2.

The value of resources used in an

investment project should be measured opportunity
in terms of their ____ cost.

3. There is neither a gain nor a loss on

the sale of a depreciable asset for an tax book value
amount exactly equal to its ____.

Adler is replacing its old packing line with a more efficient line. The old line was being depreciated on a
straight-line basis at a rate of $20,000 per year. The old machine has a current book value of $100,000.
The new line, which costs $910,000, will be depreciated on a 10-year MACRS schedule. The more
efficient operation is expected to increase revenues by $50,000 per year and reduce annual operating
costs by $80,000. Compute the net cash flows for Adler in year 2. Assume Adler has a marginal tax rate $135,520
of 40%. Use the rounded MACRS schedule listed below:
(10-Year Depreciation Schedule: 10%, 18%, 14%, 12%, 9%, 7%, 7%, 7%, 7%, 6%, 3%)

Airstat is replacing an old stamping line that cost $80,000 five years ago, with a new, more
efficient machine that will cost $225,000. Shipping and installation will cost an additional
$20,000. The old machine has a book value of $15,000 but will be sold as scrap for $5,000.
The new machine will be depreciated with a 7-year life under MACRS guidelines. With the
increased production, inventories will increase $4,000, accounts receivable will increase
$242,000
$16,000, and accounts payable will increase $14,000. If Airstat has a marginal tax rate of 40
percent, what is the net investment?

Allen Company is considering an investment project that is

expected to generate $100,000 in annual earnings before taxes.
Annual depreciation will be $50,000. Allen's marginal tax rate is $110,000
40%. Determine the project's annual net cash flows

Anderson Clayton will purchase a new pellet mill that will replace an older, less efficient
mill. The new mill costs $360,000 and shipping costs are $10,000. Improving the steam lines
to the new mill will cost an additional $22,000. The old mill has a book value of $25,000
and can be sold for $12,000. The installation of the new mill will cause inventories to
increase by $8,000, accounts receivable will go up $20,000, and accounts payable will
$392,800
increase $10,000. If Anderson Clayton has a marginal tax rate of 40%, what is the NINV for
the new mill?

A(n) ____ is a cash outlay that is expected

to generate a flow of future cash capital expenditure
benefits lasting longer than 1 year.

A(n) ____ project is one whose

acceptance is dependent on the contingent
adoption of one or more other projects.

Baker Company is considering an investment in a new metal lathe. If the new

lathe is purchased, revenues will increase by $5,000 per year and cash
operating costs will decline by $10,000 per year. The lathe will cost $60,000
and will be depreciated on a straight-line basis over 10 years to a zero $11,400
estimated salvage value. Baker's marginal tax rate is 40%. Determine the
annual net cash flows generated by the lathe.

Basin Manufacturing (40% marginal tax rate) is considering a plant expansion

project. The equipment will cost $100,000 and will require an additional
$10,000 for delivery and installation. The expansion also will require Basin to
increase immediately its net working capital by $25,000. The expansion is $135,000
expected to generate revenues of $150,000 per year. Calculate the project's
net investment.
 The capital budgeting process is very essentially plots the company's future
important to the firm because it ____ direction

Capital expenditure projects may be

classified in all the following types capital rationing
EXCEPT ____.

Capital Foods purchased an oven 5 years ago for $45,000. The oven is being
depreciated over its estimated 10-year life using the straight-line method to a
salvage value of $5,000. Capital is planning to replace the oven with a more
automated one that will cost $150,000 installed. If the old oven can be sold $2,000
for $30,000, what is the tax liability? Assume a marginal tax rate of 40
percent.

Cash flows for all investment projects

should be projected over the ____ of the economic life
project.

Com-Cat is considering expanding their current production facility. This year Com-Cat had an operating
income (EBIT) of $760,000, interest expenses of $120,000, depreciation expenses of $45,000, and
capital expenditures of $160,000. Next year, after the expansion is completed, operating income is
expected to be $880,000, interest expenses will remain at $120,000, but depreciation will increase to
$61,000. To support the expansion, cash is expected to increase by $5,000, accounts receivable by
$70,000
$12,000, inventories by $8,000, and accounts payable by $7,000. What is the change in Com-Cat's net
operating cash flows attributable to this project if the tax rate is 40%?

Consider a capital expenditure project with an expected 10-year economic life and
forecasted revenues equal to $40,000 per year; cash expenses are estimated to be $29,000
per year. The cost of the project equipment is $23,000, and the equipment's estimated
salvage value at the end of the project is $9,000. The equipment's $23,000 cost will be
depreciated using MACRS depreciation (7-year asset). The project requires a $7,000
$24,000
working capital investment in year 0 and another $5,000 in year 5. The company's marginal
tax rate is 40%. Calculate the expected net cash flow in year 10 of the project.

A contractor has a team of plumbers and assigns

those plumbers to a new construction site. The fact
that the plumbers are unavailable for any other job mutually exclusive
makes the construction site project a(n) ____ project.

A conventional project can also be

a normal project
considered ____.

The ____ curve is a schedule of projects

arranged in ____ order according to their investment opportunity; descending
expected rates of return

The decision by the Municipal Transportation

Authority to either refurbish existing buses, to buy
new large buses, or to supplement the existing fleet mutually exclusive projects
with mini-buses is an example of ____.
 Depreciation ____. is not a cash outflow

Depreciation is based on the asset cost

increase in inventory
plus all of the following EXCEPT ____

Depreciation ____ reported profits and it

reduces; reduces
____ taxes paid by a firm.

The determination of net cash flows

interest charges
(NCF) should NEVER include

The difference between a capital

is expected to generate future cash
expenditure and an operating expenditure is
that a capital expenditure ____.
benefits lasting longer than one year.

The dollar amount of interest charges is normally not considered in the net cash
____. flow calculation

A drill press costs $30,000 and is expected to have a 10-year life. The drill
press will be depreciated on a straight-line basis over 10 years to a zero
estimated salvage value. This machine is expected to reduce the firm's cash
operating costs by $4,500 per year. Assuming the firm is in the 40 percent $3,900
marginal tax bracket, determine the annual net cash flows generated by the
drill press.

The effect of a one-dollar increase in

depreciation expenses is to ____ the typical increase; less than
firm's net cash flows by ____ one dollar.

Felix Industries purchased a grinder 5 years ago for $15,000. It is being depreciated on a
straight-line basis over 15 years to an estimated salvage value of zero. It could be sold

$17,400
now for $6,000. The firm is considering selling it and purchasing a new one. The new
grinder would cost $25,000 installed and would be depreciated on a straight-line basis
over 10 years to a zero estimated salvage value. The company's marginal tax rate is 40%.
Determine the net investment if the old grinder is sold and the new one purchased.

an important input in the capital

A firm's cost of capital is ____
budgeting process
 ____ have cash flow patterns with more
Nonnormal projects
than one sign change

If a firm sells an asset for less than its the loss may be used to offset
book value, ____ operating income

In estimating the net investment, an

outlay that has already been made is sunk cost
known as a(n) ____

In-Step Video is considering expanding its video rental library to 8,000 DVDs.
The purchase price of the additional DVDs will be $80,000, and the shipping
cost is another $4,000. To house the media, the owner will have to spend
another $10,000 for display shelves, increase net working capital by $5,000, $99,000
and interest expenses will add another $8,000 to the operating cost. What is
the net investment to In-Step Video for this project?

In terms of the capital budgeting

incremental changes in a firm's cash flow
process, net cash flows are the ____.

An investment project is expected to generate earnings before

taxes (EBT) of $60,000 per year. Annual depreciation from the
project is $30,000, and the firm's tax rate is 40 percent. $66,000
Determine the project's annual net cash flows.

____ is the term used when the initial cost of all

acceptable capital budgeting projects is greater Funds constraint
than the total funds the firm has available.

Jim Bo's currently has annual cash revenues of $240,000 and annual
operating expenses of $185,000, including $35,000 in depreciation. The firm's
marginal tax rate is 40 percent. A new cutting machine can be purchased for
$120,000, which will increase revenues by $50,000 per year while operating $25,000
expenses would increase to $205,000, including $42,000 in depreciation.
Compute Jim Bo's annual incremental after-tax net cash flows.

The Johnson Drum Company is planning to build a new factory. The purchase of the land, building the plant, and
installation of equipment will take place over a 2-year period. The following are planned cash outflows:

$12,356,650
Year Cash Outflow
0 $3,500,000
1 $4,750,000
2 $6,100,000
Johnson Drum's cost of capital is 14%, and its marginal tax rate is 35%. What is the NINV measured in present value
terms today?

LISP Inc. is planning to purchase a new mixer/dubber for

$50,000. The new equipment will replace an older mixer that
has been fully depreciated but has a salvage value of $5,000. $47,000
Compute the net investment required for this project. Assume a
marginal tax rate of 40 percent.
LISP Inc. is planning to purchase a new mixer for $50,000 that will
qualify as MACRS 3-year property (first-year depreciation rate =
33.33%). The new mixer should increase revenues by $20,000 per $18,666
year, with no increase in operating cost. If LISP's marginal tax rate is 40
percent, what is the net cash flow in the first year?

Little Giant is building a manufacturing plant that will require a cash

outlay of $300,000 for the initial purchase of a building, $450,000 for
remodeling the first year, and $710,000 for new equipment in the $1,267,720
second year. If the firm's cost of capital is 12 percent, what is the
present value of the net investment at time 0?

A Lotta Bread Corp. is replacing an entire baking line that was purchased for $420,000
and currently has a book value of $60,000. The new more efficient line will cost $940,000
installed and can be depreciated as a 7-year MACRS asset. With the increased efficiency,
Lotta expects annual revenues to increase by $425,000 and operating expenses to
increase by $170,000. The older machine, which was being depreciated at the straight-line
$237,082
rate of $20,000/year, will be sold for $30,000. What are the net cash flows for year 2?
Assume the firm's marginal tax rate is 40% and that the year 2 depreciation rate is 24.49%.

The management of Jasper Equipment Company is planning to purchase a new milling

machine that will cost $160,000 installed. The old milling machine has been fully
depreciated but can be sold for $15,000. The new machine will be depreciated on a
straight-line basis over its 10-year economic life to an estimated salvage value of $10,000.
If this milling machine will save Jasper $20,000 a year in production expenses, what are the
$18,000
annual net cash flows associated with the purchase of this machine? Assume a marginal
tax rate of 40 percent

Maritech purchased a pellet mill 4 years ago for $60,000. The mill is being
depreciated over 7 years using MACRS. Maritech is planning to replace the
mill with a higher volume unit that will cost $110,000 installed. If the old mill
can be sold for $25,000, what is the tax liability? Assume a marginal tax rate
$2,560
of 40%. Use the rounded MACRS schedule listed below.

Martin Tartans Inc. is considering the purchase of a new argyle sock knitting machine to
replace a less automated one. The new machine will cost $220,000 plus $30,000 for
shipping and installation. The machine being replaced was purchased five years ago for
$140,000 and depreciated as a 7-year MACRS property. It can be sold for $24,000. Martin
has a marginal tax rate of 35%. Compute the NINV for the project. Use the rounded
$223,620
MACRS schedule listed below:
(7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

Moon Pie Company is considering automated baking equipment that costs $500,000
installed and would replace the present handmade production method. The present

$209,200
equipment has a zero book and salvage value. The new equipment will not increase
revenues but will reduce operating costs from a current level of $600,000 to $300,000 per
year. The depreciation of the new equipment will be $73,000 per year. What are the annual
incremental net cash flows? Assume a marginal tax rate of 40 percent.

Most existing products become

obsolete. For a firm to continue to grow, move all production to the firm's existing
it must do all of the following EXCEPT facilities for economies of scale
.

Most firms choose accelerated

income taxes are deferred
depreciation methods because ____.

The net cash flows for any year during the

life of a capital expenditure project are equal earnings after taxes; depreciation
to the change in ____ plus the change in ____.
 The net investment calculation for an 1. after-tax salvage value of the old
asset replacement decision normally asset
includes any ____. 2. increase in net working capital
3 installed asset costs

The net investment calculation for an ____ asset replacement; after-tax proceeds
project normally includes ____. from the sale of the old asset

The ____ of an asset are the cash flows that the

asset could generate if it were not used in opportunity costs
the project under consideration.

Of the following, an example of a

the return on common stock required
component of a firm's cost of capital is
by investors
____.
Outback is purchasing a new machine that will cost $98,000. The machine will
qualify as MACRS 5-year property but has an economic life of 8 years. The
new machine is expected to increase revenues by $35,000 per year, and
operating costs are expected to increase by $15,000 per year. If the firm's $19,864
marginal tax rate is 34 percent and the first year's depreciation rate is 20
percent, what is the net cash flow in the first year.

Parker Chemicals purchased a hexene extractor 10 years ago for $120,000. It is being
depreciated on a straight-line basis over 15 years to an estimated salvage value of zero. It

$248,000
can be sold today for $10,000. Parker is considering purchasing a new more efficient
extractor that would cost $270,000 installed and would be depreciated as a 10-year
MACRS asset. The company's marginal tax rate is 40%. Determine the NINV if the old
extractor is sold and the new one is purchased.

Parker Chemicals purchased a hexene extractor 10 years ago for $120,000. It is being depreciated on a
straight-line basis over 15 years to an estimated salvage value of zero. It can be sold today for $10,000.
Parker is considering purchasing a new more efficient extractor that would cost $270,000 installed and
would be depreciated as a 10-year MACRS asset. (The depreciation rate for year one is 10 percent for
this asset.) The company's marginal tax rate is 40%. If the new extractor is purchased, annual revenues
$19,600
will increase by $10,000 and annual operating expenses will decrease by $10,000. What is the net cash
flow in year 1?

Pixaire purchased a new mixer to replace an older system. The older system, which cost
$100,000, is 5 years old now and was being depreciated over a MACRS life at 7 years. The
new mixer, which will cost $270,000, will also be depreciated as a 7-year asset for MACRS
purposes. The new mixer is expected to increase revenues by $64,000 with no additional
operating expenses. Determine the net operating cash flows in year 2 for the new mixer.
$61,277
Assume a 40% tax rate. Use the rounded MACRS schedule listed below:
(7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

A poker player calls a large bet early in the hand and another large bet later in the hand.
At the end of the hand, her opponent makes a small bet. The poker player is almost
positive that her opponent has superior cards, but she decides to call the small bet Sunk costs should not be considered
when evaluating a project.
anyway, reasoning that she cannot fold because she has already invested so much money
in the hand. The poker player's reasoning error is analogous to a manager violating which
of the following principles of cash flow estimation?

Projects are often classified based on the type of

capital expenditure. All of the following are project to meet the needs of customers
classifications EXCEPT projects generated ____.
Projects that begin with an initial investment
and then are expected to generate a stream normal
of cash inflows are considered ____ projects.

Raider Productions has to decide whether to

build its warehouse in Dallas or Houston. This mutually exclusive projects
decision falls into the class of ____

A recent survey of Fortune 500 firms

the majority produced detailed cash
regarding their cash flow estimation
flow projections
procedures indicated that ____.
Ripstart is replacing an old, fully depreciated stamping line with a more efficient machine that will cost
$245,000. The line will be depreciated as a 7-year MACRS asset. With the increased production,
Ripstart expects revenues to increase by $55,000, and operating expenses to increase by $20,000. The

$75,615
MACRS depreciation rate during the fifth year is 8.93%, and the accumulated MACRS depreciation after
five years totals 77.69 percent of the cost of the asset. Assume the firm's marginal tax rate is 40
percent and that the company does get to take the full benefit of year 5 depreciation. If Ripstart
expects to sell the new machine at the end of year 5 for $40,000, what will be the net cash flow in the
fifth year?

Rough & Tumble Clothiers is considering the purchase of a new loom to replace a less
efficient one. The new machine will cost $240,000 including installation. The machine being

$202,614
replaced was purchased 5 years ago for $150,000 and is being depreciated as a 7-year
MACRS property. It can be sold for $40,000. Compute the NINV for this project if KC has
a marginal tax rate of 40%. Use the rounded MACRS schedule listed below:
(7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

Rupp Pumps is purchasing an extruder for $80,000. The extruder will

require an expenditure of $12,000 for installation and $4,000 for
training new operators. The new equipment will require an increase of $102,000
$5,000 in inventory, $4,000 in accounts receivable, and $3,000 in
accounts payable. What is the net investment for this project?

Sale of an asset for less than book value creates an

the loss; the company's marginal tax
operating loss that effectively reduces the
company's taxes by an amount equal to ____ times ____. rate

Seduck has just replaced a set of hydraulic screens that had been in operation for 6 years
with a newer screening system that cost $180,000 installed. The old system cost $140,000

$157,200
and had been depreciated as a 10-year MACRS asset. Its salvage value is $10,000. What is
the NINV for the new equipment? Assume a 40% tax rate. Use the rounded MACRS
schedule listed below:
(10-Year Depreciation Schedule: 10%, 18%, 14%, 12%, 9%, 7%, 7%, 7%, 7%, 6%, 3%)

The set of investment projects arranged in

descending order according to their simplified capital budgeting model
expected rates of return is known as the ____.

Shunt Technology will spend $800,000 on a piece of equipment that will

manufacture fine wire for the electronics industries. The shipping and
installation charges will be $240,000 and net working capital will increase
$48,000.The equipment will replace an existing machine that has a salvage $996,000
value of $75,000 and a book value of $125,000. If Shunt has a current
marginal tax rate of 34 percent, what is the net investment?
Ten years ago J-Bar Company purchased a lathe for $250,000. It was being
depreciated on a straight-line basis to an estimated $25,000 salvage value
over a 15-year period. The firm is considering selling the old lathe and
purchasing a new one. The new lathe would cost $500,000. The firm's $400,000
marginal tax rate 40 percent. Determine the net investment required to
purchase the new lathe, if the old lathe is sold for $100,000.

A term meaning that the firm has limited

funds and must choose only those capital rationing
projects that will be profitable is ____.

The ____ the amount of depreciation

charged in a period, the ____ will be the greater; lower
firm's taxable income.

The total accumulated net working

capital of a project is normally last
recovered in the project's ____ year.

The Weis Corp. purchased a new conveyor system to replace an older less automated system. The old
system, which was 10 years old, was being depreciated on a straight-line basis over its 20-year life at
$25,000 per year. The new system will be depreciated as a 7-year asset for MACRS purposes. The more
efficient machine, which costs $520,000 installed, will reduce operating costs by $74,000 per year.
Compute the net cash flows in year 3 for the new system. Assume a 40% tax rate. Use the rounded $71,840
MACRS schedule listed below:
(7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

What is the net investment for an extruder that costs $42,000, if

shipping costs are $1,500 and installation is $4,800? Assume this
efficient machine is replacing an older extruder with a book and $48,300
market value of zero. The replacement investment will reduce
operating costs by $6,600 a year.

What is the net investment required for a pitting machine that will
cost $35,000 including installation? The machine replaces a
machine that cost $5,000 when purchased five years ago. The 31,400
old machine has been fully depreciated but has a market value
of $6,000. Assume the marginal tax rate is 40 percent.

What type of tax consequence is

associated with the recovery of net There is no tax consequence.
working capital?

When a firm sells an asset for ____, it

realizes a capital gain and must pay more than its original cost
income taxes on it.

When calculating the net cash flow in a after-tax salvage value of any project
project's expected final year, the ____. equipment is considered
When managers knowingly bias estimates of cash
departing from the shareholder wealth
flows from investment projects in order to serve
their personal objectives, they are ____. maximization goal

Which of the following is a basic

Cash flows should be measured on an
principle when estimating a project's
incremental basis
cash flows?

Which of the following is generally 1. Uncertainty about the value of future cash flows
2. Bias in the estimation of cash flows
considered a problem associated with 3. Different levels of uncertainty among different
cash flow estimation? types of projects

Which of the following is NOT a major choosing an appropriate criterion for

difficulty in implementing the basic selecting among various investment
capital budgeting model? alternatives

Which of the following is NOT a major analyzing the effect of a project on the
step in the capital budgeting process firm's financial ratios

Which of the following items is NOT

considered as a part of the net the first year's net cash flow
investment calculation?

Which of the following would not be

classified as a capital expenditure for purchase of 90-day Treasury bills
decision-making purposes?