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1. Ina decision analysis situation, which of the following would be
relevant costs?
I. Unavoidable fixed costs
II. Potential productivity loss due to employee morale
II. Opportunity costs
(A) I, UH, and II
(B) I and III
(C) Land III
(D) III only
53
54 ) McGraw-Hill Education 500 Business Environment and Concepts Questions
Use the following facts to answer Questions 192-195.
Battaglia Corporation is considering the acquisition of a new machine. The
machine can be purchased for $100,000; it will cost $4,000 to install and $7,000
to transport to Battaglia’s plant. It is estimated that the machine will last 10 years,
and it is expected to be worth $4,000 after it’s fully depreciated. Over its 10-year
life, the machine is expected to produce 3,000 units per year with a selling price
of $300 and combined material and labor costs of $250 per unit. Federal tax
regulations permit machines of this type to be depreciated using the straight-line
method over 7 years with no consideration for salvage value. Battaglia has a
marginal tax rate of 30 percent.
2. What is the net cash outflow at the beginning of the first year that
Battaglia Corporation should use in a capital budgeting analysis?
(A) $100,000 (B) $107,000 (C) $111,000
(D) $97,500
3. How much depreciation should Battaglia include in the calculation of
after-tax cash flow in its capital budgeting analysis for Year 2?
(A) $15,857 (B) $13,059 (C) $11,500 (D) $11,100
4. What is the net cash flow for the second year that Battaglia should use in
a capital budgeting analysis?
(A) $150,000
(B) $109,757
(C) $134,143
(D) $40,243
5. What is the net cash flow for Year 10 of the project that Battaglia should
use in a capital budgeting analysis?
(A) $105,000
(B) $107,800
(C) $109,800
(D) $109,000
Financial Management <¢ 55
6. Crellin Inc. is considering purchasing a new machine to replace an older,
197,
198.
199.
ineficient model. The new machine has a cost of $320,000. The old
machine has a value of $9,500. Which of the following costs would NOT
be included in a capital budgeting analysis as part of the net cash outflow
of the new machine?
I. Transportation cost of the new machine
II. Installation cost of the new machine
III. Depreciation expense times the tax rate
(A) II only
(B) Land III
(C) I and II
(D) None of the above
Herbie’s Auto Shop purchased an asset for $90,000 that has no salvage
value and a 10-year life. Herbie’s effective income tax rate is 30 percent,
and it uses the straight-line depreciation method for income tax reporting
purposes. For book purposes, Herbie will also depreciate this asset using
the straight-line method, and there is an expected salvage value of $10,000.
Herbie’s annual depreciation tax shield from the asset would be
(A) $9,000
(B) $2,700
(C) $6,300
(D) $2,400
Most capital budgeting techniques, including net present value, focus on
I. cash flow »
II. net income
III. earnings before interest and taxes
(A) Land III
(B) Land II
(C) I only
(tating, tL
In equipment replacement decisions, which of the following costs are
relevant?
I. Original fair market value of the old equipment
II. Current salvage value of the old equipment:
III. Operating costs of the new equipment
IV. Cost of the new equipment
(A) I, II, Ill, and IV
(B) IL and III
(Cet ead Ly
(D) Ib I and ny
56 ) McGraw-Hill Education 500 Business Environment and Concepts Questions
200. Olney Company owns land that could be developed in the future. Olney
estimates it can sell the land to Ritter Inc. for $950,000 net of all selling
costs. If the land is not sold, Olney will continue with its plans to build
three single-family homes on the land. If Olney decided to develop the
property, what type of cost would the potential selling price of the land
represent in Olney’s decision?
(A) Sunk
(B) Incremental
(C) Opportunity
(D) Variable
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