Question : 85.Event Supplies evaluating a renovation of its retail store. The : 1302830

85.Event Supplies is evaluating a renovation of its retail store. The cost of the renovation is estimated to be $290,000 and will be depreciated over 8 years using the straight-line method. The renovation is expected to generate additional annual revenue of $86,500, annual operating cash flows are expected to increase by $50,775, and net income is expected to increase by $14,525 per year. The company’s income tax rate is 30% and its minimum required rate of return is 9%. To which of the following amounts is the internal rate of return of the renovation closest?

A.5.7%

B.8.2%

C.25%

D.16%

86.Why does depreciation have an indirect effect on cash flows?

A.It reduces the amount of income taxes a company must pay.

B.It reduces the original cash outflow associated with the asset.

C.It reduces the annual operating cash flows.

D.It causes net income to be less than operating cash flows.

87.Maxson, Inc.’s revenues are collected when they are earned and its operating expenses are paid when they are incurred. Which of the following summarizes the calculation of operating cash flows if the income tax rate is 30%?

A.Revenues – operating expenses + income taxes = Operating cash flows

B.Net income – income taxes + depreciation = Operating cash flows

C.Net income – depreciation = Operating cash flows

D.Revenues – operating expenses – income taxes + depreciation = Operating cash flows

88.Why may worthwhile investment opportunities be rejected if inflation is ignored?

A.Inflation effects generally increase estimated future cash flows, which increases the NPV and the likelihood of acceptance.

B.The payback period for projects will be shorter than it would be if the future cash flow amounts were adjusted for inflation, which decreases the likelihood of acceptance.

C.Inflation effects generally reduce future profits and operating cash flows making the NPV smaller than if inflation is ignored, which in turn decreases the likelihood of acceptance.

D.Estimated future cash flows adjusted for inflation have larger NPVs, which increases the likelihood of rejection.

89.Which one of the following is a long-run decision that is not a capital budgeting decision, for which time value of money analyses are appropriate?

A.Decision to drop a product line

B.Decision to repave a parking lot

C.Decision to acquire a patent from a competitor

D.Decision to hire additional workers

90.Celebration Cruises wants to acquire a new tender at a cost $425,000. The tender will have an estimated salvage value at the end of its 8-year life of $50,000. It is expected that annual incremental income before taxes will be $36,000. Celebration Cruises plans to make the purchase on January 1, 2014. The company’s cost of capital is 9% and the required rate of return is 10%. The income tax rate is 32%. How much is the depreciation tax shield for 2014?

A.$17,000

B.$46,875

C.$53,125

D.$15,000

91.A company is considering investing in a piece of machinery that will cost $550,000. It will provide an additional $160,000 in sales each year and its annual cash operating expenses are expected to be $52,000. Management plans to depreciate the machine on a straight-line basis over a 10-year life with no estimated salvage value. The company has a 40% tax rate. How much is net annual operating cash flow expected if the machinery is acquired?

A.$64,800

B.$96,000

C.$86,800

D.$118,000

92.Sunny Farms is considering investing in a chicken plucker machine that will cost $300,000. The investment will provide an additional $90,000 in sales annually. Sunny Farms’ annual cash operating expenses are expected to be $22,000. The machine will be depreciated on a straight-line basis over a 10-year life with a $12,000 estimated salvage value. The company has a 30% tax rate and its required rate of return is 10%. How much is the annual depreciation tax shield?

A.$9,600

B.$8,640

C.$28,800

D.$30,000

93.A company is considering investing in a piece of machinery costing $400,000. The investment will provide an additional $142,000 in additional sales each year and its annual cash operating expenses are expected to be $51,000. The machine will be depreciated on a straight-line basis over an 8-year life with no estimated salvage value. The company has a 40% tax rate. How much are annual operating cash flows?

A.$54,600

B.$24,600

C.$4,600

D.$74,600

94.Testor Labs determined it would recover its investment of a new laboratory at 12.5 years. What did Testor Labs calculate?

A.The breakeven point

B.The payback period

C.The net present value

D.The accounting return period