1. If the net present value of a project is positive (nonzero), then the project's:

A. PI will be less than 1.

B. internal rate of return will exceed its required rate of return.

C. costs exceed its benefits.

D. discounted payback period will exceed the life of the project.

E. payback period must equal the life of the project.

2. Which of these are disadvantages of the payback method?

I. May ignore some cash flows

II. Required time period is set arbitrarily

III. Easy to compute

IV. Ignores the time value of money

A. IV only

B. I and III only

C. II and IV only

D. II, III, and IV only

E. I, II, and IV only

3. Projects A and B are mutually exclusive, have positive net present values and required discounted

payback periods that exceed the projected discounted payback periods. Which project(s), if either,

should the firm accept?

A. Both A and B

B. Neither A nor B

C. A, but not B

D. B, but not A

E. Either A or B but not both A and B

4. Projects A and B require an initial investment of $48,000 and $98,000, respectively. The projects are

mutually exclusive and both have positive net present values. Which of these methods is probably the

best method to use to determine which project to accept?

A. Payback

B. Modified IRR

C. AAR

D. Incremental IRR

E. IRR

5. The discount rate that makes the net present value of an investment exactly equal to zero is called

the:

A. profitable rate of return.

B. internal rate of return.

C. average accounting return.

D. profitability index.

E. riskfree rate.

6. The present value of an investment's future cash flows divided by the initial cost of the investment is

called the:

A. average accounting return.

B. internal rate of return.

C. profitability index.

D. profile period.

E. net present value.

7. All else constant, the net present value of a typical investment project increases when:

A. the discount rate increases.

B. each cash inflow is delayed by one year.

C. the initial cost of a project increases.

D. the rate of return decreases.

E. all cash inflows are moved to the last year of the project.

8. One advantage of the payback method of project analysis is the method's:

A. application of a discount rate to each separate cash flow.

B. bias towards liquidity.

C. difficulty of use.

D. arbitrary cutoff point.

E. consideration of all relevant cash flows.

9. The net present value of a project is projected at $210. How should this amount be interpreted?

A. The project's cash inflows exceed its outflows by $210.

B. The project will return an accounting profit of $210.

C. The project's discounted cash flows are $210 less than its undiscounted cash flows.

D. The project will increase the firm's cash account by $210 when the project is started.

E. The project is earning $210 in addition to the project's required rate of return.

10. The internal rate of return:

A. is more reliable as a decision making tool than net present value when considering mutually

exclusive projects.

B. is the discount rate that makes the net present value of a project equal to one.

C. is easier to apply than net present value when cash flows are unconventional.

D. will provide the same accept/reject decision as NPV when cash flows are conventional and

projects are independent.

E. is influenced by daily changes in the market rate of interest.

11. Two mutually exclusive projects produce the same positive NPV at a discount rate of 11.34 percent.

Both projects have 4year lives. Project A has larger cash flows than Project B in the first two years.

Given this information, you know that:

A. it makes no difference which project you accept as long as the discount rate does not exceed

11.34 percent.

B. Project A should always be preferred.

C. one project will be preferred at rates less than 11.34 percent and the other will be preferred at

higher rates.

D. Project B must require a smaller investment than Project A at Time 0.

E. Project B should only be accepted if the discount rate is 11.34 percent.

12. Analysis using the profitability index:

A. frequently conflicts with the accept and reject decisions generated by the application of the net

present value rule.

B. is useful as a decision tool when investment funds are limited.

C. cannot be used to aid capital structure decisions.

D. utilizes the same basic variables as those used in the average accounting return.

E. produces results which typically are difficult to comprehend or apply.

13. Uptown Developers is considering two projects. Project A consists of building a wholesale book

outlet on the firm's downtown lot. Project B consists of building a sitdown restaurant on that same lot.

The lot can only accommodate one of the projects. When trying to decide whether to build the book

outlet or the restaurant, management should rely most heavily on the analysis results from which one of

these methods?

A. Profitability index

B. Internal rate of return

C. Payback

D. Net present value

E. Accounting rate of return

14. You are considering a project with the following data: IRR = 8.7 percent; PI = .98; NPV = $393;

Payback period = 2.44 years. Which one of the following statements is correct given this information?

A. The discount rate used in computing the net present value must have been less than 8.7

percent.

B. The discounted payback period will have to be less than 2.44 years.

C. The discount rate used to compute the profitability ratio was equal to the internal rate of

return.

D. This project should be accepted based on the profitability ratio.

E. The required rate of return must be greater than 8.7 percent.

15. Two key weaknesses of the internal rate of return rule are the:

A. arbitrary determination of a discount rate and failure to consider initial expenditures.

B. failure to correctly analyze mutually exclusive projects and the multiple rate of return problem.

C. failure to consider all cash flows and the multiple rate of return problem.

D. failure to consider initial expenditures and failure to correctly analyze mutually exclusive

projects.

E. failure to correctly analyze mutually exclusive projects and the lack of clearcut decision rule.

16. A project has an initial cost of $12,100 and cash flows of $2,100, $5,800, $16,600, and $800 for

Years 1 to 4, respectively. How many IRR's will this project have?

A. 0

B. 1

C. 2

D. 3

E. 4

17. Baxter's Market is considering opening a new location with an initial cost of $428,700. This location

is expected to generate cash flows of $132,400, $161,500, $187,800, and $201,000 in Years 1 to 4. What

is the payback period?

A. 1.86 years

B. 2.72 years

C. 1.31 years

D. 2.54 years

E. 2.31 years

18. Rodriquez's Hot Rods is considering a new project with an initial cost of $26,410 and a discount rate

of 8 percent. The project is expected to have one cash inflow of $42,500 in Year 2. What is the

discounted payback period?

A. .72 years

B. 1.39 years

C. .62 years

D. 1.72 years

E. 1.62 years

19. Bloomfield Tires has assigned a discount rate of 14.4 percent to a new project that has an initial cost

of $229,000 and cash flows of $74,300, $128,700, and $89,500 for Years 1 to 3, respectively. What is the

net present value of this project?

A. $1,308.16

B. $8,344.40

C. $5,934.79

D. $5,127.10

E. $4,899.03

20. Project Water has an initial cost of $639,700 and projected cash flows of $288,000, $319,000, and

$165,000 for Years 1 to 3, respectively. Project Aqua has an initial cost of $411,200 and projected cash

flows of $186,000, $178,000, and $145,000 for Years 1 to 3, respectively. What is the incremental IRR of

these two mutually exclusive projects?

A. 8.67%

B. 10.93%

C. 8.77%

D. 1.06%

E. 2.335

21. A project has an initial cost of $38,300 and anticipated cash flows of $9,200, $18,700, $14,600 for

Years 1 to 3, respectively. What is the profitability index value if the required return is 9.5 percent?

A. .86

B. .92

C. .99

D. 1.09

E. 1.16

22. Project Q has an initial cost of $211,415 and projected cash flows of $121,300 in Year 1 and

$176,300 in Year 2. Project R has an initial cost of $415,000 and projected cash flows of $187,500 in Year

1 and $236,600 in Year 2. The discount rate is 8.5 percent and the projects are independent. Which

project(s), if either, should be accepted based on its profitability index value?

A. Accept both Project Q and R

B. Reject both Project Q and R

C. Accept Project Q and reject Project R

D. Accept Project R and reject Project Q

E. Accept either Project R or Project Q, but not both

23. A project costs $22,900 to initiate. It is expected to provide cash flows of $15,900 in Year 1 and

$9,900 in Year 2. In Year 3, it will cost the firm $5,500 to end the project. What is the modified IRR at a

discount rate of 14 percent?

A. 6.79%

B. 6.67%

C. 10.63%

D. 11.08%

E. 14.00%

24. A project requires an initial investment of $21,600 and will produce cash inflows of $4,900, $14,200,

and $8,700 over the next three years, respectively. What is the project's NPV at a required return of 14

percent?

A. $287.22

B. $503.06

C. $6,200.00

D. $21,096.94

E. $42,696.94

25. A project will not produce any cash flows for two years. Starting in the third year, it will produce

annual cash flows of $11,900 a year for two years. The project initially costs $43,600. In Year 6, the

project will be closed and as a result should produce a final cash inflow of $50,500. What is the net

present value of this project if the required rate of return is 8.7 percent?

A. $5,474.76

B. $4,802.57

C. $3,935.56

D. $7,465.95

E. $5,447.76

26. You are considering two independent projects. The required rate of return is 11.25 percent for

project A and 11.85 percent for project B. Project A has an initial cost of $38,900 and cash inflows of

$11,400, $16,900, and $26,200 for Years 1 to 3, respectively. Project B has an initial cost of $41,300 and

cash inflows of $20,000 a year for three years. Which project(s), if either, should you accept?

A. Accept both A and B

B. Reject both A and B

C. Accept A and reject B

D. Accept B and reject A

E. Accept either A or B but not both A and B

27. Toy Town is considering a new toy that will cost $49,100 in startup costs. The toy is expected to

produce cash flows of $47,500 in Year 1 and $18,600 in Year 2. The toy will be discontinued after the

second year. The discount rate assigned to the toy is 14.9 percent. Should the toy be produced? What is

the IRR?

A. Yes; 26.65%

B. Yes; 41.79%

C. Yes; 38.03%

D. No; 26.65%

E. No; 41.79%

28. You are considering two independent projects. The required return for both projects is 13 percent.

Project A has an initial cost of $139,600 and cash inflows of $48,200, $54,600, and $68,700 for Years 1 to

3, respectively. Project B has an initial cost of $94,200 and cash inflows of $67,600 and $41,200 for Years

1 and 2, respectively. Given this information, which one of the following statements is correct based on

the NPV and IRR methods of analysis?

A. You should accept both projects.

B. You should accept Project A and reject Project B.

C. You should accept Project B and reject Project A.

D. NPV indicates accept Project A while IRR indicates accepting Project B.

E. You should reject both projects.

29. A new product has startup costs of $338,200 and projected cash flows of $102,000, $187,500, and

$245,000 for Years 1 to 3, respectively. What is the profitability index given a 9 percent required return?

A. .71

B. .77

C. 1.16

D. 1.30

E. 1.41

30. Miller's is considering a 2year expansion project that will require $410,000 up front. The project will

produce cash flows of $358,000 and $98,000 for Years 1 and 2, respectively. Based on the profitability

index (PI) rule, should the project be accepted if the discount rate is 12 percent? Why or why not?

A. Yes; because the PI is 1.03

B. Yes; because the PI is .97

C. Yes; because the PI is .94

D. No; because the PI is 1.03

E. No; because the PI is .97

31. A project has an initial cost of $10,800 and produces cash inflows of $4,100, $4,800, and $5,600

over Years 1 to 3, respectively. What is the discounted payback period if the required rate of return is 11

percent?

A. 2.13 years

B. 2.34 years

C. 2.78 years

D. 2.91 years

E. Never

32. Project A has an initial cost of $16,400 and cash flows of $5,100, $6,800, and $6,900 for Years 1 to 3,

respectively. Project B has an initial cost of $21,200 and cash flows of $8,300, $7,900, and $7,700 for

Years 1 to 3, respectively. What is the incremental IRR?

A. 2.89%

B. 4.07%

C. 5.91%

D. 6.75%

E. 7.90%

33. The WalkUp Window is considering two mutually exclusive projects. Project A has an initial cost of

$49,230 and annual cash flows of $31,200 for three years. Project B has an initial cost of $21,400 and

annual cash flows of $21,400 for two years. What is the crossover rate?

A. 26.18%

B. 29.39%

C. 15.44%

D. 20.49%

E. 15.86%

34. Project I has an initial cash outflow of $18,300 and annual cash flows of $8,700 for Years 1 to 3.

Project II has an initial cash outflow of $25,400 and annual cash flows of $10,500 for Years 1 to 3. These

projects are mutually exclusive. The required rate of return is 11 percent. Based on the incremental

NPV(II I), which project(s) should be accepted and why?

A. Project II; because the incremental NPV(II I) is negative

B. Project I; because both the incremental NPV(II I) and NPVI are positive

C. Both Project I and II; because both project NPVs are positive

D. Project II; because it has the larger NPV

E. Project I; because the incremental NPV(II I) is negative and NPVI is positive

35. A project is expected to have annual cash flows of $22,400, $13,600 and $4,200 for Years 1 to 3,

respectively. The initial cash outlay is $27,500 and the discount rate is 12 percent. What is the modified

IRR?

A. 13.12%

B. 13.22%

C. 2.73%

D. 8.67%

E. 9.75%

36. Global Enterprises has spent $134,000 on research developing a new type of shoe. For this shoe to

now be manufactured, the firm will need to expand into an empty building that it currently owns. The

firm was offered $229,000 last week for that building. An additional $342, 000 will be required for new

equipment and building improvements. Labor and material costs are estimated at $4.98 per pair of

shoes. Interest expense on the loan needed to finance the production of this new shoe will be $17,800 a

year. Which one of these correctly identifies the sunk costs?

A. $229,000 value of the building

B. $134,000 for research

C. $229,000 value of the building plus $342,000 for new equipment and improvements

D. $17,800 for interest plus $134,000 for research

E. $229,000 for the building plus $134,000 for research

37. Bloomfield's has some equipment sitting idle in a warehouse. The equipment is fully paid for and

also fully depreciated. If the firm decides to use this equipment for a new project, what cost, if any,

should the firm include in its startup costs for the project?

A. There is no cost to the project for this equipment.

B. The original purchase price of the equipment should be included in the startup costs.

C. The original purchase price minus any tax savings realized to date on the depreciation should be

included in the startup costs.

D. The current market value of the equipment should be included in the startup costs.

E. The annual storage cost for the equipment should be included as a cash inflow in the startup

costs.

38. The most valuable investment given up if an alternative investment is chosen is referred to as a(n):

A. sunk cost.

B. opportunity cost.

C. salvage value expense.

D. equivalent annual cost.

E. erosion cost.

39. The cash flows of a new project that come at the expense of a firm's existing projects are called:

A. opportunity costs.

B. net working capital expenses.

C. erosion costs.

D. salvage value expenses.

E. sunk costs.

40. Which one of these statements is correct?

A. Operating cash flow is equal to net income plus depreciation plus taxes.

B. Sunk costs should be included in the initial cost of a project.

C. Synergy occurs when a new product reduces the sales of a current product.

D. The cost of test marketing a product prior to deciding whether or not to produce the product is

a sunk cost.

E. Real cash flows must be discounted at the nominal rate.

41. Which one of these statements related to depreciation is correct for a firm with taxable income of

$121,600 and aftertax income of $74,200?

A. Depreciation increases the net book value of the firm's assets.

B. Depreciation in a noncash expense that increases the firm's cash flows.

C. Depreciation lowers the firm's net income but does not affect its cash flows.

D. Depreciation has no effect on either the firm's net income or its cash flows.

E. Depreciation decreases both the firm's net income and its cash flows.

42. The cash flows for a project include the:

A. net operating cash flow generated by the project, less both sunk and erosion costs.

B. incremental operating cash flow, as well as the capital spending and net working capital

requirements.

C. net income generated by the project plus the annual depreciation expense.

D. sunk costs, opportunity costs, and erosion costs of the project.

E. incremental operating cash flow and aftertax salvage value of the project.

43. The incremental cash flows of a project are best defined as:

A. the cash received from the additional sales generated by the project.

B. any change in a firm's cash flows resulting from the addition of the project including opportunity

costs.

C. the cash received or lost from changes in the sales of a firm's current products as a result of

adding the project.

D. the increase or decrease in a firm's cash flows resulting from adding the project, excluding all

sunk and opportunity costs.

E. the total cash flows of a firm once the new project is completely integrated into the firm's

operations.

44. Which one of the following is an example of an incremental cash flow for Project A?

A. The insurance on a building the company currently owns that will house the operations for

Project A

B. The property taxes on a currently owned warehouse that has been sitting idle but is going to be

utilized by Project A

C. The cost of the test marketing to ascertain whether or not Project A is feasible

D. The rental cost of some new machinery that will be acquired for Project A

E. The contractual annual salary of the company president

45. Assume an asset cost $41,500 and has a current book value of $23,200. The asset is sold today for

$19,900 cash. The firm's tax rate is 34 percent. As a result of this sale, the firm's net cash flow:

A. will increase by exactly $19,900.

B. will decrease by the difference between the $23,200 and the $19,900.

C. will increase by more than $19,900.

D. will increase by less than $19,900.

E. will decrease by some amount.

46. Which of the following should be included in the analysis of a project?

I. Sunk costs

II. Opportunity costs

III. Erosion costs

IV. Incremental costs

A. I and II only

B. III and IV only

C. II and IV only

D. II, III, and IV only

E. I, II, and IV only

47. Changes in net working capital:

A. are included in project analysis only if they represent cash outflows.

B. only affect the initial cash flows of a project.

C. can affect the cash flows of a project every year of the project's life.

D. are generally excluded from project analysis due to their irrelevance to the total project.

E. affect the initial and the final cash flows of a project but not the cash flows of the middle years.

48. The book value of an asset is primarily used to compute the:

A. annual depreciation tax shield.

B. amount of tax due on the sale of an asset.

C. amount of tax saved annually due to the depreciation expense.

D. amount of cash that can be received from the sale of an asset.

E. change in depreciation needed to reflect the market value of the asset.

49. All else equal, a project's operating cash flow will increase when the:

A. net working capital requirement increases.

B. sales projections are lowered.

C. interest expense is lowered.

D. depreciation expense increases.

E. earnings before interest and taxes decreases.

50. The topdown approach to computing the operating cash flow:

A. applies only if a project produces sales.

B. ignores all noncash items.

C. can only be used if the entire cash flows of a firm are included.

D. is equal to sales costs taxes depreciation.

E. includes the interest expense related to a project.

51. Toni's Tools is comparing machines to determine which one to purchase. The machines sell for

differing prices, have differing operating costs, differing machine lives, and will be replaced when worn

out. These machines should be compared using:

A. net present value only.

B. both net present value and the internal rate of return.

C. the replacement parts approach.

D. the depreciation tax shield approach.

E. the equivalent annual cost method.

52. Which one of these is a requirement when computing the net present value of a capital project?

A. The discount rate used must be a nominal rate.

B. The discount rate must be stated in real terms.

C. Nominal cash flows must be discounted using a real rate.

D. Real cash flows must be converted to nominal cash flows.

E. Real cash flows must be discounted using a real rate.

53. When compiling the relevant cash flows for a project, the aftertax value of any asset sold any time

during the life of the project should be treated as:

A. a cash outflow at Time 0.

B. a change in net working capital.

C. a reduction in the cash flow for Time 0.

D. a cash flow in the last year of the project.

E. a cash flow in the year of sale.

54. Dilwater Furniture purchased a corner lot in Pittsburg five years ago at a cost of $890,000. The lot

was recently appraised at $1,070,000. At the time of the purchase, the company spent $80,000 to grade

the lot and another $120,000 to pave the lot for commuter parking. The company now wants to build a

new retail store on the site. The building cost is estimated at $1.8 million. What amount should be used

as the initial cash flow for this building project?

A. $3,070,000

B. $1,070,000

C. $1,800,000

D. $2,870,000

E. $2,890,000

55. Aaron's Paint paid $320,000, in cash, for a piece of equipment three years ago. Last year, the

company spent $34,000 to update the equipment with the latest technology. The equipment is being

depreciated using the straightline method over seven years. The company no longer uses this

equipment in its current operations and has received an offer of $175,000 from a firm that would like to

purchase it. Aaron's is debating whether to sell the equipment or to expand its operations such that the

equipment can be used. When evaluating the expansion option, what value, if any, should be assigned

to this equipment as an initial cost of the expansion project?

A. $364,000

B. $179,000

C. $175,000

D. $187,000

E. $212,000

56. Walks Softly sells customized shoes. Currently, it sells 16,000 pairs of shoes annually at an average

price of $68 a pair. The company is considering adding a lowerpriced line of shoes that will sell for $39 a

pair. Walks Softly estimates it can sell 7,000 pairs of the lowerpriced shoes but will sell 1,000 less pairs

of the higherpriced shoes by doing so. What is the amount of the sales that should be used when

evaluating the addition of the lowerpriced shoes?

A. $205,000

B. $245,000

C. $313,000

D. $273,000

E. $1,293,000

57. Farris Industrial purchased a machine five years ago at a cost of $164,900. The machine is being

depreciated using the straightline method over eight years. The tax rate is 35 percent and the discount

rate is 14 percent. If the machine is sold today for $42,500, what will the aftertax salvage value be?

A. $35,731.88

B. $27,625.00

C. $49,268.13

D. $63,696.88

E. $52,011.18

58. Turkey Hill Motor Homes currently sells 1,200 Class A motor homes, 2,600 Class C motor homes,

and 4,000 popup trailers each year. It is considering adding a midrange camper and expects that if it

does so the firm can sell 1,500 of them. However, if the new camper is added, the firm expects its Class

A sales to decline by 10 percent while the Class C camper sales decline to 2,100 units. The sales of popups

will not be affected. Class A motor homes sell for an average of $162,000 each. Class C homes are

priced at $59,500 and the popups sell for $5,500 each. The new midrange camper will sell for $32,900.

What is the erosion cost?

A. $36,250,000

B. $49,190,000

C. $49,350,000

D. $160,000

E. $118,000

59. Ernie's Electrical is evaluating a project that will increase sales by $39,000 and costs by $6,000. The

project will initially cost $102,000 for fixed assets that will be depreciated straightline to a zero book

value over the 10year life of the project. The applicable tax rate is 35 percent. What is the operating

cash flow for this project?

A. $13,300

B. $21,450

C. $25,020

D. $11,550

E. $18,180

60. Kurt's Kabinets is looking at a project that will require $80,000 in fixed assets and another $20,000

in net working capital. The project is expected to produce sales of $138,000 with associated costs of

$74,000. The project has a 4year life. The company uses straightline depreciation to a zero book value

over the life of the project. The tax rate is 34 percent. What is the operating cash flow for this project?

A. $42,240

B. $62,240

C. $35,440

D. $49,040

E. $69,040

61. Ripley Co. is considering a project that will produce sales of $21,000 and increase cash expenses by

$8,600. If the project is implemented, the firm's taxes will increase from $23,000 to $27,000 and

depreciation will increase from $4,000 to $5,500. What is the amount of the operating cash flow using

the topdown approach?

A. $6,900

B. $8,400

C. $12,400

D. $10,900

E. $9,900

62. A project will increase sales by $60,000 and cash expenses by $41,000. The project will cost $40,000

and be depreciated using straightline depreciation to a zero book value over the 4year life of the

project. The company has a marginal tax rate of 35 percent. What is the operating cash flow of the

project using the tax shield approach?

A. $12,350

B. $8,650

C. $15,850

D. $13,150

E. $10,350

63. A project will increase annual sales by $144,000 and cash expenses by $95,000 for four years. The

project has an initial cost of $102,000 for equipment that will be depreciated using MACRS depreciation.

The applicable MACRS table values are .1429, .2449, .1749, and .1249 for Years 1 to 4, respectively. The

company has a marginal tax rate of 34 percent. What is the depreciation tax shield for Year 3?

A. $3,925.59

B. $6,065.53

C. $11,774.27

D. $8,288.16

E. $4,955.77

64. You purchased an asset three years ago at a cost of $135,000 and sold it today for $82,500. The

equipment is 5year property for MACRS. The MACRS table values are .2000, .3200, .1920, .1152, .1152,

and .0576 for Years 1 to 6, respectively. Which one of the following statements is correct if tax rate is 34

percent?

A. The current book value is $64,800.

B. The taxable amount on the sale is $38,880.

C. The tax due on the sale is $14,830.80.

D. The book value today is $8,478.

E. The aftertax salvage value is $24,049.20.

65. Kustom Cars purchased a fixed asset two years ago for $39,000 and sold it today for $19,000. The

assets are classified as 5year property for MACRS. The MACRS table values are .2000, .3200, .1920,

.1152, .1152, and .0576 for Years 1 to 6, respectively. What is the net cash flow from the salvage value if

the tax rate is 35 percent?

A. $18,020

B. $19,098

C. $18,720

D. $18,902

E. $19,000

66. A project is expected to create operating cash flows of $24,500 a year for three years. The initial

cost of the fixed assets is $55,000. These assets will be worthless at the end of the project. An additional

$4,000 of net working capital will be required throughout the life of the project. What is the project's

net present value if the required rate of return is 10 percent?

A. $4,933.13

B. $1,954.17

C. $1,927.87

D. $4,208.11

E. $5,927.87

67. A project will produce operating cash flows of $42,000 a year for four years. During the life of the

project, inventory will be lowered by $12,000, accounts receivable will increase by $15,000, and

accounts payable will increase by $10,000. The project requires $120,000 of new equipment that will be

depreciated straightline to a zero book value over four years. At the end of the project, net working

capital will return to its normal level and the equipment will be sold for $25,000, after taxes. What is the

net present value given a required return of 14 percent?

A. $13,483.48

B. $18,117.05

C. $20,033.36

D. $12,037.86

E. $14,322.49

68. Thornley Co. is considering a 3year project with an initial cost of $587,000. The project will not

directly produce any sales but will reduce operating costs by $265,000 a year. The equipment is

classified as MACRS 7year property. The MACRS table values are .1429, .2449, .1749, .1249, .0893,

.0892, .0893, and .0446 for Years 1 to 8, respectively. At the end of the project, the equipment will be

sold for an estimated $295,000. The tax rate is 34 percent and the required return is 9 percent. An extra

$23,000 of inventory will be required for the life of the project. What is the total cash flow for Year 3?

A. $491,782.87

B. $496,208.19

C. $514,782.87

D. $519,208.19

E. $523,008.24

69. Assume the initial cost of one customized tool and die machine is $684,000 and costs $12,600 a year

to operate. Each machine has a life of three years before it is replaced. Ignore taxes. What is the

equivalent annual cost of this machine if the required return is 14 percent?

A. $237,750.85

B. $268,411.15

C. $307,220.33

D. $240,600.00

E. $289,038.11

70. DeCento's is analyzing two machines to determine which one it should purchase. Whichever

machine is purchased will be replaced at the end of its useful life. The company requires a 12 percent

rate of return and uses straightline depreciation to a zero book value over the life of the machine.

Machine A has a cost of $276,000, annual operating costs of $18,000, and a 3year life. Machine B costs

$220,000, has annual operating costs of $22,000, and a 2year life. The firm currently pays no taxes.

Which machine should be purchased and why?

A. Machine A; because it will save the company about $18,600 a year

B. Machine A; because it will save the company about $19,261 a year

C. Machine B; because it will save the company about $21,202 a year

D. Machine B; because it will save the company about $19,315 a year

E. Machine B; because it will save the company about $18,667 a year

71. JADO Mfg. is trying to decide which one of two machines to purchase. Machine A costs $421,000,

has a 5year life, and requires $108,000 in pretax annual operating costs. Machine B costs $589,000, has

a 4year life, and requires $92,000 in pretax annual operating costs. Either machine will be depreciated

using the straightline method to zero over its life. Neither machine will have any salvage value.

Whichever machine is selected, it will never be replaced. The discount rate is 13 percent and the tax rate

is 35 percent. Which machine should be purchased and why?

A. Machine A; because its NPV is about $49,320 higher than Machine B's NPV

B. Machine A; because its NPV is about $38,319 higher than Machine B's NPV

C. Machine A; because its EAC is about $89.989 lower than Machine B's EAC

D. Machine B; because its EAC is about $68,360 lower than Machine A's EAC

E. Machine B; because its NPV is about $45,880 higher than Machine A's NPV

72. Margarite's Enterprises is considering a new project that will require $345,000 for new fixed assets,

$160,000 for inventory, and $35,000 for accounts receivable. Shortterm debt is expected to increase by

$110,000. The project has a 5year life. The fixed assets will be depreciated straightline to zero over the

life of the project. At the end of the project, the fixed assets can be sold for 25 percent of their original

cost. The net working capital returns to its original level at the end of the project. The project is

expected to generate annual sales of $550,000 and costs of $430,000. The tax rate is 35 percent and the

required rate of return is 15 percent. What is the initial cost of this project?

A. $330,000

B. $430,000

C. $580,000

D. $360,000

E. $650,000