Chapter 12 Test Questions

# Chapter 12 Test Questions - Chapter 12 Test Questions Use...

This preview shows pages 1–11. Sign up to view the full content.

Chapter 12 Test Questions

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Use this information to answer questions 1 through 5. Louie’s Leisure Products is considering a project which will require the purchase of \$1.3 million in new equipment. Shipping and installation will be an additional \$100,000. For tax purposes, the equipment will be depreciated straight-line to a salvage value of \$175,000 over the 7-year life of the project. Louie’s expects to sell the equipment at the end of seven years for
Question 1 Initial outlay for the project a. \$1,060,000 b. \$1,400,000 c. \$1,540,000 d. \$1,640,000 e. None of the above

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Answer Question 1 The initial outlay is the cost of the equipment + the installation costs + net working capital investments. So it is \$1,300,000 + \$100,000 + (20% * \$1,200,000) = \$1,640,000. Answer : D
Question 2 What is the amount of the free cash flow in year one? a. \$47,600 b. \$72,000 c. \$95,200 d. \$144,000 e. None of the above

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Answer Question 2 To get this we take the annual sales \$1,200,000 minus the annual costs \$750,000 minus depreciation (to find depreciation we take the cost plus installation \$1,400,000 minus salvage value \$175,000 and divide by 7 years: \$1,225,000/7 = \$175,000.) Now we have EBIT of \$275,000. After taxes (34%) this would be \$181,500. Now we add back in depreciation \$175,000 as it is not a cash flow to get \$356,500.
Question 3 What is the terminal cash flow from the project? a. \$184,800 b. \$280,000 c. \$424,800 d. \$484,300 e. None of the above

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Answer Question 3 First Louie’s expects to sell the equipment for \$280,000. This is greater than the salvage value \$175,000 and so taxes must be paid on the difference \$280,000 - \$175,000 = \$105,000. \$105,000 * 34% = \$35,700. So we get \$280,000 - \$35,700 (taxes) + \$240,000 (working capital found in Question 1) = \$484,300. Answer : D
Question 4 What is the NPV of the project? (round to nearest \$1000) a. \$82,000 b. \$243,000 c. \$841,000 d. \$3,362,000 e. None of the above

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
For this we will take information from questions 1-3. CF0 = -\$1,640,000, CF1-6 = \$356,500, CF7 = \$356,500 + \$484,300 = \$840,800. The discount rate is 14% and so the NPV is \$82,325. Answer : A
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 10/23/2011 for the course BUS M 301 taught by Professor Jimbrau during the Fall '11 term at BYU.

### Page1 / 31

Chapter 12 Test Questions - Chapter 12 Test Questions Use...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online