PART I Assume an asset costs $38,700 and has a current book value of $18,209. Th
ID: 2784393 • Letter: P
Question
PART I
Assume an asset costs $38,700 and has a current book value of $18,209. The asset is sold today for $15,000 cash. The tax rate is 34 percent. As a result of this sale, the company’s net cash flow will
A. increase by exactly $15,000.
B. decrease by the difference between the $18,209 and the $15,000.
C. increase by more than $15.000.
D. increase by less than $15,000.
E. decrease by some amount.
PART II
Uptown Furniture purchased a corner lot 5 years ago at a cost of $670,000. The lot was recently appraised at $640,000. At the time of the purchase, the company spent $45,000 to grade the lot and another $100,000 to pave the lot for commuter parking. The company now wants to build a new retail store on the site. The building cost is estimated at $1.6 million. What amount should be used as the initial cash flow for this building project?
A. $2,415,000
B. $1,600,000
C. $2,385,000
D. $2,240,000
E. $2,270,000
PART III
Julian's has spent $47,200 to design a new airline carryon bag. It spent another $56,500 testing various materials for their durability. An additional $75,000 was spent on test marketing to determine both the market demand and color preference. Since the test marketing proved successful, the firm is now compiling data to evaluate the addition of this bag to its production runs. The estimated production start up costs are $932,300 with annual costs thereafter of $57,000. The discount rate is 11 percent and the estimated life of the project is 5 years. What value should be used for the Time 0 cash flow?
A. $932,300
B. $1,217,300
C. $654,973
D. $1,036,000
E. $1,111,000
Explanation / Answer
Part I:
C.Increase by more than $15,000.
(this is because apart from $receiving $15,000, we can also avail tax benefits on capital loss of ($18,209 -15,000=>$3,209)@34%.
Part II:
D.$2,240,000.
initial cash flow for the building = cost of building + appraisal value
=>$1,600,000+$640,000
=>$2,240,000.
Part III:
A.-$932,000.
ONly the startup costs are relevant and the remaining costs, such as design costs
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