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# FIN 370 Week 5 Apply: Week 5 Exercise

FIN 370 Week 5 Apply: Week 5 Exercise

Review the Week 5 “Knowledge Check” in Connect® in preparation for this assignment.

Complete the Week 5 “Exercise” in Connect®.

Note: You have only one attempt available to complete this assignment. Grades must be transferred manually to eCampus by your instructor. Don’t worry, this might happen after your due date.

Equipment was purchased for \$50,000 plus \$2,500 in freight charges. Installation costs were \$1,500 and sales tax totaled \$1,000. Hiring a special consultant to provide advice during the selection of the equipment cost \$3,000. What is this asset’s depreciable basis?

Multiple Choice

\$58,000

\$57,000

\$51,000

\$55,000

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:

Multiple Choice

committed cost.

sunk cost.

complementary cost.

obligated cost.

Effects that arise from a new product or service that decrease sales of the firm’s existing products or services are referred to as:

Multiple Choice

complementary effects.

sunk effects.

substitutionary effects.

marginal effects.

Your company is considering a new project that will require \$100,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of \$25,000 using straight-line depreciation. The cost of capital is 11 percent, and the firm’s tax rate is 34 percent. Estimate the present value of the tax benefits from depreciation.

Multiple Choice

\$16,997.13

\$15,017.54

\$14,841.29

\$13,607.52

Accelerated depreciation allows firms to:

Multiple Choice

receive less of the dollars of depreciation earlier in the asset’s life.

receive more of the dollars of depreciation later in the asset’s life.

receive more of the dollars of depreciation earlier in the asset’s life.

not pay any taxes during an asset’s life.

You are trying to pick the least expensive car for your new delivery service. You have two choices: the Scion xA, which will cost \$13,000 to purchase and which will have OCF of −\$1,200 annually throughout the vehicle’s expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost \$23,000 to purchase and which will have OCF of −\$550 annually throughout that vehicle’s expected five-year life. Both cars will be worthless at the end of their life. If you intend to replace whichever type of car 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 16 percent, what is the difference in the EAC of the two cars?

Multiple Choice

\$428.04

\$586.07

\$381.36

\$601.51

Which of the following statements is correct?

Multiple Choice

A weakness of both payback and discounted payback is that neither accounts for cash flows received after the payback.

Discounted payback uses a more aggressive reinvestment rate assumption than payback.

Neither payback nor discounted payback uses time value of money concepts.

None of the statements are correct.

Compute the NPV for Project X with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

Time       0          1          2          3          4

Cash Flow      –\$    100,000              \$     36,000               \$     200,000              \$     210,000              \$     10,000

________________________________________

Multiple Choice

\$262,622.77

\$248,962.50

\$183,507.96

\$247,410.67

Compute the MIRR for Project Y and accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent.

Time:      0     1     2     3     4     5

Cash flow:      −5,000    1,000      1,000      0     2,000      2,000

Multiple Choice

47.09 percent, accept

7.62 percent, reject

47.09 percent, reject

7.62 percent, accept

Compute the PI statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

Time:      0     1     2     3     4     5

Cash flow:      −75  −75  0     100  75    50

Multiple Choice

18.96 percent, accept

13.26 percent, accept

10 percent, reject

14.22 percent, accept

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