The following information applies to the next seven problems.)

You must evaluate a proposal to buy a new machine. Its base price is $50,000, installation costs would add another $10,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $40,000. The depreciation rates would thus be 33%, 45%, 15% and 7% for the first 4 years. The machine would require $8,000 increase in net working capital. Marginal tax rate is 40% and WACC is 10%. In addition, Fixed costs are expected to be $50,000 each year, and the firm spent $10,000 last year on market research. The below is expected information about the project.

Year 1 2 3

Price 120 120 120

Quantity 500 450 600

Variable Cost 20000 18000 24000

1. The Initial Cash Outlay is *

a. 40,000

b. 50,000

c. 60,000

d. 68,000

e. None of the above

2. Find the project's cash flows at t = 1. *

a. $1000

b. -$1920

c. $1920

d. -$17880

e. None of the above

3. Find the project's cash flows at t = 2. *

a. $2400

b. $2700

c. $3400

d. All of the above

e. None of the above

4. Find the project's cash flows at t = 3. *

a. $2400

b. $2700

c. $3400

d. All of the above

e. None of the above

5. Find the terminal Cash Flow at t = 3. *

a. $2400

b. $4200

c. $33680

d. $36,380

e. None of the above

6. The project's NPV is *

a. $37163

b. -$37163

c. $48000

d. $2000

e. None of the above

7. Would you accept the project? *

a. Yes since NPV> WACC

b. No since NPV

c. Yes since NPV>0

d. No since NPV<0

e. None of the above

8. Which of the following statements is CORRECT? As a firm increases the operating leverage used to produce a given quantity of output, this *

a. normally leads to an increase in its fixed assets turnover ratio.

b. normally leads to a decrease in its business risk.

c. normally leads to a decrease in the standard deviation of its expected EBIT.

d. normally leads to a decrease in the variability of its expected EPS.

e. normally leads to a reduction in its fixed assets turnover ratio.

9. Adams Audio is considering whether to make an investment in a new type of technology. Which of the following factors should the company consider when it decides whether to undertake the investment? *

a. The company has already spent $3 million researching the technology.

b. The new technology will affect the cash flows produced by its other operations.

c. ignoring this investment allows the company to sell one of its laboratories for $2 million.

d. Statements b and c should be considered.

e. All of the statements above should be considered.

10. Southampton Inc. is considering the replacement of its old, fully depreciated machine. Two new projects are available: Project L, which has a cost of $100,000, a 3-year expected, and after-tax cash flows of $60,000 per year, and Project J, which has a cost of $320,000, a 6-year life, and after-tax cash flows of $83,000 per year. Assume that both projects can be repeated, and that machine prices are not expected to rise. Assume the companys WACC is 12%. Which Project would you accept if they are mutually exclusive? *

a. Project L since EAAL > EAAJ.

b. Project J since EAAL < EAAJ.

c. Both projects since EAA of both projects is positive.

d. Neither project.

e. None of the above