question 21

A proposed power-saving equipment has a purchase price of $520,000 and installation cost of $60,000. The equipment will be used in a four-year project but is classified as five-year MACRS property for tax purposes. The equipment is expected to save $280,000 before taxes per year in energy costs, and it will have a salvage value of $60,000 at the end of the project. To decide on the feasibility of the investment, the managers have ordered a series of tests to determine whether the proposed equipment will realize the required costs savings or not for a total cost of $18,000. The required rate of return on the equipment is 14% and it is expected to increase working capital by $45,000 at the beginning of the project. The tax rate is 35 percent and the MACRS depreciation schedule is as follows:

Year	1	2	3	4	5	6
MACRS	20.00%	32.00%	19.20%	11.52%	11.52%	5.76%

The operating cash flow in year 1 is:

Question 21 options:

1)

$222,600

2)

$224,800

3)

$232,875

4)

$245,050

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Question 23 (3.33 points)

Which of the following statements is CORRECT?

Question 23 options:

1)	If a company assigns the same cost of capital to all of its projects regardless of each projects risk, then the company is likely to reject some safe projects that it actually should accept and to accept some risky projects that it should reject.

2)	Because of the risk of bankruptcy, the cost of debt is always higher than the cost of equity capital.

3)	Since debt capital is riskier than equity capital, the after-tax cost of debt is always greater than the WACC.

4)	Because no flotation costs are required to obtain capital as retained earnings, the cost of retained earnings is generally lower than the after-tax cost of debt.