Question 5 Sanford & Son Inc. is thinking about expanding their business by opening another shop on property they purchased 10 years ago. Which of the following items should be included in the analysis of this endeavor?a.The property was cleared of trees and brush 5 years ago at a cost of $5,000.b.The new shop is expected to affect the profitability of the existing shop since some current customers will transfer their business to the new shop. Sanford and Son estimate that profits at the existing shop will decrease by 10 percent.c.Sanford & Son can lease the entire property to another company (that wants to grow flowers on the lot) for $5,000 per year.d.Both statements b and c should be included in the analysis.e.All of the statements above should be included in the analysis.1 points Question 6 The Target Copy Company is contemplating the replacement of its old printing machine with a new model costing $60,000. The old machine, which originally cost $40,000, has 6 years of expected life remaining and a current book value of $30,000 versus a current market value of $24,000. Target’s corporate tax rate is 40 percent. If Target sells the old machine at market value, what is the initial after-tax outlay for the new printing machine?a.-$22,180b.-$30,000c.-$33,600d.-$36,000e.-$40,0001 points Question 7 Stanton Inc. is considering the purchase of a new machine which will reduce manufacturing costs by $5,000 annually and increase sales by $6,000 annually. Stanton will use the MACRS method to depreciate the machine, and it expects to sell the machine at the end of its 5-year operating life for $10,000 before taxes. Stanton’s marginal tax rate is 40 percent, and it uses a 9 percent cost of capital to evaluate projects of this type. If the machine’s cost is $40,000, what is the project’s NPV?a.$1,014b.$2,292c.$7,550d.$ 817e.$5,0401 points Question 8 Klott Company encounters significant uncertainty with its sales volume and price in its primary product. The firm uses scenario analysis in order to determine an expected NPV, which it then uses in its budget. The base case, best case, and worse case scenarios and probabilities are provided in the table below. What is Klott’s expected NPV, standard deviation of NPV, and coefficient of variation of NPV?ProbabilityUnit SalesSalesNPVof OutcomeVolumePrice(In Thousands)Worst case0.306,000$3,600-$6,000Base case0.5010,0004,200+13,000Best case0.2013,0004,400+28,000a.Expected NPV = $35,000; sNPV = 17,500; CVNPV = 2.00.b.Expected NPV = $35,000; sNPV = 11,667; CVNPV = 0.33.c.Expected NPV = $10,300; sNPV = 12,083; CVNPV = 1.17.d.Expected NPV = $13,900; sNPV = 8,476; CVNPV = 0.61.e.Expected NPV = $10,300; sNPV = 13,900; CVNPV = 1.35.1 points Question 9 Scenario 13-1The information below applies to the following problem(s).The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer’s price is $40,000, and it falls into the MACRS 3-year class. Purchase of the computer would require an increase in net operating working capital of $2,000. The computer would increase the firm’s before-tax revenues by $20,000 per year but would also increase operating costs by $5,000 per year. The computer is expected to be used for 3 years and then be sold for $25,000. The firm’s marginal tax rate is 40 percent, and the project’s cost of capital is 14 percent.Refer to Scenario 13-1. What is the net investment required at t = 0?a.-$42,000b.-$40,000c.-$38,600d.-$37,600e.-$36,6001 points Question 10 Scenario 13-1The information below applies to the following problem(s).The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer’s price is $40,000, and it falls into the MACRS 3-year class. Purchase of the computer would require an increase in net operating working capital of $2,000. The computer would increase the firm’s before-tax revenues by $20,000 per year but would also increase operating costs by $5,000 per year. The computer is expected to be used for 3 years and then be sold for $25,000. The firm’s marginal tax rate is 40 percent, and the project’s cost of capital is 14 percent.Refer to Scenario 13-1. What is the operating cash flow in Year 2?a.$ 9,000b.$10,240c.$11,687d.$13,453e.$16,2001 points Question 11 Scenario 13-1The information below applies to the following problem(s).The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer’s price is $40,000, and it falls into the MACRS 3-year class. Purchase of the computer would require an increase in net operating working capital of $2,000. The computer would increase the firm’s before-tax revenues by $20,000 per year but would also increase operating costs by $5,000 per year. The computer is expected to be used for 3 years and then be sold for $25,000. The firm’s marginal tax rate is 40 percent, and the project’s cost of capital is 14 percent.Refer to Scenario 13-1. What is the total value of the terminal year non-operating cash flows at the end of Year 3?a.$18,120b.$19,000c.$21,000d.$25,000e.$27,0001 points Question 12 Scenario 13-1The information below applies to the following problem(s).The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer’s price is $40,000, and it falls into the MACRS 3-year class. Purchase of the computer would require an increase in net operating working capital of $2,000. The computer would increase the firm’s before-tax revenues by $20,000 per year but would also increase operating costs by $5,000 per year. The computer is expected to be used for 3 years and then be sold for $25,000. The firm’s marginal tax rate is 40 percent, and the project’s cost of capital is 14 percent.Refer to Scenario 13-1. What is the project’s NPV?a.$2,622b.$2,803c.$2,917d.$5,712e.$6,4381 points Question 13 The Unlimited, a national retailing chain, is considering an investment in one of two mutually exclusive projects. The discount rate used for Project A is 12 percent. Further, Project A costs $15,000, and it would be depreciated using MACRS. It is expected to have an after-tax salvage value of $5,000 at the end of 6 years and to produce after-tax cash flows (including depreciation) of $4,000 for each of the 6 years. Project B costs $14,815 and would also be depreciated using MACRS. B is expected to have a zero salvage value at the end of its 6-year life and to produce after-tax cash flows (including depreciation) of $5,100 each year for 6 years. The Unlimited’s marginal tax rate is 40 percent. What risk-adjusted discount rate will equate the NPV of Project B to that of Project A? [Hint: Ask me in class!]a.15%b.16%c.18%d.20%e.12%
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