6.
Metro Corporation will spend $1 million for special manufacturing equipment.
Shipping and
installation charges will amount to $175,000 and an initial increase in net working capital of
$50,000 will be required.
The equipment will replace an existing machine that has a salvage
value of $85,000 and a book value of $140,000.
If Metro has a current marginal tax rate of 34%,
what is the amount of the initial outlay for this project?
a) -$1,121,300
d) -$1,225,000
b) -$1,328,700
e) -$1,021,300
c) -$1,158,700
7.
Shell Biotech Corporation is considering two mutually exclusive capital investment projects.
Project 1 costs $75,000, and would produce differential cash flows of $16,200 for each of the next
9 years.
Project 2 also costs $75,000, but would produce differential cash flows of $14,000 for
each of the next 12 years.
If Shell's cost of capital is 11%, which alternative should be chosen?
a) Project 1 should be accepted.
d) Neither is acceptable.
b) Project 2 should be accepted.
e) Projects 1 and 2 can not be compared.
c) Both projects should be accepted.
8.
Jefferson Corporation is purchasing equipment with a 10-year life which will increase revenue by
$38,000 per year and increase expenses by $21,000 per year.
The cost of the project is $24,000,
and the equipment has a salvage value of $9,000 at the end of the tenth year.
The project will
require a $6,000 investment in net working capital immediately.
The equipment will be
depreciated for 10 years using simplified straight line.
Jefferson's marginal tax rate is 35%.
Calculate the total year 10 net cash flow, including both the last annual cash flow and the project's