51. A project produces annual net income of $9,500, $12,500, and $15,500 over the three years of its life, respectively. The initial cost of the project is $260,400. This cost is depreciated straight-line to a zero book value over three years. What is the average accounting rate of return if the required discount rate is 7 percent? 9.60 percent AAR ($9,500 $12,500 $15,500) 3 = 9.60 percent .5 ($260,400 0) 52. The Winston Co. is considering two mutually exclusive projects with the following cash flows. The crossover rate is _____ and if the required rate is higher than the crossover rate then project _____ should be accepted. Year 0 1 2 3 Project AProject B Cash Flow Cash Flow -$75,000 -$60,000 $30,000 $25,000 $35,000 $30,000 $35,000 $25,000 13.94 percent; B Year 0 1 2 3 Project A Cash Flow -$75,000 $30,000 $35,000 $35,000 Project B Cash Flow Difference -$60,000 -$15,000 $25,000 $ 5,000 $30,000 $ 5,000 $25,000 $10,000 Cash flows for (A-B): Cash flows for A: Cash flows for B: CF0 -$15,000 CF0 -$75,000 CF0 -$60,000 C01 $ 5,000 C01 $30,000 C01 $25,000 F01 1 F01 1 F01 1 C02 $ 5,000 C02 $35,000 C02 $30,000 F02 1 F02 1 F02 1 C03 $10,000 C03 $35,000 C03 $25,000 F03 1 F03 1 F03 1 IRR CPT I = 15 I = 15 13.94 percent NPV CPT NPV CPT $565.05 $861.35 The crossover rate is 13.94 percent. At a rate higher than the crossover rate, such as 15 percent, Project B will have the higher NPV and should be accepted. 53. Which of the following are examples of an incremental cash flow? I. an increase in accounts receivable II. a decrease in net working capital III. an increase in taxes IV. a decrease in the cost of goods sold e. I, II, III, and IV 54. The book value of an asset is primarily used to compute the: amount of tax due on the sale of an asset. 55. Jamestown Ltd. currently produces boat sails and is considering expanding its operations to include awnings for homes and travel trailers. The company owns land beside its current manufacturing facility that could be used for the expansion. The company bought this land ten years ago at a cost of $250,000. Today, the land is valued at $425,000. The grading and excavation work necessary to build on the land will cost $15,000. The company currently has some unused equipment which it currently owns valued at $60,000. This equipment could be used for producing awnings if $5,000 is spent for equipment modifications. Other equipment costing $780,000 will also be required. What is the amount of the initial cash flow for this expansion project? $1,285,000 CF0 = $425,000 + $15,000 + $60,000 + $5,000 + $780,000 = $1,285,000 56. Sun Lee’s Furniture just purchased some fixed assets classified as 5-year property for MACRS. The assets cost $24,000. What is the amount of the depreciation expense for the third year? MACRS 5-year property Year Rate 1 20.00% 2 32.00% 3 19.20% 4 11.52% 5 11.52% 6 5.76% $4,608 Depreciation for year 3 = $24,000 .1920 = $4,608 57. An analysis of what happens to the estimate of the net present value when you consider the best case and the worst case situations is called _____ analysis. scenario 58. The degree to which a firm relies on fixed production costs is called its: operating leverage. 59. Sensitivity analysis is conducted by: changing the value of a single variable and computing the resulting change in the current value of a project. 60. Which of the following statements are correct concerning the accounting break-even point? I. The net income is equal to zero at the accounting break-even point. II. The net present value is equal to zero at the accounting break-even point. III. The quantity sold at the accounting break-even point is equal to the total fixed costs plus depreciation divided by the contribution margin. IV. The quantity sold at the accounting break-even point is equal to the total fixed costs divided by the contribution margin. I and III only