Chapter 10 Making Capital Investment Decisions

NPVInflows = $56,400/1.155 + $75,900/1.1552
NPVInflows = $105,726.65

PI = $105,726.65/$109,200
PI = .97

Since the PI is less than the requirement, the project should be rejected.
142) C
PVInflows = $60,800/1.13 + $62,300/1.132 + $75,000/1.133
PVInflows = $154,574.11

PI = $154,574.11/$152,000
PI = 1.02

Since the PI is greater than 1, the project should be accepted.
143) B
PVInflows = $4,600/1.14 + $3,300/1.142 + $3,800/1.143
PVInflows = $9,139.22

PI = $9,139.22/$9,200
PI = .99

Student name:
1) SheltonCompany purchased a parcel of land six years ago for $878,500. At that time, the
firm invested $150,000 in grading the site so that it would be usable. Since the firm wasn't ready
to use the site itself at that time, it decided to lease the land for $56,500 a year. The company is
now considering building a warehouse on the site as the rental lease is expiring. The current
value of the land is $930,000. What value should be included in the initial cost of the warehouse
project for the use of this land?
1)

, A) $0
B) $930,000
C) $878,500
D) $1,028,500
E) $1,080,000



Question Details
AACSB : Analytical Thinking
Difficulty : 1 Basic
Topic : Cash flows
Learning Objective : 10-01 Determine the relevant cash flows for a proposed project.
Section : 10.2 Incremental Cash Flows
Bloom's : Understand




2) You own a house that you rent for $1,150 per month. The maintenance expenses on the
house average $210 per month. The house cost $221,000 when you purchased it 4 years ago. A
recent appraisal on the house valued it at $243,000. If you sell the house you will incur $19,440
in real estate fees. The annual property taxes are $2,600. You are deciding whether to sell the
house or convert it for your own use as a professional office. What value should you place on
this house when analyzing the option of using it as a professional office?
2)


A) $243,000
B) $219,600
C) $223,560
D) $221,000
E) $0



Question Details
AACSB : Analytical Thinking
Difficulty : 1 Basic
Topic : Cash flows
Learning Objective : 10-01 Determine the relevant cash flows for a proposed project.
Section : 10.2 Incremental Cash Flows
Bloom's : Understand

,3) Bubbly Waters currently sells 310 Class A spas, 460 Class C spas, and 210 deluxe model
spas each year. The firm is considering adding a mid-class spa and expects that if it does, it can
sell 385 units per year. However, if the new spa is added, Class A sales are expected to decline to
230 units while the Class C sales are expected to increase to 485. The sales of the deluxe model
will not be affected. Class A spas sell for an average of $12,100 each. Class C spas are priced at
$6,100 and the deluxe models sellfor $17,100 each. The new mid-range spa will sell for $8,100.
What annual sales figure should you use in your analysis?
3)


A) $3,118,500
B) $4,239,000
C) $3,934,000
D) $815,500
E) $2,303,000



Question Details
AACSB : Analytical Thinking
Difficulty : 1 Basic
Topic : Cash flows
Learning Objective : 10-01 Determine the relevant cash flows for a proposed project.
Section : 10.2 Incremental Cash Flows
Bloom's : Understand




4) McCanless Company recently purchased an asset for $2,550,000 that will be used in a 3-
year project. The asset is in the 4-year MACRS class. The depreciation percentage each year is
33.33 percent, 44.45 percent, 14.81 percent, and 7.41 percent, respectively. What is the amount
of depreciation in Year 2?
4)

, A) $188,955
B) $377,655
C) $1,133,475
D) $849,915
E) $850,000



Question Details
AACSB : Analytical Thinking
Difficulty : 1 Basic
Topic : Depreciation
Learning Objective : 10-01 Determine the relevant cash flows for a proposed project.
Section : 10.3 Pro Forma Financial Statements and Project Cash Flows
Bloom's : Understand




5) A company purchased an asset for $3,400,000 that will be used in a 3-year project. The
asset is in the 3-year MACRS class. The depreciation percentage each year is 33.33 percent,
44.45 percent, and 14.81 percent, respectively. What is the book value of the equipment at the
end of the project?
5)


A) $755,480
B) $251,940
C) $0
D) $2,266,780
E) $3,148,060



Question Details
AACSB : Analytical Thinking
Difficulty : 1 Basic
Topic : Depreciation
Learning Objective : 10-01 Determine the relevant cash flows for a proposed project.
Section : 10.3 Pro Forma Financial Statements and Project Cash Flows
Bloom's : Understand