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Zellar's, Inc. Is considering two mutually exclusive projects, A and B. Project A costs $ 75,000 and is expected to generate $48,000 in year one and...

This question was answered on May 21, 2010. View the Answer
1. Zellar’s, Inc. Is considering two mutually exclusive projects, A and B. Project A costs
$ 75,000 and is expected to generate $48,000 in year one and $45,000 in year two. Project B costs $80,000 and is expected to generate $34,000 on year one, $37,000 in year two, $26,000 in year three, and $25,000 in year four. Zellar, Inc.’s required rate of return for these projects is 10%. The profitability index for Project A is ________ (Points :1)
1.47
1.22
1.13
1.08

2. Your company is considering a replacement of an old delivery van with a new one that is more efficient. The old van cost $30,000 when it was purchased 5 years ago. The old van is being depreciated using the simplified straight line method over a useful life of 10 years. The old van could be sold today for $5,000. The new van has an invoice price of $75,000, and it will cost $5,000 to modify the van to carry the company’s products. Cost savings from use of the new van are expected to be $ 22,000 per year for 5 years. At which time the van will be sold for its estimated salvage value of $15,000. The new van will be depreciated using the simplified straight line method over its 5 year useful life. The company’s statutory rate is 35%. Working capital is expected to increase by $3,000 at the inception of the project, but this amount will be recaptured at the end of year five. What is the tax effect of selling the old machine? (Points :1)
A savings of $1,750
A savings of $3,500
Additional taxes paid of $1,750
A tax savings of $1,200

3. Your company is considering a replacement of an old delivery van with a new one that is more efficient. The old van cost $30,000 when it was purchased 5 years ago. The old van is being depreciated using the simplified straight line method over a useful life of 10 years. The old van could be sold today for $5,000. The new van has an invoice price of $75,000, and it will cost $5,000 to modify the van to carry the company’s products. Cost savings from use of the new van are expected to be $ 22,000 per year for 5 years. At which time the van will be sold for its estimated salvage value of $15,000. The new van will be depreciated using the simplified straight line method over its 5 year useful life. The company’s statutory rate is 35%. Working capital is expected to increase by $3,000 at the inception of the project, but this amount will be recaptured at the end of year five. What is the initial outlay required to fund this replacement project ? (Points :1)
$81,500
$78,500
$74,500
$71,000

4. J.B. Enterprises purchased a new molding machine for $75,000. The company paid $6,000 for shipping and another $ 4,000 to get the machine integrated with the company’s existing assets. J.B. Must maintain a supply of special lubricating oil just in case the machine breaks down. The company purchased a supply of oil for $2,000. The machine is to be depreciated on a straight line basis over its expected useful life of 10 years. What will depreciation expense be during the first year? (Points :1)
$7,500
$8,100
$8,500
$8,700

5. A new machine can be purchased for $1,000,000. It will cost $65,000 to ship and $35,000 to modify the machine. A $30,000 recently completed feasibility study indicated that the firm can employ an existing factory owned by the firm, which would have otherwise been sold for $150,000. The firm will borrow $750,000 to finance the acquisition. Total interest expense for 5 years is expected to approximate $250,000. What is the investment cost of the machine for capital budgeting purposes? (Points :1)
$1,100,000
$1,250,000
$1,280,000
$1,530,000
$ 2,030,000

6. Zinc, Inc. Is considering the acquisition of a new processing line. The processor can be purchase for $3,750,000; it will have a 10 year useful life. It will cost $165,000 to ship and $85,250 to install the processor. A recently completed feasibility study that was performed at a cost of $65,000 indicated that the processor would produce a positive NPV. The processor will be depreciated using the straight line method to zero expected salvage value. ?Studies have shown that employee-training expenses will be $ 125,000. What will be the annual depreciation expenses of the processing line for capital budgeting purposes? (Points :1)
$375,000
$419,025
$390,000
$400,025

7. Nickel Industries is considering the purchase of a new machine that will cost $178,000, plus an additional $12,000 to ship and install. The new machine will have a 5 year useful life and will be depreciated using the straight line method. The machine is expected to generate new sales of $85,000 per year and is expected to increase operating costs by $ 10,000 annually. Nickel’s income tax rate is 40%. What is the projected incremental cash flow of the machine or year 1? (Points :1)
$54,800
$60,200
$66,350
$68,200

8. Jiffy Wax Corp. Can sell common stock for $15 per share and its investors require a 14 % return. However, the administrative or flotation costs associated with selling the stock amount to $2.40 per share. What is the cost of capital for Jiffy Wax if the corporation raises money by selling preferred stock? (Points :1)
30.00%
21.50%
16.67%
14.00%

9. A corporate bond has a face value of $1,000 and a coupon rate of 6.5%. The bond matures in 10 years and has a current market price of $985. If the corporation sells more bonds it will incur flotation costs of $36 per bond. If the corporate tax rate is 34 %, what is the after tax cost of debt capital? (Points :1)
5.71%
5.45%
5.18%
4.78%

10. The cost of new preferred stock is equal to ___________ (Points :1)
The preferred stock dividend divided by the market price
The preferred stock dividend divided by its par value
[1-tax rate] time the preferred stock dividend divided by net price
Preferred stock dividend divided by the net selling price of preferred

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548009_FIN
1. . Zellar’s, Inc. Is considering two mutually exclusive projects, A and B.
Project A costs $ 75,000 and is expected to generate $48,000 in year one
and $45,000 in year two. Project B...

This question was asked on May 21, 2010 and answered on May 21, 2010.

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