C. $13,200 D. $15,250 E. $27,200 102. A firm is considering a project that will increase sales by $135,000 and cash expenses by $105,000. The project will cost $120,000 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%. What is the value of the depreciation tax shield? A. $6,000 B. $10,200 C. $13,200 D. $19,800 E. $20,000 103. Steve's Collectibles is expanding its product offerings to reach a wider range of customers. The expansion project includes increasing the floor inventory by $80,000 and increasing the debt to suppliers by $32,001. The company will also spend $140,000 to expand the size of the showroom. As part of the expansion plan, the company will be offering credit to its customers and thus expects accounts receivable to rise by $20,001. What is the initial net working capital requirement for this expansion project? A. $68,000 B. $92,000 C. $132,000 D. $174,000 E. $208,000 104. Louie's Leisure Products is considering a 7 year project which will require the purchase of $1.4 million in new equipment. The equipment belongs in a 20% CCA class. Louie's expects to sell the equipment at the end of the project for 20% of its original cost. Annual sales from this project are estimated at $1.2 million. Net working capital equal to 20% of sales will be required to support the project. All of the net working capital will be recouped at the end of the project. The firm desires a minimal 14% rate of return on this project. The tax rate is 34%. What is the present value of the CCA tax shield for this project? A. $34,299 B. $68,047 C. $132,493 D. $200,782 E. $240,427 105. You are working on a bid to build ten cabins a year for the next four years for a local campground. This project requires the purchase of $215,000 of equipment which will be depreciated using straightline depreciation to a zero book value over four years. The equipment can be sold at the end of the project for $149,001. You will also need $28,000 in net working capital for the life of the project. Your fixed costs will be $22,000 a year and the variable costs will be $127,000 per cabin. Your required rate of return is 13% for this project and your tax rate is 35%. What is the minimum amount, rounded to the nearest $100, you should bid per cabin? A. $133,700 B. $134,900 C. $135,600 D. $137,800 E. $138,200 106. You are considering investing in a piece of equipment to implement a cost-cutÝng proposal. The pre-tax cost reduction is expected to equal $41.67 for each of the three years of the project's life. The equipment has an initial cost of $125 and belongs in a 20% CCA class. Assume a 34% tax bracket, a discount rate of 15%, and a salvage value of zero. What is the value of the annual depreciation tax shield for year 2 of the project? A. $6.80 B. $7.65 C. $14.17 D. $27.50 E. $41.67 107. Given the following information and assuming a 20% CCA class, what is the NPV for this project? Initial investment in fixed assets = $800,000; initial investment in net working capital = $200,000; life = four years; after-tax cost savings = $250,000 per year; salvage value = $30,000; tax rate = 35%; discount rate = 16%. A. $95,101 B. $105,967 C. $147,261 D. $187,098 E. $418,198 108. Louie's Leisure Products is considering a project which will require the purchase of $1.4 million in new equipment. The equipment belongs in a 20% CCA class. Louie's expects to sell the equipment at the end of the project for 20% of its original cost. Annual sales from this project are estimated at $1.2 million. Net working capital equal to 20% of sales will be required to support the project. All of the net working capital will be recouped at the end of the project. The firm desires a minimal 14% rate of return on this project. The tax rate is 34%. What is the recovery amount attributable to net working capital at the end of the project? A. $55,200 B. $81,600 C. $159,600 D. $240,000 E. $424,800 109. The managers of PonchoParts, Inc. plan to manufacture engine blocks for classic cars from the 1960s era. They expect to sell 250 blocks annually for the next five years. The necessary foundry and machining equipment will cost a total of $800,000 and belongs in a 30% CCA class for tax purposes. The firm expects to be able to dispose of the manufacturing equipment for $150,000 at the end of the project. Labour and materials costs total $500 per engine block, fixed costs are $125,000 per year. Assume a 35% tax rate and a 12% discount rate. What is the present value of the CCA tax shield? A. $65,031 B. $97,540 C. $168,007 D. $175,329 E. $220,125 110. Using the tax shield approach, calculate OCF given the following information: Sales $885,000; Costs $670,000; Depreciation $120,000. Tax rate is 35%. A. 165,500 B. $171,750 C. $175,500 D. $181,750 E. $185,500  111. New equipment costs $675,000 and is expected to last for five years with no salvage value. During this time the company will use a 30% CCA rate. The new equipment will save $120,000 annually before taxes. If the company's required rate of return is 12%, determine the PVCCATS of the purchase. Assume a tax rate of 35% A. $159,710 B. $169,710 C. $179,710 D. $189,710 E. $199,710 112. You own a house that you rent out 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 $5,001. 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 ofÏce. What value should you place on this house when analyzing the option of using it as a professional ofÏce? A. $89,000 B. $120,000 C. $185,000 D. $190,000 E. $210,000 113. A four-year project requires an initial investment of $165,000 in fixed assets plus $25,000 in net working capital. The project has after-tax costs of $14,501. The assets belong in a 20% CCA class and will have no salvage value. What is the project's equivalent annual cost if the required return is 14% and the firm's tax rate is 34%? A. $63,998 B. $159,418 C. $186,474 D. $201,011 E. $232,249 114. You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $400 and sales volume to be 1,000 units in year 1, 1,250 units in year 2, and 1,325 units in year 3. The project has a three year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000 which is depreciated straight-line to zero over the three year project life. The actual market value of the initial investment at the end of year 3 is $35,001. Initial net working capital investment is $75,000 and NWC will maintain a level equal to 20% of sales each year thereafter. The tax rate is 34% and the required return on the project is 10%. What is the total cash flow for the project in year 3? A. $126,461 B. $178,156 C. $194,945 D. $234,838 E. $239,100 115. Margarite's Enterprises is considering a new project. The project will require $325,000 for new fixed assets, $160,000 for additional inventory and $35,000 for additional accounts receivable. Accounts payable is expected to increase by $100,000 and long-term debt is expected to increase by $300,001. The project has a 5-year life. The fixed assets will belong in a 30% CCA class. At the end of the project, the fixed assets can be sold for 25% of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $554,000 and costs of $430,001. The tax rate is 35% and the required rate of return is 15%. What is the cash flow recovery from net working capital at the end of this project? A. $95,000 B. $147,812 C. $195,000 D. $247,812 E. $295,000  116. Your company may introduce a new line of tennis shoes. You have been given the following projections: sales = 35,000 units @ $40 per unit; variable costs = $25 per unit; fixed costs = $125,000 per year; initial investment = $1,000,000; interest expense = $50,000 per year; project life = 10 years. What is the net income for this project in the third year if the corporate tax rate is 34%? You may assume that the CCA rate on the initial investment is 30%, the half-year rule applies, and the appropriate discount rate of 12%. A. $62,700 B. $113,190 C. $198,070 D. $264,310 E. $297,420 117. Ronnie's Coffee House is considering a project which will produce sales of $6,000 and increase cash expenses by $2,501. If the project is implemented, taxes will increase by $1,301. The additional depreciation expense will be $1,001. 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. $4,200 118. The managers of PonchoParts, Inc. plan to manufacture engine blocks for classic cars from the 1960s era. They expect to sell 250 blocks annually for the next five years. The necessary foundry and machining equipment will cost a total of $800,000 and belongs in a 30% CCA class for tax purposes. The firm expects to be able to dispose of the manufacturing equipment for $150,000 at the end of the project. Labour and materials costs total $500 per engine block, fixed costs are $125,000 per year. Assume a 35% tax rate and a 12% discount rate. What is the minimum bid price the firm should set as a sale price for the blocks if the firm were in a bidding situation? A. $1,692 B. $1,934 C. $2,382 D. $2,564 E. $2,821 119. Justin's Manufacturing purchased a lot in Lake City ten years ago at a cost of $790,000. Today, that lot has a market value of $1.2 million. At the time of the purchase, the company spent $100,000 to grade the lot and another $20,000 to build a small garage on the lot to house additional equipment. The company now wants to build a new facility on the site. The building cost is estimated at $1.7 million. What amount should be used as the initial cash flow for this project? A. -$2,490,000 B. -$2,610,000 C. -$2,900,000 D. -$3,020,000 E. -$3,690,000 120. You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $400 and sales volume to be 1,000 units in year 1, 1,250 units in year 2, and 1,325 units in year 3. The project has a three year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000 which is depreciated straight-line to zero over the three year project life. The actual market value of the initial investment at the end of year 3 is $35,001. Initial net working capital investment is $75,000 and NWC will maintain a level equal to 20% of sales each year thereafter. The tax rate is 34% and the required return on the project is 10%. What is EBIT for the project in the first year? A. $13,200 B. $15,000 C. $20,000 D. $44,000 E. $52,000 121. Nu Look needs to maintain 15% of its sales in net working capital. The store manager is considering a 3-year project which is expected to increase sales from the current level of $1.1 million to $1.3 million the first year and $1.5 million a year for the following two years. What amount should be included in the project analysis as the net working capital cash flow for year 3? Assume that all accounts are restored to their original values at the end of year 3. A. -$20,000 B. $0 C. $20,000 D. $30,000 E. $60,000 122. Your company currently sells oversized golf clubs. The Board of Directors wants you to look at replacing them with a line of supersized clubs. Which of the following is NOT relevant? A. A reduction in revenues of $300,000 from terminating the oversized line of clubs. B. Land you own with a market value of $750,000 that may be used for the project. C. $200,000 spent on research and development last year on oversized clubs. D. $350,000 you will pay to Fred Singles to promote your new clubs. E. $125,000 you will receive by selling the existing production equipment which must be upgraded if you produce the new supersized clubs. 123. A firm purchases Class 8 equipment for $1,000,000 (CCA Rate 20%) for a 10 year project. What will be the CCA tax shield in year 3? The tax rate is 35%. A. $144,000 B. $50,400 C. $201,600 D. $63,000 E. $35,000 124. Your company wants to bid on the sale of 10 customized machines per year for five years. The initial costs for the project are $1.6 million with a salvage value of $800,000 after five years. The manufacturing equipment belongs in a 30% CCA class. Annual fixed costs are estimated at $700,001. Variable cost per machine is $81,501. The project requires net working capital of $120,001. The company has a 34% tax rate and desires a 15% return on the project. What is the minimum price that the company should bid per single machine? A. $197,320 B. $212,028 C. $219,887 D. $221,009 E. $223,619 125. A project will increase sales by $140,000 and cash expenses by $95,001. The project will cost $100,000 and belong in a 30% CCA class. The company has a marginal tax rate of 34%. What is the value of the depreciation tax shield in the second year? A. $8,670 B. $17,000 C. $22,500 D. $25,000 E. $37,750 126. The Windom Co. has sales of $845,960, costs of $578,402, interest expense of $42,750, and a marginal tax rate of 35%. The company also has $1,299,998 in fixed assets that are being depreciated in a 15% CCA class (you may assume that the ½ year rule has been applied to all of the assets in the pool in the past). What is the operating cash flow for the current year? A. $210,911 B. $211,125 C. $224,808 D. $255,125 E. $267,558  127. Downtown Candies is considering replacing the equipment it uses to make chocolate candy bars. The equipment would cost $721,000 and lower manufacturing costs by an estimated $170,000 a year. The equipment belongs in a 30% CCA class. The required rate of return is 14% and the tax rate is 35%. What is the increase in net income for the second year from this proposed project? A. -$9,006 B. -$417 C. $25,550 D. $40,203 E. $47,200  128. 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 project belongs in a 50% CCA class, and the tax rate is 35%. What is the operating cash flow in the first year for this project? A. $7,000 B. $13,000 C. $27,000 D. $33,000 E. $40,000 129. Jackson Enterprises is preparing a pro forma statement for next year. It estimates sales at 12,840 units with a selling price of $43.01. Variable costs are estimated at $21 a unit. $868,000 of fixed assets is being depreciated straight-line to zero over seven years. Annual fixed costs are $104,660 and annual interest payments are $11,051. The tax rate is 35%. The net income is _____ and the operating cash flow is ______. A. $27,800; $132,460 B. $27,800; $162,850 C. $27,800; $209,320 D. $34,983; $132,460 E. $34,983; $209,320 130. A project will produce operating cash flows of $45,000 a year for four years. During the life of the project, inventory will be lowered by $30,000 and accounts receivable will increase by $15,001. Accounts payable will decrease by $10,001. The project requires the purchase of equipment at an initial cost of $120,001. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating a $25,000 after-tax cash flow. At the end of the project, net working capital will return to its normal level. What is the net present value of this project given a required return of 14%? A. $3,483.48 B. $16,117.05 C. $27,958.66 D. $32,037.86 E. $49,876.02 131. Downtown Cleaners (DC) operates a dry cleaning business. When the cleaners purchased their existing building they spent an additional $49,500 and purchased the empty lot next door. This lot is currently appraised at $62,500. DC is currently considering expanding their business and providing laundry services for dress shirts. The expansion would entail an addition to their existing facility which would be built on the adjacent lot. The expansion to the building will cost $114,900. DC currently has $14,500 worth of unused equipment which could be used in the new operation. In addition, DC would need to acquire an additional $96,000 of equipment. The total initial cost of this project is estimated at: A. $260,400. B. $273,400. C. $274,900. D. $286,400. E. $287,900. 132. You own a house that you rent for $1,600 a month. The maintenance expenses on the house average $300 a month. The house cost $110,000 when you purchased it six years ago. A recent appraisal on the house valued it at $295,000. If you sell the house you will incur $15,000 in real estate fees. The annual property taxes are $25,000. You are deciding whether to sell the house or convert it for your own use as a professional ofÏce. What value should you place on this house when analyzing the option of using it as a professional ofÏce? A. $150,000 B. $255,000 C. $280,000 D. $293,100 E. $310,000 133. The Market Place Grill has annual sales of $1.9 million, depreciation of $238,000, and net working capital of $196,001. The firm has a tax rate of 35% and a profit margin of 8.2%. The firm has no longterm debt. What is the amount of the operating cash flow? A. $88,585 B. $197,800 C. $284,585 D. $393,800 E. $521,200 134. 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. $515,000 135. RP&A, Inc. purchased some fixed assets four years ago at a cost of $19,801. They no longer need these assets so are going to sell them today at a price of $3,501. The assets belong in a 30% CCA class. What is the current book value of these assets? A. $1,140.48 B. $3,421.44 C. $3,500.00 D. $4,016.67 E. $5,772.69 136. Shelly's Boutique is evaluating a project which will increase annual sales by $70,000 and annual costs by $40,000. The project will initially require $100,000 in fixed assets which will be depreciated straight-line to a zero book value over the 5-year life of the project. The applicable tax rate is 34%. What is the operating cash flow for this project? A. $26,400 B. $26,600 C. $30,000 D. $46,400 E. $46,600 137. Ann's Custom Catering has sales of $214,000, depreciation of $9,000, and net working capital of $16,000. The firm has a tax rate of 34% and a profit margin of 7%. The firm has no interest expense. What is the amount of the operating cash flow? A. $7,980 B. $23,980 C. $30,350 D. $39,980 E. $53,700 138. Using the tax shield approach, calculate OCF given the following information: Sales $104,000; Costs $63,000; Depreciation $10,000. Tax rate is 40%. A. $32,200 B. $31,300 C. $30,400 D. $29,500 E. $28,600 139. A company is considering a new four-year project with an initial investment requirement of $72,001. The equipment belongs in a 30% CCA class and will be worthless at the end of the project. Sales are estimated at $136,800 with costs of $87,901. The tax rate is 34%. What is the project OCF in the second year? A. $20,394 B. $28,506 C. $30,900 D. $38,516 E. $41,406 140. OfÏce Furniture Makers, Inc. uses machines to produce high quality ofÏce chairs for other firms. The initial cost of one customized machine is $750,000. This machine costs $12,000 a year to operate. Each machine has a life of 3 years before it is replaced. What is the equivalent annual cost of this machine if the required return is 10%? (Round your answer to whole dollars) A. -$259,947 B. -$285,942 C. -$301,586 D. -$313,586 E. -$326,947 141. Walks Softly, Inc. sells customized shoes. Currently, it sells 10,000 pairs of shoes annually at an average price of $68 a pair. It is considering adding a lower-priced line of shoes which sell for $49 a pair. Walks Softly estimates it 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. $857,000 142. Benson Industries is adding a new assembly line which will increase annual sales by $980,000 and cash expenses by $535,001. The project will require an initial investment in equipment of $1.2 million. This equipment belongs in a 40% CCA class. The company has a marginal tax rate of 35%. What is the operating cash flow in the first year of the project using the tax shield approach? A. $205,250 B. $289,250 C. $314,500 D. $347,500 E. $373,250 143. The Monumental Co. is considering purchasing a piece of equipment costing $642,001. The equipment belongs in a 30% CCA class. What is the anticipated tax shield in year three on this equipment if the company is in the 34% marginal tax bracket? A. $22,799 B. $23,469 C. $32,087 D. $33,438 E. $38,963 144. The Wolf's Den Outdoor Gear is considering replacing the equipment it uses to produce tents. The equipment would cost $1.4 million and lower manufacturing costs by an estimated $215,000 a year. The equipment will belong in a 25% CCA class. The required rate of return is 13% and the tax rate is 34%. What is the increase in net income in the first year from this proposed project? A. $13,600 B. $26,400 C. $32,400 D. $40,000 E. $53,600 145. Judson Industries is considering a new project. The project will initially require $749,000 for new fixed assets, $238,000 for additional inventory, and $25,000 for additional accounts receivable. Accounts payable is expected to increase by $70,001. The fixed assets will belong in a 30% CCA class. At the end of the project, in four years' time, the fixed assets can be sold for 40% of their original cost. The net working capital will return to its original level at the end of the project. The project is expected to generate annual sales of $944,000 with related cash expenses of $620,000. The tax rate is 35% and the required rate of return is 14%. What is the amount of the earnings before interest and taxes for the first year of this project? A. -$425,000 B. -$276 C. $32,900 D. $113,400 E. $211,650  146. You just purchased some equipment that belongs in a 25% CCA class. The equipment cost $67,601. What will the book value of this equipment be at the end of three years should you decide to resell the equipment at that point in time? A. $19,468.80 B. $20,280.20 C. $33,271.88 D. $48,131.20 E. $48,672.00 147. You are working on a bid to build four small apartment buildings a year for the next three years for a local community. This project requires the purchase of $900,000 of equipment which will be depreciated using straight-line depreciation to a zero book value over the three years. The equipment can be sold at the end of the project for $400,000. You will also need $200,000 in net working capital over the life of the project. The fixed costs will be $475,000 a year and the variable costs will be $140,000 per building. Your required rate of return is 12% for this project and your tax rate is 34%. What is the minimal amount, rounded to the nearest $500 that you should bid per building? A. $292,500 B. $316,500 C. $330,500 D. $341,500 E. $365,000 148. Nathan's is considering offering boots for sale along with their current lines of shoes and slippers. The projected annual sales for the company, with and without boots, are as follows: Product Shoes Slippers Boots Without boots With boots $289,400 $271,850 $54,950 $53,900 $0 $46,800 What amount should be used as the annual sales figure when evaluating the addition of boots to the product line? A. $28,200 B. $46,800 C. $344,350 D. $372,550 E. $400,750 149. Glassparts, Inc. uses machines to manufacture windshields for automobiles. One machine costs $142,000 and lasts about 5 years before it needs replaced. The operating cost per machine is $7,000 a year. What is the equivalent annual cost of one machine if the required rate of return is 11%? (Round your answer to whole dollars) A. $30,811 B. $33,574 C. $35,400 D. $37,267 E. $45,421  150. Wong Exporters purchased an $89,000 truck that belongs in CCA class 10 (a 30% class). The company has a marginal tax rate of 33% and a discount rate of 12%. After 3 years, the company expects to sell the truck for $36,501. What is the after-tax salvage value at the time of the intended sale? (Assume that Wong owns several other vehicles.) A. $35,006 B. $35,600 C. $36,203 D. $36,634 E. $37,697