Chapter 10 Making Capital Investment Decisions
Chapter 10 Quiz A
Student Name _________________________
Student ID ____________
Round all answers to whole dollars.
________
1.
You just purchased some new equipment costing $459,000. The equipment is classified as 7-year property for
MACRS. What is the total accumulated depreciation expense at the end of year 2?
MACRS 7-year property
Year
Rate
1
14.29%
2
24.49%
3
17.49%
4
12.49%
5
8.93%
6
8.93%
7
8.93%
8
4.45%
a. $112,409
b. $178,000
c. $197,282
d. $281,000
________ 2.
A proposed project is expected to decrease accounts receivable by $10,000, decrease inventory by $4,000,
and increase accounts payable by $6,000. What is the amount of the initial cash flow for this project?
________
3.
Last year, Bottlers, Inc. purchased land located beside their factory at a price of $1,500,000 plus $250,000 in
real estate fees. Today, the land has a market value of $2,000,000. The company is now considering building
a new warehouse on that land. The construction cost of the warehouse is estimated at $675,000. In addition,
$90,000 worth of grading will be required to prepare the construction site. What is the initial cash flow of this
project?
________
4.
You are analyzing a proposed 4-year project. You expect to sell 20,000 units per year at an average selling
price of $5 per unit. The initial cash outlay for fixed assets will be $120,000. These assets will be depreciated
using straight-line depreciation to a zero book value over the life of the project. The fixed assets will be
worthless at the end of the project. Fixed costs are expected to be $8,000 and variable costs should be $1.90
per unit. The project requires an initial investment in net working capital of $10,000 which will be recovered
in full at the end of the project’s life. What is the total project cash flow at the end of year 4 if the tax rate is
35 percent?
________
5.
You purchased some fixed assets six years ago at a cost of $165,700. You have been depreciating these
assets using straight-line depreciation to a zero book value over 10 years. Today, you are selling these assets
for $62,500. What is the after-tax cash flow from this sale if the applicable tax rate is 35 percent?
a. $61,177
b. $62,500
c. $63,823
d. $66,280
________
6.
You are considering a project that will generate sales of $89,000, costs of $56,000, and annual depreciation of
$26,000. What is the value of the operating cash flow if the tax rate is 34 percent?
________
7.
You need a new oven for your bakery. Your current oven is worn out so you are trying to decide which one of
two ovens to buy as a replacement. Whichever oven you purchase will be replaced after its useful life. Oven
A costs $25,000 and costs $3,000 a year to operate over an 8-year life. Oven B costs $20,000 and costs
$4,500 a year to operate over a 6-year life. Given this information, which one of the following statements is
correct if the applicable discount rate is 10 percent?