FIN 480 UPDATED STUDY EXAM GUIDE QUESTIONS
AND ANSWERS SURE A+
✔✔Edward's Manufactured Homes purchased some machinery 2 years ago for
$51,000. The assets are classified as 5-year property for MACRS. The company is
replacing this machinery today with newer machines that utilize the latest in technology.
The old machines are being sold for $16,000 to a foreign firm for use in its production
facility in South America. What is the aftertax salvage value from this sale if the tax rate
is 34 percent?
MACRS 5-year property
Year Rate
1 20.00%
2 32.00%
3 19.20%
4 11.52%
5 11.52%
6 5.76% - ✔✔$18,883.20
Book value2 = $51,000 x (1 - 0.20 - 0.32) = $24,480.00
Tax on sale = ($16,000 - $24,480.00) x .34 = -$2,883.20
Aftertax cash flow = $16,000 + $2,883.20 = $18,883.20
✔✔Camille's Café is considering a project that will not produce any sales but will
decrease cash expenses by $12,000. If the project is implemented, taxes will increase
from $23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. What is
the amount of the operating cash flow using the top-down approach? - ✔✔$10,500
OCF = $0 ?(?$12,000) - ($24,500 ?23,000) = $10,500
✔✔Assume a firm has no interest expense or extraordinary items. Given this, the
operating cash flow can be computed as: - ✔✔Net income + Depreciation.
✔✔Ben's Border Café is considering a project that will produce sales of $16,000 and
increase cash expenses by $10,000. If the project is implemented, taxes will increase
from $23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. What is
the amount of the operating cash flow using the top-down approach? - ✔✔$4,500
OCF = $16,000 ?10,000 ?($24,500 ?23,000) = $4,500
✔✔The equivalent annual cost method is useful in determining: - ✔✔which one of two
machines to purchase when the machines are mutually exclusive, have different
machine lives, and will be replaced once they are worn out.
✔✔Peter's Boats has sales of $760,000 and a profit margin of 5 percent. The annual
depreciation expense is $80,000. What is the amount of the operating cash flow if the
company has no long-term debt? - ✔✔$118,000
OCF = ($760,000 �.05) + $80,000 = $118,000
, ✔✔Jamie's Motor Home Sales currently sells 1,100 Class A motor homes, 2,200 Class
C motor homes, and 2,800 pop-up trailers each year. Jamie is considering adding a
mid-range camper and expects that if she does so she can sell 1,500 of them. However,
if the new camper is added, Jamie expects that her Class A sales will decline to 850
units while the Class C camper sales decline to 2,000. The sales of pop-ups will not be
affected. Class A motor homes sell for an average of $140,000 each. Class C homes
are priced at $59,500 and the pop-ups sell for $5,000 each. The new mid-range camper
will sell for $42,900. What is the erosion cost of adding the mid-range camper? -
✔✔$46,900,000
Erosion cost = [(1,100 ?850) �$140,000] + [(2,200 ?2,000) �$59,500] = $46,900,000
✔✔Ronnie's Coffee House is considering a project which will produce sales of $6,000
and increase cash expenses by $2,500. If the project is implemented, taxes will
increase by $1,300. The additional depreciation expense will be $1,000. An initial cash
outlay of $2,000 is required for net working capital. What is the amount of the operating
cash flow using the top-down approach? - ✔✔$2,200
OCF = $6,000 ?2,500 ?1,300 = $2,200
✔✔Walks Softly sells customized shoes. Currently, it sells 14,800 pairs of shoes
annually at an average price of $59 a pair. It is considering adding a lower-priced line of
shoes that will be priced at $39 a pair. Walks Softly estimates it can sell 6,000 pairs of
the lower-priced shoes but will sell 3,500 less pairs of the higher-priced shoes by doing
so. What annual sales revenue should be used when evaluating the addition of the
lower-priced shoes? - ✔✔$27,500
Sales = (6,000 �$39) + (?3,500 � $59) = $27,500
✔✔Wexford Industrial Supply is considering a new project with estimated depreciation
of $33,000, fixed costs of $35,000, and total sales of $75,000. The variable costs per
unit are estimated at $5.00. What is the accounting break-even level of production? -
✔✔1,400 units
Qaccounting break even = $35,000 + $33,000 = $75,000 - ($5.00 × Q)
✔✔Stellar Plastics is analyzing a proposed project. The company expects to sell 11,000
units, give or take 4 percent. The expected variable cost per unit is $7.00 and the
expected fixed cost is $36,000. The fixed and variable cost estimates are considered
accurate within a plus or minus 4 percent range. The depreciation expense is $33,000.
The tax rate is 34 percent. The sale price is estimated at $16.00 a unit, give or take 3
percent.
What is the operating cash flow for a sensitivity analysis using total fixed costs of
$32,000? - ✔✔$55,440.00
OCF = [(11,000 x ($16.00 - $7.00)] - $32,000][1- .34] +($33,000 x .34) = $55,440.00
✔✔Including the option to expand in your project analysis will tend to: - ✔✔increase the
net present value of a project.
AND ANSWERS SURE A+
✔✔Edward's Manufactured Homes purchased some machinery 2 years ago for
$51,000. The assets are classified as 5-year property for MACRS. The company is
replacing this machinery today with newer machines that utilize the latest in technology.
The old machines are being sold for $16,000 to a foreign firm for use in its production
facility in South America. What is the aftertax salvage value from this sale if the tax rate
is 34 percent?
MACRS 5-year property
Year Rate
1 20.00%
2 32.00%
3 19.20%
4 11.52%
5 11.52%
6 5.76% - ✔✔$18,883.20
Book value2 = $51,000 x (1 - 0.20 - 0.32) = $24,480.00
Tax on sale = ($16,000 - $24,480.00) x .34 = -$2,883.20
Aftertax cash flow = $16,000 + $2,883.20 = $18,883.20
✔✔Camille's Café is considering a project that will not produce any sales but will
decrease cash expenses by $12,000. If the project is implemented, taxes will increase
from $23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. What is
the amount of the operating cash flow using the top-down approach? - ✔✔$10,500
OCF = $0 ?(?$12,000) - ($24,500 ?23,000) = $10,500
✔✔Assume a firm has no interest expense or extraordinary items. Given this, the
operating cash flow can be computed as: - ✔✔Net income + Depreciation.
✔✔Ben's Border Café is considering a project that will produce sales of $16,000 and
increase cash expenses by $10,000. If the project is implemented, taxes will increase
from $23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. What is
the amount of the operating cash flow using the top-down approach? - ✔✔$4,500
OCF = $16,000 ?10,000 ?($24,500 ?23,000) = $4,500
✔✔The equivalent annual cost method is useful in determining: - ✔✔which one of two
machines to purchase when the machines are mutually exclusive, have different
machine lives, and will be replaced once they are worn out.
✔✔Peter's Boats has sales of $760,000 and a profit margin of 5 percent. The annual
depreciation expense is $80,000. What is the amount of the operating cash flow if the
company has no long-term debt? - ✔✔$118,000
OCF = ($760,000 �.05) + $80,000 = $118,000
, ✔✔Jamie's Motor Home Sales currently sells 1,100 Class A motor homes, 2,200 Class
C motor homes, and 2,800 pop-up trailers each year. Jamie is considering adding a
mid-range camper and expects that if she does so she can sell 1,500 of them. However,
if the new camper is added, Jamie expects that her Class A sales will decline to 850
units while the Class C camper sales decline to 2,000. The sales of pop-ups will not be
affected. Class A motor homes sell for an average of $140,000 each. Class C homes
are priced at $59,500 and the pop-ups sell for $5,000 each. The new mid-range camper
will sell for $42,900. What is the erosion cost of adding the mid-range camper? -
✔✔$46,900,000
Erosion cost = [(1,100 ?850) �$140,000] + [(2,200 ?2,000) �$59,500] = $46,900,000
✔✔Ronnie's Coffee House is considering a project which will produce sales of $6,000
and increase cash expenses by $2,500. If the project is implemented, taxes will
increase by $1,300. The additional depreciation expense will be $1,000. An initial cash
outlay of $2,000 is required for net working capital. What is the amount of the operating
cash flow using the top-down approach? - ✔✔$2,200
OCF = $6,000 ?2,500 ?1,300 = $2,200
✔✔Walks Softly sells customized shoes. Currently, it sells 14,800 pairs of shoes
annually at an average price of $59 a pair. It is considering adding a lower-priced line of
shoes that will be priced at $39 a pair. Walks Softly estimates it can sell 6,000 pairs of
the lower-priced shoes but will sell 3,500 less pairs of the higher-priced shoes by doing
so. What annual sales revenue should be used when evaluating the addition of the
lower-priced shoes? - ✔✔$27,500
Sales = (6,000 �$39) + (?3,500 � $59) = $27,500
✔✔Wexford Industrial Supply is considering a new project with estimated depreciation
of $33,000, fixed costs of $35,000, and total sales of $75,000. The variable costs per
unit are estimated at $5.00. What is the accounting break-even level of production? -
✔✔1,400 units
Qaccounting break even = $35,000 + $33,000 = $75,000 - ($5.00 × Q)
✔✔Stellar Plastics is analyzing a proposed project. The company expects to sell 11,000
units, give or take 4 percent. The expected variable cost per unit is $7.00 and the
expected fixed cost is $36,000. The fixed and variable cost estimates are considered
accurate within a plus or minus 4 percent range. The depreciation expense is $33,000.
The tax rate is 34 percent. The sale price is estimated at $16.00 a unit, give or take 3
percent.
What is the operating cash flow for a sensitivity analysis using total fixed costs of
$32,000? - ✔✔$55,440.00
OCF = [(11,000 x ($16.00 - $7.00)] - $32,000][1- .34] +($33,000 x .34) = $55,440.00
✔✔Including the option to expand in your project analysis will tend to: - ✔✔increase the
net present value of a project.
