# 1. If a firm has already paid an expense or is obligated to pay one in the...

## Question:

1. If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a

A. Committed cost

B. Complementary cost

C. Obligated cost

D. Sunk cost

2. You are trying to pick the least-expensive machine for your company. You have two choices: machine A, which will cost $50,000 to purchase and which will have OCF of -$3,500 annually throughout the machine's expected life of three years; and machine B, which will cost $75,000 to purchase and which will have OCF of -$4,900 annually throughout that machine's four-year life. Both machines will be worthless at the end of their life. If you intend to replace whichever type of machine you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 14 percent, which one should you choose?

A. Machine A

B. Machine B

C. Both Machine A and B

D. Neither Machine A nor B

3. You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $20,000 initially, and then $4,000 per year in maintenance costs. Machine B costs $25,000 initially, has a life of three years, and requires $3500 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine. Which is the better machine for the firm? The discount rate is 14% and the tax rate is zero.

A. Machine A

B. Machine B

C. Both Machines A and B

D. Neither Machine A nor B

4. Your firm needs a machine which costs $100,000, and requires $25,000 in maintenance for each year of its 3-year life. After 3 years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. Assume a tax rate of 35% and a discount rate of 14%. What is the depreciation tax shield for this project in year 3?

A. $2,073.40

B. $5,183.50

C. $9,626.50

D. $14,810.00

5. Your firm needs a machine which costs $90,000, and requires $30,000 in maintenance for each year of its 5-year life. After 5 years, this machine will be replaced. The machine falls into the MACRS 5-year class life category. Assume a tax rate of 35% and a discount rate of 13%. What is the depreciation tax shield for this project in year 5?

A. $471.74

B. $1,347.84

C. $3,628.80

D. $6,739.20

**Related Book For**