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Exam 9: Making Capital Investment Decisions

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Question 51

Multiple Choice

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Mark is analyzing a proposed project to determine how changes in the variable costs per unit would affect the project's net present value.What type of analysis is Mark conducting?

A) Sensitivity analysis
B) Erosion planning
C) Scenario analysis
D) Benefit-cost analysis
E) Opportunity cost analysis

F) A) and E)
G) A) and D)

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Question 52

Multiple Choice

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Lakeside Rides is adding a new roller coaster to its amusement park.The firm expects this addition to increase its overall ticket sales and increase attendance at its park.In particular,the firm expects to sell more tickets for its current roller coaster and experience extremely high demand for its new coaster.Sales for its boat ride are expected to decline but food and beverage sales are expected to increase significantly.Which of the following are considered side effects associated with the new roller coaster? I.Ticket sales for the new roller coaster II.Change in ticket sales for the existing coaster III.Change in ticket sales for the boat ride IV.Change in food and beverage sales

A) I only
B) III only
C) II and III only
D) I, II, and III only
E) II, III, and IV only

F) B) and E)
G) C) and D)

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Question 53

Multiple Choice

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Boyertown Industrial Tools is considering a three-year project to improve its production efficiency.Buying a new machine press for $611,000 is estimated to result in $193,000 in annual pretax cost savings.The press falls in the MACRS five-year class,and it will have a salvage value at the end of the project of $162,000.The press also requires an initial investment in spare parts inventory of $19,000,along with an additional $2,000 in inventory for each succeeding year of the project.If the tax rate is 35 percent and the discount rate is 12 percent,should the company buy and install the machine press? Why or why not? Table 9.7 Modified ACRS depreciation allowances

Scenario analysis asks questions such as:

Scenario analysis:

Valley Forge and Metal purchased a truck five years ago for local deliveries.Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of eight years.

The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns.This lot was purchased four years ago at a cost of $299,000,which the firm paid in cash.To date,the firm has spent another $38,000 on land improvements,all of which was also paid in cash.Today,the lot has a market value of $329,000.What value should be included in the analysis of the expansion project for the cost of the land?

Cinram Machines has the following estimates for its new gear assembly project: price = $1,340 per unit; variable costs = $348 per unit; fixed costs = $5.1 million; quantity = 82,000 units.Suppose the company believes all of its estimates are accurate only to within ± 5 percent.What value should the company use for its total variable costs when performing its best-case scenario analysis?

Outdoor Sports is considering adding a miniature golf course to its facility.The course would cost $138,000,would be depreciated on a straight-line basis over its five-year life,and would have a zero salvage value.The estimated income from the golfing fees would be $72,000 a year with $24,000 of that amount being variable cost.The fixed cost would be $11,600.In addition,the firm anticipates an additional $14,000 in revenue from its existing facilities if the golf course is added.The project will require $3,000 of net working capital,which is recoverable at the end of the project.What is the net present value of this project at a discount rate of 12 percent and a tax rate of 34 percent?

The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:

Bruce Moneybags owns several restaurants and hotels near a local interstate.One restaurant,Beef and More,needs modernized.He is trying to decide whether to accept an offer and sell Beef and More as is for the offer price of $1.1 million or renovate the restaurant himself.The projected renovation cost is $1.3 million.The restaurant would need to be shut down completely during the renovation which would cause a net operating cash flow loss of $210,000 in today's dollars.The estimated present value of the cash inflows from the renovated restaurant are $3.2 million.When analyzing the renovation project,what opportunity cost,if any,should be included for the current restaurant? Assume the restaurant is totally paid for and any future costs will be paid in cash.

Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project?

The Shoe Box is considering adding a new line of winter footwear to its product lineup.Which of the following are relevant cash flows for this project? I.Decreased revenue from products currently being offered if this new footwear is added to the lineup II.Revenue from the new line of footwear III.Money spent to date looking for a new product line to add to the store's offerings IV.Cost of new counters to display the new line of footwear

Which of the following should be included in the analysis of a proposed investment? I.Erosion effects II.Opportunity costs III.Sunk costs IV.Side effects

A project requires $360,000 of equipment that is classified as seven-year property.What is the depreciation expense in year 3 given the following MACRS depreciation allowances,starting with year 1: 14.29,24.49,17.49,12.49,8.93,8.92,8.93,and 4.46 percent?

Fig Newton Industries is considering a project and has developed the following estimates: unit sales = 7,300,price per unit = $149,variable cost per unit = $91,fixed costs = $216,400.The depreciation is $94,700 a year and the tax rate is 40 percent.What effect would an increase of $1 in the selling price have on the operating cash flow?

Sensitivity analysis:

Which one of the following terms refers to the best option that was foregone when a particular investment is selected?

Jamie is analyzing the estimated net present value of a project under various what if scenarios.The type of analysis that Jamie is doing is best described as:

Isabella is considering three mutually exclusive options for the additional space she just added to her specialty women's store.The cost of the expansion was $127,000.She can use this additional space to add a fabric and quilting section,add an exclusive gifts department,or expand into imported decorator items for the home.She estimates the present value of these options at $114,000 for fabric and quilting,$163,000 for exclusive gifts,and $138,000 for decorator items.Which option(s) ,if any,should Isabella accept?