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New Corporate Finance Online 1St Edition Eakins Test Bank Full Chapter PDF
New Corporate Finance Online 1St Edition Eakins Test Bank Full Chapter PDF
1) Projects should be evaluated on the basis of accounting profits, as these profits actually cover the
company's obligations.
Answer: TRUE
Comment: Annual cash inflows aren't the same as accounting earnings. Annual cash inflows adjust the
accounting earnings for depreciation.
Diff: 1
Section: 1
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
2) An outlay for installation costs is not considered part of the depreciable basis of the asset to be
purchased.
Answer: FALSE
Comment: Installation and shipping costs are considered part of the initial cost of acquiring the asset and
are depreciated as if they were included in the initial cost of the item.
Diff: 1
Section: 1.1
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
3) The book value of an asset is equal to the asset's after-tax proceeds, provided after the asset has been
sold.
Answer: FALSE
Comment: The book value is the initial purchase price minus accumulated depreciation.
Diff: 1
Section: 1.1
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
1
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4) Operating cash flow (OCF) is calculated by adding back depreciation to the net operating profit after
taxes.
Answer: TRUE
Comment: When calculating operating cash flows, you subtract depreciation from EBITDA (Gross profit)
and add it back to net operating profit after tax. The reason you first subtract depreciation and then add it
back is to adjust taxable income so that the correct tax amount will be computed.
Diff: 1
Section: 1.2
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
5) Droids-R-Us Inc. (DRU), is considering the installation of a new production line to make service
mechanoids. The cost of the new manufacturing equipment is $2.2 million. The machines are classified as
7-year properties. (MACRS rates are provided in the table, below.) The machines will be purchased at the
beginning of 2014. (DRU uses a mid-year placed-in-service convention.) DRU's engineers estimate that
the new assembly line could be ready for operations in early 2014. Annual EBITDA is forecasted to be
$1.3M for 2014 and all subsequent years of the project. DRU's marginal tax rate is 35%. What is the value
of the depreciation tax shield in 2015? (Do NOT assume that the equipment is salvaged in 2015.) Round
your answers to the nearest dollar.
A) $110,033
B) $188,573
C) $134,673
D) $314,380
E) $538,780
Answer: B
Comment: First determine the amount of depreciation:
Depr = d × C0
2015 is the second year of the asset's life so d = 0.2449
Depr = 0.2449 × $2,200,000 = $538,780.
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6) When the sale of an asset is equal to its book value, a firm will have to pay taxes on recaptured
depreciation.
Answer: FALSE
Comment: No taxable gain results when the sale of an asset is equal to its book value. The firm has not
recaptured any depreciation in this transaction.
Diff: 1
Section: 1.3
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
3
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9) A corporation has decided to replace an existing machine with a newer model. The old machine had an
initial purchase price of $35,000, and has $20,000 in accumulated depreciation. If the 40% tax rate applies
to the corporation and the old asset can be sold for $10,000, what will be the tax effect of the replacement?
A) No effect
B) Loss of $2,000
C) Refund of $2,000
D) Loss of $4,000
Answer: C
Comment: Tax on Sale = T × (S - B)
4
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10) Bill Sharpe, owner of Sharper Knives Inc., is closing his business at the end of the current fiscal year.
His sole asset, the knife-sharpening machine, is four years old. A depreciation table for the asset is shown
below. Bill has agreed to sell the machine at the end of the year for $100,000. What is the impact on taxes
from the sale of the machine? (Assume that Sharper Knives claimed a regular depreciation expense in the
calculation of income taxes.) The tax rate is 35%. Round your answers to the nearest dollar.
5
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11) Bill Sharpe, owner of Sharper Knives Inc., is closing his business at the end of the current fiscal year.
His sole asset, the knife-sharpening machine, is three years old. A depreciation table for the asset is
shown below. Bill has agreed to sell the machine at the end of the year for $100,000. What is the impact on
taxes from the sale of the machine? (Assume that Sharper Knives claimed a regular depreciation expense
in the calculation of income taxes.) The tax rate is 35%. Round your answers to the nearest dollar.
1) Projects will usually have an initial investment, cash inflows, and a terminal cash flow.
Answer: TRUE
Comment: Cash flows for a project usually include an initial cash flow, annual cash flows, and a terminal
cash flow.
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
2) The relevant cash flows for a proposed project are the incremental after-tax cash outflows and the
resulting cash inflows.
Answer: TRUE
6
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Comment: The analysis of a project is substantially simplified by considering only incremental cash
flows. An analysis of the incremental cash flows replaces an analysis of two scenarios: 1) the value of the
firm without the project; and 2) the value of the firm with the project. Incremental cash flows are those
that change as a result of accepting a project.
Diff: 1
Section: 2.2
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
3) When calculating the cash flows for a project, you should include interest payments.
Answer: FALSE
Comment: The financing decision is separate from the capital budgeting decision. NPV and IRR include
the cost of funds by using a discount rate that reflects the required return. If we were to include interest
expense in the cash flow estimate, we would be, in essence, double charging the project for financing.
Diff: 1
Section: 2.2
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
4) Net working capital is the amount by which a firm's current assets exceed its current liabilities.
Answer: FALSE
Comment: Net working capital is defined as current assets minus current liabilities.
Diff: 1
Section: 2.1
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
5) The initial outlays and operating costs of large projects can be forecast with great accuracy, but
revenues are more uncertain and large errors are not uncommon.
Answer: FALSE
Comment: Subsequent indirect costs of a large project are difficult to forecast accurately.
Diff: 1
Section: 2.1
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
7
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6) A project having the conventional pattern of cash flows exhibits all of the following EXCEPT
A) a terminal cash flow.
B) initial investment.
C) operating cash outflows.
D) operating cash inflows.
Answer: C
Comment: A project following a conventional pattern of cash flows consists of an initial investment,
operating cash inflows, and a terminal cash flow.
Diff: 1
Section: 2
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
7) Using the following data, what is the change in net working capital?
A) -$4,000
B) -$1,000
C) +$9,000
D) +$19.000
Answer: C
Comment: Change in NWC = Change in current assets - Change in current liabilities.
Change = (12,000 + 24,000) - (21,000 + 6,000) = 9,000
Diff: 2
Section: 2.1
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
8
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8) The initial purchase price of a new stamp press is $6,000. The firm will spend $5,000 on shipping and
installation. Training of new employees will cost $2,000. As a result of the purchase, inventory must
increase $1,300. What is the net initial cash flow? Round your answer to the nearest dollar. Sign your cash
flows negative for outflows and positive for inflows.
A) $13,000
B) -$13,000
C) $14,300
D) -$14,300
E) $11,000
Answer: D
Comment: Initial Cash Flow = - (Initial purchase price of new asset) - (Installation/shipping cost of new
asset) - (Increase in net working capital)
Initial Cash Flow = -$6,000 - $5,000 - $2,000 - $1,300
Initial Cash Flow = -$14,300
Diff: 2
Section: 2.1
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
9) Jones Crusher Company is evaluating the proposed acquisition of a new machine. The machine will
cost $190,000, and it will cost another $33,000 to modify it for special use by the firm. The machine falls
into the MACRS 3-year class, and it will be sold after 3 years of use for $110,000. The machine will require
an increase in net working capital of $9,000 and will have no effect on revenues, but is expected to save
the firm $90,000 per year in before-tax operating costs, mainly labour. The company's marginal tax rate is
40%. What is the initial cash flow for the project?
A) -$42,000
B) -$190,000
C) -$199,000
D) -$223,000
E) -$232,000
Answer: E
Comment: Initial Cash Flow = -(Initial purchase price of new asset) - (Installation/shipping cost of new
asset) - (Increase in net working capital)
Initial Cash Flow = -$190,000 - $33,000 - $9,000 = -$232,000
Diff: 2
Section: 2.1
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
9
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10) The Boeing Corp. is considering building a new aircraft, the 787--larger than the 747 and larger than
the Airbus A380. The company's Renton WA Facility, where 747s are currently manufactured, would
have to be expanded. Expansion costs are forecast to be $2.5B, incurred at t = 0. Also at time t = 0, before
production begins, inventory will be increased by $1.855B. Assume that this inventory is sold at the end
of the project at t = 2. The first sales from operation of the new plant will occur at the end of year 1 (t = 1).
Boeing forecasts sales of 220 planes in each of the two years. The plane will be sold for $130M each. The
cost of manufacturing a plane is $115M. Annual overhead expenses are $775M. The construction facilities
are classified as 15 year property. When the plant is closed it will be sold for $1B. The company is in the
34% marginal tax bracket. Boeing's cost of capital is 12%. What is the initial cash flow for the project?
A) -$645M
B) -$1,885M
C) -$2,500M
D) -$4,355M
E) -$5,000M
Answer: D
Comment: Initial Cash Flow = - (Initial purchase price of new asset) - (Increase in Net Working Capital)
Initial cash flows = -$2,500M + (-$1,855M) = -$4,355M
Diff: 2
Section: 2.1
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
10
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11) Goodweek Tire, Inc., has recently developed a new tire, the SuperTread, and must decide whether to
make the investment. The research and development costs so far total $10 million. Market research
(costing $5 million) shows that there is significant demand for a SuperTread type tire.
The SuperTread will be produced and sold for the next two years. Goodweek Tire must initially invest
$120 million in production equipment. This equipment can be sold for $51,428,571 at the end of two years.
The equipment is classified as 15-year property for depreciation purposes.
The SuperTread is expected to sell for $45 per tire. The variable cost for each SuperTread is $15. Analysts
expect automobile manufacturers to build five million new cars this year and for production to grow
2.5% in the following year. Each new car needs four tires. Goodweek Tire expects the SuperTread to
capture 10 percent of the market. Assume that revenues and expenses occur at the end of each of the two
years of production.
Working capital is equal to 15% of sales. Investments in working capital are made at the beginning of
each year. At the end of the terminal year, the working capital is liquidated. What is the initial cash flow
for the project?
A) -$15,000,000
B) -$120,000,000
C) -$133,500,000
D) -$138,500,000
E) -$148,500,000
Answer: C
Comment: Initial Cash Flow = -(Initial purchase price of new asset) - (Increase in Net Working Capital)
11
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12) Dr. Magneto is evaluating whether to open a private MRI clinic in leased office space in a local strip
mall. The clinic will run for two years and then close. Before the clinic opens, the offices require $200,000
of renovations. Dr. Magneto will buy $20,000 of computer equipment and one MRI machine. The MRI
machine (GE 3.0T Signa Excite HD) costs $2.4M. Assume that the renovations, computer equipment and
MRI are paid for at the beginning of the first year (t=0) and that all three are classified as 15-year
property.
Assume that the MRI machine will be sold for $500,000 at the end of the second year of business. The
computer equipment will be worthless at that time.
The clinic can perform 72 scans per week for 49 operational weeks per year. The clinic will charge $600
per scan.
The clinic will need two technicians, two receptionists and one office manager. Wages, salaries and other
payroll costs (i.e., health insurance premiums) will total $275,000 per year. Maintenance, supplies,
marketing and operating costs for the machine are expected to be $200,000 per year. Annual rent is
$60,000 payable at the end of each year. Assume that all revenues (and expenses) occur at the end of the
year. The tax rate is 40% and Dr. Magneto's cost of capital is 10%. What is the initial cash flow for the
project?
A) -$2,400,000
B) -$2,420,000
C) -$2,620,000
D) -$2,655,000
E) -$2,835,000
Answer: C
Comment: Initial Cash Flow = -(Initial purchase price of new asset) - (Increase in Net Working Capital)
12
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13) The Munsell Colour Company is considering the purchase of a new batch polymer-bonding machine
for producing its number one line of crayons. Although the machine being considered will not produce
any increase in sales revenues, it will result in the before-tax reduction of labour costs by $200,000 per
year. The machine has a purchase price of $250,000, and it would cost an additional $10,000 to install the
machine. In addition, to operate this machine, inventory must be increased by $15,000. The machine is
categorized as 10-year property. After 2 years, it can be sold for $150,000. The tax rate is 34% and the cost
of capital is 15%. What is the initial cash flow for the project?
A) -$250,000
B) -$260,000
C) -$265,000
D) -$275,000
E) -$285,000
Answer: D
Comment: Initial Cash Flow = -(Initial purchase price of new asset) - (Increase in Net Working Capital)
Initial cash flows = -250,000 - 10,000 - 15,000 = -$275,000
Diff: 2
Section: 2.1
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
13
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14) Orange Inc., the Cupertino-based computer manufacturer, has developed a new all-in-one device:
phone, music-player, camera, GPS, and computer. The device is called the iPip. The following data have
been collected regarding the iPip project. The company has identified a prime piece of real estate and
must purchase it immediately for $100,000. In addition, R&D expenditures of $175,000 must be made
immediately. During the first year the manufacturing plant will be constructed. The plant will be ready
for operation at the end of Year 1. The construction costs are $500,000 and will be paid upon completion.
At the end of the Year 1, an inventory of raw materials will be purchased costing $50,000. Production and
sales will occur during years 2 and 3. (Assume that all revenues and operating expenses are received
(paid) at the end of each year.) Annual revenues are expected to be $850,000. Fixed operating expenses
are $100,000 per year and variable operating expenses are 25% of sales. The construction facilities are
classified as 10-year property for tax-depreciation purposes. When the plant is closed it will be sold for
$200,000. (Note: Assume the investment in plant is depreciated during years 2 and 3.) The land will be
sold for $225,000 at the end of year 3. The tax rate on all types of income is 34%. The cost of capital is 12%.
What is the undiscounted sum of the initial cash flows incurred at Year 0 and Year 1 for the iPip project?
A) -$100,000
B) -$175,000
C) -$275,000
D) -$550,000
E) -$825,000
Answer: E
Comment: Initial Cash Flow = -(Initial purchase price of new asset) - (Increase in Net Working Capital) -
R&D - (Land Cost)
Initial cash flows = - 500,000 - 50,000 - 175,000 - 100,000 = -$825,000
Diff: 2
Section: 2.1
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
14
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15) After a trip to Bordeaux France you are considering opening a restaurant based on Restaurant
L'Entrecote. You will offer a fixed menu of salad, steak and French fries. Your innovation is that you will
use a bordelaise (red wine) sauce instead of a tarragon butter sauce. You plan to run the restaurant for
two years and then retire. Start-up costs, to be incurred immediately, are $500,000. Start-up costs include
kitchen equipment, kitchen supplies, renovations, furniture, fixtures, and the point-of-sales system.
Assume that all of those assets are classified as 5-year property. The assets can be sold for $150,000 after
two years.
You expect 100 diners per night. The restaurant will be open for 300 nights per year. The average diner
orders food with a menu price of $35 and beverages with a menu price of $15. Food costs are 34% of the
menu price and beverage costs are 50% of the menu price.
The nightly wages are $2,160 (for the chef, 5 kitchen staff, a bartender, the Maitre d' and 10 wait staff).
Municipal tax, rent, and utilities, are $41,400 per annum.
Assume that all revenues and operating expenses are received (paid) at the end of each year.
The small business tax rate is 20%. The cost of capital is 10%.
When the restaurant opens you will have to invest in an inventory of wine, beer and liquor costing
$50,000. What is initial cash flow for the L'Entrecote project?
A) -$50,000
B) -$175,000
C) -$275,000
D) -$500,000
E) -$550,000
Answer: E
Comment: Initial Cash Flow = -(Initial purchase price of new asset) - (Increase in Net Working Capital)
Initial cash flows = - 500,000 - 50,000 = -$550,000
Diff: 2
Section: 2.1
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
15
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16) John Kay Inc. is considering the installation of a new production line to make automated flying
shuttles for weaving machines. The capital cost of the equipment is $2.2 million. The machines on the
new line are classified as 15-year property. Kay plans to operate the line for two years, at which time the
project will end and the assets will be disposed of for $1,000,000. The new line requires an increase in net
working capital of $20,000, which would be liquidated at the end of the project. The investment outlays
would occur immediately.
Sales are expected to be constant at $2,000,000, and operating expenses at $800,000. Assume that all
revenues and operating expenses are received (paid) at the end of each of the two years of operations.
Kay's marginal tax rate is 35 percent. Kay's cost of capital is 11%. What is initial cash flow for the flying
shuttle project?
A) $2,220,000
B) $2,200,000
C) $0
D) -$2,200,000
E) -$2,220,000
Answer: E
Comment: Initial Cash Flow = -(Initial purchase price of new asset) - (Increase in Net Working Capital)
Initial cash flows = -2,200,000 - 20,000 = -$2,220,000
Diff: 2
Section: 2.1
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
16
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17) Tom Morrison Inc., a leading manufacturer of golf equipment, is currently evaluating a new golf ball
called the 'Feathery'. The secret to the Feathery is that its core is made from goose down. The advantage
of down is that the ball flies higher and longer. You have been asked to analyze The Feathery project and
present your findings to the company's executive committee.
The production line would be set up in an unused section of Morrison's main plant. The machinery is
estimated at $480,000. Further, Morrison's inventories would have to be increased by $50,000 to handle
the new line. The machinery is depreciated using MACRS with a 7-year recovery period. The machinery
will be used for 2 years and have an expected salvage value of $200,000 at the end of that time. Morrison's
tax rate is 30% and its weighted average cost of capital is 10%.
Operating earnings (EBITDA) are expected to be $330,000 per year for each of the two years. Assume that
the purchase of the machine and increase in inventory occur at the beginning of the first year of
operations. Assume that operating cash flows occur at the end of each of the two years of operations.
What is initial cash flow for the Feathery project?
A) -$530,000
B) -$480,000
C) -$430,000
D) -$50,000
E) $0
Answer: A
Comment: Initial Cash Flow = -(Initial purchase price of new asset) - (Increase in Net Working Capital)
Initial Cash flow = -480,000 - 50,000 = -$530,000
Diff: 2
Section: 2.1
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
18) The relevant cash flows for capital budgeting analysis are
A) incremental cash flows.
B) ordinary cash flows.
C) necessary cash flows.
D) consistent cash flows.
Answer: A
Comment: Incremental cash flows are those that change as a result of accepting a project.
Diff: 1
Section: 2.2
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
17
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19) You estimate that if a new 4D computer graphic display product is launched by your firm, revenues
will increase by $3,053 in the first year and 10% each year for the next 3 years. Expenses will be 50% of
revenues. Depreciation is computed using MACRS for an asset with a 3-year life and a basis of $7,236.
The tax rate is 40%. Compute the second years' annual cash flows.
A) $1,542
B) $1,881
C) $2,294
D) $2,386
E) $2,974
Answer: C
Comment:
Depr Schedule Depr Schedule
Year 1 Year 2
Original Cost $7,236 $7,236
MACRS 3-Year 0.333 0.445
Depr Expense 2,412 3,216
Year 1 Year 2
Operating Cash
Flows
Revenue $3,053 $3,358
Operating
Expenses 1,527 1,679
EBITDA 1,527 1,679
Depr Expense 2,412 3,216
EBIT -885 -1,537
Taxes -354 -615
NOPAT -531 -922
Add: Depr 2,412 3,216
OCF 1,881 2,294
Diff: 2
Section: 2.2
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
18
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20) Jones Crusher Company is evaluating the proposed acquisition of a new machine. The machine will
cost $190,000, and it will cost another $33,000 to modify it for special use by the firm. The machine falls
into the MACRS 3-year class, and it will be sold after 3 years of use for $110,000. The machine will require
an increase in net working capital of $9,000 and will have no effect on revenues, but is expected to save
the firm $90,000 per year in before-tax operating costs, mainly labour. The company's marginal tax rate is
40%. What is the cash flow from the project for year 1?
A) $90,000
B) $83,730
C) $79,331
D) $71,840
E) $9,404
Answer: B
Comment: EBIT = R - OE - Depr
EBIT = $90,000 - ($223,000 × 33.33%) = $15,674
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Depr Schedule Depr Schedule
Year 1
Original Cost $223,000
MACRS 3-Year 0.333
Depr Expense 74,326
Accum. Depr 74,326
Ending Book
Value 148,674
Year 0 Year 1
Initial Cash
Flows
New
Machinery $-223,000
Investment in
NWC -9,000
Operating
Cash Flows
Revenue $0
Operating
Expenses -90,000
EBITDA 90,000
Depr Expense 74,326
EBIT 15,674
Taxes 6,270
NOPAT 9,404
Add: Depr 74,326
OCF 83,730
Diff: 3
Section: 2.2
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
20
Copyright © 2014 Pearson Education, Inc.
21) The Boeing Corp. is considering building a new aircraft, the 787--larger than the 747 and larger than
the Airbus A380. The company's Renton WA Facility, where 747s are currently manufactured, would
have to be expanded. Expansion costs are forecast to be $2.5B, incurred at t = 0. Also at time t = 0, before
production begins, inventory will be increased by $1.855B. Assume that this inventory is sold at the end
of the project at t = 2. The first sales from operation of the new plant will occur at the end of year 1 (t = 1).
Boeing forecasts sales of 220 planes in each of the two years. The plane will be sold for $130M each. The
cost of manufacturing a plane is $115M. Annual overhead expenses are $775M. The construction facilities
are classified as 15 year property. When the plant is closed it will be sold for $1B. The company is in the
34% marginal tax bracket. Boeing's cost of capital is 12%. What are the operating cash flows at the end of
Year 1 (t = 1)?
A) $1,584M
B) $1,709M
C) $1,945M
D) $2,400M
E) $2,525M
Answer: B
Comment: EBIT = Revenues - Costs - Depr
Depr = 0.05 × 2,500 = $125
EBIT = 220 × (130 - 115) - 775 - 125 = $2,400
NOPAT = EBIT × (1 - T)
NOPAT = 2,400 × (1 - 0.34) = $1,584
21
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Depr Schedule
Year 1
Basis $2,500
MACRS 15-year 0.050
Depr Expense 125
Accumulated
Depreciation 125
Ending Book
Value 2,375
Year 0 Year 1
Initial Cash
Flows
New
Machinery $-2,500
Investment in
NWC -1,855
Operating
Cash Flows
Revenue 28,600
Operating
Expenses 26,075
EBITDA 2,525
Depr Expense 125
EBIT 2,400
Taxes 816
NOPAT 1,584
Add: Depr 125
OCF 1,709
Diff: 2
Section: 2.2
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
22
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22) Goodweek Tire, Inc., has recently developed a new tire, the SuperTread, and must decide whether to
make the investment. The research and development costs so far total $10 million. Market research
(costing $5 million) shows that there is significant demand for a SuperTread type tire.
The SuperTread will be produced and sold for the next two years. Goodweek Tire must initially invest
$120 million in production equipment. This equipment can be sold for $51,428,571 at the end of two years.
The equipment is classified as 15-year property for depreciation purposes.
The SuperTread is expected to sell for $45 per tire. The variable cost for each SuperTread is $15. Analysts
expect automobile manufacturers to build five million new cars this year and for production to grow
2.5% in the following year. Each new car needs four tires. Goodweek Tire expects the SuperTread to
capture 10 percent of the market. Assume that revenues and expenses occur at the end of each of the two
years of production.
Working capital is equal to 15% of sales. Investments in working capital are made at the beginning of
each year. At the end of the terminal year, the working capital is liquidated. Assume a tax rate of 40%.
What are the operating cash flows at the end of Year 1?
A) 11.6625M
B) 25.4625M
C) 30.2625M
D) 38.0625M
E) 38.4000M
Answer: D
Comment: EBIT = Revenues - Expenses - Depr
Revenues = $45 × 4 × 5M × 0.10 = $90 million
Expenses = $15 × 4 × 5M × 0.10 = $30 million
Depr = 0.05 × 120M = $6M
EBIT = 90 - 30 - 6 = $54
NOPAT = EBIT × (1 - T)
NOPAT = 54 × (1 - 0.40) = $32.4
Sales in Year 2 are 2.5% larger than in Year 1. Since NWC is a percentage (15%) of sales, the investment in
NWC rises in the second year from 13.5M to 13.8375M (= 0.15 * 92.25M). The investment in NWC occurs
at the beginning of Year 2 (end of Year 1).
23
Copyright © 2014 Pearson Education, Inc.
Depr Schedule Depr Schedule
Year 1
Original Cost $120
MACRS 15-
Year 0.050
Depr Expense 6
Accum. Depr 6
Ending Book
Value 114
Year 0 Year 1
Initial Cash
Flows
New
Machinery $-120
Investment in
NWC -13.5 -0.3375
Operating
Cash Flows
Revenue $90
Operating
Expenses 30
EBITDA 60
Depr Expense 6
EBIT 54
Taxes 22
NOPAT 32.4
Add: Depr 6
OCF 38.40
Terminal Cash
Flows
Recovery of
NWC
Net Salvage
Value
Free Cash Flow $-133.50 $38.0625
Diff: 2
Section: 2.2
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
24
Copyright © 2014 Pearson Education, Inc.
23) Dr. Magneto is evaluating whether to open a private MRI clinic in leased office space in a local strip
mall. The clinic will run for two years and then close. Before the clinic opens, the offices require $200,000
of renovations. Dr. Magneto will buy $20,000 of computer equipment and one MRI machine. The MRI
machine (GE 3.0T Signa Excite HD) costs $2.4M. Assume that the renovations, computer equipment and
MRI are paid for at the beginning of the first year (t=0) and that all three are classified as 15-year
property.
Assume that the MRI machine will be sold for $500,000 at the end of the second year of business. The
computer equipment will be worthless at that time.
The clinic can perform 72 scans per week for 49 operational weeks per year. The clinic will charge $600
per scan.
The clinic will need two technicians, two receptionists and one office manager. Wages, salaries and other
payroll costs (i.e., health insurance premiums) will total $275,000 per year. Maintenance, supplies,
marketing and operating costs for the machine are expected to be $200,000 per year. Annual rent is
$60,000 payable at the end of each year. Assume that all revenues (and expenses) occur at the end of the
year. The tax rate is 40% and Dr. Magneto's cost of capital is 10%. What are the operating cash flows at the
end of Year 1?
A) $997,080
B) $1,001,480
C) $1,037,480
D) $1,048,640
E) $1,053,880
Answer: B
Comment: Revenues - Expenses - Depr
Revenues = $600 × 72 × 49 = $2,116,800
Expenses = $275,000 + $200,000 + $60,000 = $535,000
Depr = 0.05 × 2,620,000 = $131,000
EBIT = 2,116,800 - 535,000 - 131,000 = $1,450,800
NOPAT = EBIT × (1 - T)
NOPAT = 1,450,800 × (1 - 0.40) = $870,480
25
Copyright © 2014 Pearson Education, Inc.
Depr Schedule
Year 1
Basis $2,620
MACRS 15-year 0.050
Depr Expense 131
Accumulated
Depreciation 131
Ending Book
Value 2,489
Year 0 Year 1
Initial Cash
Flows
Inv. in Fixed
Assets $-2,620
Investment in
NWC 0
Operating
Cash Flows
Revenue 2,116.80
Operating
Expenses 535
EBITDA 1,581.80
Depr Expense 131
EBIT 1,450.80
Taxes 580.32
NOPAT 870.48
Add: Depr 131
OCF 1,001.48
Diff: 3
Section: 2.2
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
26
Copyright © 2014 Pearson Education, Inc.
24) The Munsell Colour Company is considering the purchase of a new batch polymer-bonding machine
for producing its number one line of crayons. Although the machine being considered will not produce
any increase in sales revenues, it will result in the before-tax reduction of labour costs by $200,000 per
year. The machine has a purchase price of $250,000, and it would cost an additional $10,000 to install the
machine. In addition, to operate this machine, inventory must be increased by $15,000. The machine is
categorized as 10-year property. After 2 years, it can be sold for $150,000. The tax rate is 34% and the cost
of capital is 15%. What are the operating cash flows at the end of Year 1?
A) $132,000
B) $136,420
C) $140,840
D) $165,780
E) $175,240
Answer: C
Comment: EBIT = Revenues - Expenses - Depr
Revenues = $0
Expenses = -$200,000
Depr = 0.10 × 260,000 = $26,000
EBIT = -(-200,000) - 26,000 = $174,000
NOPAT = EBIT × (1 - T)
NOPAT = 174,000 × (1 - 0.34) = $114,840
27
Copyright © 2014 Pearson Education, Inc.
Depr Schedule
Year 1
Basis $260,000
MACRS 15-year 0.100
Depr Expense 26,000
Accumulated
Depreciation 26,000
Ending Book
Value 234,000
Year 0 Year 1
Initial Cash
Flows
Inv. in Fixed
Assets $-260,000
Investment in
NWC -15,000
Operating
Cash Flows
Revenue 0
Operating
Expenses -200,000
EBITDA 200,000
Depr Expense 26,000
EBIT 174,000
Taxes 59,160
NOPAT 114,840
Add: Depr 26,000
OCF 140,840
Diff: 3
Section: 2.2
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
28
Copyright © 2014 Pearson Education, Inc.
25) Orange Inc., the Cupertino-based computer manufacturer, has developed a new all-in-one device:
phone, music-player, camera, GPS, and computer. The device is called the iPip. The following data have
been collected regarding the iPip project. The company has identified a prime piece of real estate and
must purchase it immediately for $100,000. In addition, R&D expenditures of $175,000 must be made
immediately. During the first year the manufacturing plant will be constructed. The plant will be ready
for operation at the end of Year 1. The construction costs are $500,000 and will be paid upon completion.
At the end of the Year 1, an inventory of raw materials will be purchased costing $50,000. Production and
sales will occur during years 2 and 3. (Assume that all revenues and operating expenses are received
(paid) at the end of each year.) Annual revenues are expected to be $850,000. Fixed operating expenses
are $100,000 per year and variable operating expenses are 25% of sales. The construction facilities are
classified as 10-year property for tax-depreciation purposes. When the plant is closed it will be sold for
$200,000. (Note: Assume the investment in plant is depreciated during years 2 and 3.) The land will be
sold for $225,000 at the end of year 3. The tax rate on all types of income is 34%. The cost of capital is 12%.
What are the operating cash flows at the end of Year 2?
A) $304,750
B) $318,775
C) $321,750
D) $368,775
E) $371,750
Answer: E
Comment: EBIT = Revenues - Expenses - Depr
Revenues = $850,000
Expenses = $100,000 + 0.25 × $850,000 = $312,500
Depr = 0.10 × 500,000 = $50,000
EBIT = 850,000 -312,500 - 50,000 = $487,500
29
Copyright © 2014 Pearson Education, Inc.
Depr Schedule Depr Schedule
Year 1 Year 2
Basis $500,000
MACRS 10-year 0.100
Depr Expense 50,000
Accumulated
Depreciation 50,000
Ending Book
Value 450,000
Diff: 3
Section: 2.2
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
30
Copyright © 2014 Pearson Education, Inc.
26) After a trip to Bordeaux France you are considering opening a restaurant based on Restaurant
L'Entrecote. You will offer a fixed menu of salad, steak and French fries. Your innovation is that you will
use a bordelaise (red wine) sauce instead of a tarragon butter sauce. You plan to run the restaurant for
two years and then retire. Start-up costs, to be incurred immediately, are $500,000. Start-up costs include
kitchen equipment, kitchen supplies, renovations, furniture, fixtures, and the point-of-sales system.
Assume that all of those assets are classified as 5-year property. The assets can be sold for $150,000 after
two years.
You expect 100 diners per night. The restaurant will be open for 300 nights per year. The average diner
orders food with a menu price of $35 and beverages with a menu price of $15. Food costs are 34% of the
menu price and beverage costs are 50% of the menu price.
The nightly wages are $2,160 (for the chef, 5 kitchen staff, a bartender, the Maitre d' and 10 wait staff).
Municipal tax, rent, and utilities, are $41,400 per annum.
Assume that all revenues and operating expenses are received (paid) at the end of each year.
The small business tax rate is 20%. The cost of capital is 10%.
When the restaurant opens you will have to invest in an inventory of wine, beer and liquor costing
$50,000. What are the operating cash flows at the end of Year 1?
A) $100,000
B) $128,600
C) $102,880
D) $202,880
E) $1,271,400
Answer: D
Comment: EBIT = Revenues - Expenses - Depr
Revenues = 300 × 100 × ($35 + $15) = $1,500,000
Expenses = (30,000 × (0.34 × $35) + 30,000 (0.5 × $15)) + $41,400 + (300 × $2,160) = $1,271,400
Depr = 0.2 × 500,000 = $100,000
EBIT = 1,500,000 - 1,271,400 - 100,000 = $128,600
NOPAT = EBIT × (1 - T)
NOPAT = 128,600 × (1 - 0.20) = $102,880
31
Copyright © 2014 Pearson Education, Inc.
Depr Schedule
Year 1
Basis $500,000
MACRS 5-year 0.2
Depr Expense 100,000
Accumulated
Depreciation 100,000
Ending Book
Value 400,000
Year 0 Year 1
Initial Cash
Flows
Inv. in Fixed
Assets $-500,000
Investment in
NWC -50,000
Operating
Cash Flows
Revenue $1,500,000
Operating
Expenses 1,271,400
EBITDA 228,600
Depr Expense 100,000
EBIT 128,600
Taxes 25,720
NOPAT 102,880
Add: Depr 100,000
OCF 202,880
Diff: 3
Section: 2.2
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
32
Copyright © 2014 Pearson Education, Inc.
27) John Kay Inc. is considering the installation of a new production line to make automated flying
shuttles for weaving machines. The capital cost of the equipment is $2.2 million. The machines on the
new line are classified as 15-year property. Kay plans to operate the line for 2 years, at which time the
project will end and the assets will be disposed of for $1,000,000. The new line requires an increase in net
working capital of $20,000, which would be liquidated at the end of the project. The investment outlays
would occur immediately.
Sales are expected to be constant at $2,000,000, and operating expenses at $800,000. Assume that all
revenues and operating expenses are received (paid) at the end of each of the two years of operations.
Kay's marginal tax rate is 35 percent. Kay's cost of capital is 11%. What are the operating cash flows at the
end of Year 1?
A) $708,500
B) $764,000
C) $793,000
D) $818,500
E) $818,850
Answer: D
Comment: EBIT = Revenues - Expenses - Depr
Revenues = 2,000,000
Expenses = 800,000
Depr = 0.05 × 2,200,000 = $110,000
EBIT = 2,000,000 - 800,000 - 110,000 = $1,090,000
NOPAT = EBIT × (1 - T)
NOPAT = 1,090,000 × (1 - 0.35) = $708,500
33
Copyright © 2014 Pearson Education, Inc.
Depr Schedule
Year 1
Basis $2,200,000
MACRS 15-year 0.050
Depr Expense 110,000
Accumulated
Depreciation 110,000
Ending Book
Value 2,090,000
Year 0 Year 1
Initial Cash
Flows
Inv. in Fixed
Assets $-2,200,000
Investment in
NWC -20,000
Operating
Cash Flows
Revenue $2,000,000
Operating
Expenses 800,000
EBITDA 1,200,000
Depr Expense 110,000
EBIT 1,090,000
Taxes 381,500
NOPAT 708,500
Add: Depr 110,000
OCF 818,500
Diff: 3
Section: 2.2
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
34
Copyright © 2014 Pearson Education, Inc.
28) Tom Morrison Inc., a leading manufacturer of golf equipment, is currently evaluating a new golf ball
called the 'Feathery'. The secret to the Feathery is that its core is made from goose down. The advantage
of down is that the ball flies higher and longer. You have been asked to analyze The Feathery project and
present your findings to the company's executive committee.
The production line would be set up in an unused section of Morrison's main plant. The machinery is
estimated at $480,000. Further, Morrison's inventories would have to be increased by $50,000 to handle
the new line. The machinery is depreciated using MACRS with a 7-year recovery period. The machinery
will be used for two years and have an expected salvage value of $200,000 at the end of that time.
Morrison's tax rate is 30% and its weighted average cost of capital is 10%.
Operating earnings (EBITDA) are expected to be $330,000 per year for each of the two years. Assume that
the purchase of the machine and increase in inventory occur at the beginning of the first year of
operations. Assume that operating cash flows occur at the end of each of the two years of operations.
What are the operating cash flows at the end of Year 1?
A) $182,986
B) $211,738
C) $225,437
D) $251,578
E) $261,408
Answer: D
Comment: EBITDA = $330,000
Depr = 0.1429 × 480,000 = $68,592
EBIT = 330,000 - 68,592 = $261,408
NOPAT = EBIT × (1 - T)
NOPAT = 261,408 × (1 - 0.30) = $182,986
35
Copyright © 2014 Pearson Education, Inc.
Depr Schedule
Year 1
Basis $480,000
MACRS 7-year 0.143
Depr Expense 68,592
Accumulated
Depreciation 68,592
Ending Book
Value 411,408
Year 0 Year 1
Initial Cash
Flows
Inv. in Fixed
Assets $-480,000
Investment in
NWC -50,000
Operating
Cash Flows
Revenue $330,000
Operating
Expenses 0
EBITDA 330,000
Depr Expense 68,592
EBIT 261,408
Taxes 78,422
NOPAT 182,986
Add: Depr 68,592
OCF 251,578
Diff: 3
Section: 2.2
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
36
Copyright © 2014 Pearson Education, Inc.
29) Jones Crusher Company is evaluating the proposed acquisition of a new machine. The machine will
cost $190,000, and it will cost another $33,000 to modify it for special use by the firm. The machine falls
into the MACRS 3-year class, and it will be sold after 3 years of use for $110,000. The machine will require
an increase in net working capital of $9,000 and will have no effect on revenues, but is expected to save
the firm $90,000 per year in before-tax operating costs, mainly labour. The company's marginal tax rate is
40%. What are the terminal year cash flows?
A) $93,649
B) $102,649
C) $148,820
D) $179,470
E) $188,740
Answer: C
37
Copyright © 2014 Pearson Education, Inc.
Comment:
Depr Schedule Depr Schedule Depr Schedule Depr Schedule
Year 1 Year 2 Year 3
Original Cost $223,000 $223,000 $223,000
MACRS 3-Year 0.333 0.445 0.148
Depr Expense 74,326 99,124 33,026
Accum. Depr 74,326 173,449 206,476
Ending Book
Value 148,674 49,551 16,524
Diff: 3
Section: 2.3
AACSB: Analytical Skills
Learning Outcome: F-08: Forecast incremental earnings and calculate cash flows as part of the capital
budgeting process
38
Copyright © 2014 Pearson Education, Inc.
30) The Boeing Corp. is considering building a new aircraft, the 787—larger than the 747 and larger than
the Airbus A380. The company's Renton WA Facility, where 747s are currently manufactured, would
have to be expanded. Expansion costs are forecast to be $2.5B, incurred at t = 0. Also at time t = 0, before
production begins, inventory will be increased by $1.855B. Assume that this inventory is sold at the end
of the project at t = 2. The first sales from operation of the new plant will occur at the end of year 1 (t = 1).
Boeing forecasts sales of 220 planes in each of the two years. The plane will be sold for $130M each. The
cost of manufacturing a plane is $115M. Annual overhead expenses are $775M. The construction facilities
are classified as 15 year property. When the plant is closed it will be sold for $1B. The company is in the
34% marginal tax bracket. Boeing's cost of capital is 12%. What are the terminal year cash flows?
A) $1,747M
B) $3,134M
C) $3,242M
D) $4,989M
E) $5,089M
Answer: D
39
Copyright © 2014 Pearson Education, Inc.
Comment: Terminal Cash Flows = OCF + (Decrease in net working capital) + (Net salvage)
Depr Schedule
Year 1 Year 2
Basis $2,500 $2,500
MACRS 15-year 0.050 0.095
Depr Expense 125 238
Accumulated
Depreciation 125 363
Ending Book
Value 2,375 2,138
40
Copyright © 2014 Pearson Education, Inc.
31) Goodweek Tire, Inc., has recently developed a new tire, the SuperTread, and must decide whether to
make the investment. The research and development costs so far total $10 million. Market research
(costing $5 million) shows that there is significant demand for a SuperTread type tire.
The SuperTread will be produced and sold for the next two years. Goodweek Tire must initially invest
$120 million in production equipment. This equipment can be sold for $51,428,571 at the end of two years.
The equipment is classified as 15-year property for depreciation purposes.
The SuperTread is expected to sell for $45 per tire. The variable cost for each SuperTread is $15. Analysts
expect automobile manufacturers to build five million new cars this year and for production to grow
2.5% in the following year. Each new car needs four tires. Goodweek Tire expects the SuperTread to
capture 10 percent of the market. Assume that revenues and expenses occur at the end of each of the two
years of production.
Working capital is equal to 15% of sales. Investments in working capital are made at the beginning of
each year. Assume a tax rate of 40%. At the end of the terminal year, the working capital is liquidated.
What are the terminal year cash flows?
A) $30,540,000
B) $44,377,500
C) $95,806,071
D) $105,928,048
E) $127,195,000
Answer: E
41
Copyright © 2014 Pearson Education, Inc.
Comment: Terminal Cash Flows = OCF + (Decrease in net working capital) + (Net salvage)
Depr Schedule Depr Schedule Depr Schedule
Year 1 Year 2
Original Cost $120 $120
MACRS 15-
Year 0.050 0.095
Depr Expense 6 11
Accum. Depr 6 17
Ending Book
Value 114 103
42
Copyright © 2014 Pearson Education, Inc.
budgeting process
32) Dr. Magneto is evaluating whether to open a private MRI clinic in leased office space in a local strip
mall. The clinic will run for two years and then close. Before the clinic opens, the offices require $200,000
of renovations. Dr. Magneto will buy $20,000 of computer equipment and one MRI machine. The MRI
machine (GE 3.0T Signa Excite HD) costs $2.4M. Assume that the renovations, computer equipment and
MRI are paid for at the beginning of the first year (t=0) and that all three are classified as 15-year
property.
Assume that the MRI machine will be sold for $500,000 at the end of the second year of business. The
computer equipment will be worthless at that time.
The clinic can perform 72 scans per week for 49 operational weeks per year. The clinic will charge $600
per scan.
The clinic will need two technicians, two receptionists and one office manager. Wages, salaries and other
payroll costs (i.e., health insurance premiums) will total $275,000 per year. Maintenance, supplies,
marketing and operating costs for the machine are expected to be $200,000 per year. Annual rent is
$60,000 payable at the end of each year. Assume that all revenues (and expenses) occur at the end of the
year. Revenues and operating expenses are expected to grow at a rate of 2.5%. The tax rate is 40% and Dr.
Magneto's cost of capital is 10%. What are the terminal year cash flows?
A) $1,336,630
B) $2,167,927
C) $2,268,407
D) $2,429,287
E) $2,603,527
Answer: C
43
Copyright © 2014 Pearson Education, Inc.
Comment: Terminal Cash Flows = OCF + (Decrease in net working capital) + (Net salvage)
Depr Schedule Depr Schedule
Year 1 Year 2
Basis $2,620 $2,620
MACRS 15-year 0.050 0.095
Depr Expense 131 249
Accumulated
Depreciation 131 380
Ending Book
Value 2,489 2,240
44
Copyright © 2014 Pearson Education, Inc.
33) The Munsell Colour Company is considering the purchase of a new batch polymer-bonding machine
for producing its number one line of crayons. Although the machine being considered will not produce
any increase in sales revenues, it will result in the before-tax reduction of labour costs by $200,000 per
year. The machine has a purchase price of $250,000, and it would cost an additional $10,000 to install the
machine. In addition, to operate this machine, inventory must be increased by $15,000. The machine is
categorized as 10-year property. After 2 years, it can be sold for $150,000. The tax rate is 34% and the cost
of capital is 15%. Operating expenses are expected to increase by 2.5%. What are the terminal year cash
flows?
A) $147,912
B) $155,139
C) $170,139
D) $320,139
E) $328,860
Answer: E
45
Copyright © 2014 Pearson Education, Inc.
Another random document with
no related content on Scribd:
COMMON WINE SAUCE.
Boil very gently together half a pint of new milk or of milk and
cream mixed, a very thin strip or two of fresh lemon-rind, a bit of
cinnamon, half an inch of a vanilla bean, and an ounce and a half or
two ounces of sugar, until the milk is strongly flavoured; then strain,
and pour it, by slow degrees, to the well-beaten yolks of three eggs,
smoothly mixed with a knife-end-full (about half a teaspoonful) of
flour, a grain or two of salt, and a tablespoonful of cold milk; and stir
these very quickly round as the milk is added. Put the sauce again
into the stewpan, and whisk or stir it rapidly until it thickens, and
looks creamy. It must not be placed upon the fire, but should be held
over it, when this is done. The Germans mill their sauces to a froth;
but they may be whisked with almost equally good effect, though a
small mill for the purpose—formed like a chocolate mill—may be had
at a very trifling cost.
A DELICIOUS GERMAN PUDDING-SAUCE.
Measure half a pint of sound red currants after they have been
stripped from the stalks; wash them, should they be dusty, and drain
all the water from them. Have ready a syrup, made with three
ounces of sugar in lumps, and the third of a pint of water, boiled
gently together for five minutes; put in the currants, and stew them
for ten minutes; strain off the juice, of which there will be nearly or
quite half a pint, through a lawn sieve or folded muslin; heat it afresh,
and pour it boiling to a small spoonful of arrow-root which has been
very smoothly mixed with a tablespoonful of cold water, being careful
to stir it briskly while the juice is being added; give the sauce a
minute’s boil to render it transparent, and mask the pudding with it
(or, in other words, pour it equally over it, so as to cover the entire
surface); or serve it in a tureen. A few raspberries may be added in
their season, to flavour this preparation; but if quite ripe, they must
be thrown into the syrup without having been washed, two or three
minutes after the currants have been put into it. A delicious sauce
may be made entirely from raspberries as above, allowing a larger
proportion of the fruit, as it yields less juice than the currant.
The proportions directed in this receipt are quite sufficient for a
pudding of moderate size, but they can easily be increased when
required.
COMMON RASPBERRY-SAUCE.
After having pared away every morsel of the rind from a ripe and
highly flavoured pine-apple, cut three-quarters of a pound of it into
very thin slices, and then into quite small dice. Pour to it nearly half a
pint of spring water; heat, and boil it very gently until it is extremely
tender, then strain and press the juice closely from it through a cloth
or through a muslin strainer[144] folded in four; strain it clear, mix it
with ten ounces of the finest sugar in small lumps, and when this is
dissolved, boil the syrup gently for a quarter of an hour. It will be
delicious in flavour and very bright in colour if well made. If put into a
jar, and stored with a paper tied over it, it will remain excellent for
weeks; and it will become almost a jelly with an additional ounce of
sugar and rather quicker boiling. It may be poured round moulded
creams, rice, or sago; or mingled with various sweet preparations for
which the juice of fruit is admissible.
144. It is almost superfluous to say that the large squares of muslin, of which on
account of their peculiar nicety we have recommended the use for straining
many sweet preparations, must never have a particle of starch in them; they
should be carefully kept free from dust and soil of any kind, and always well
rinsed and soaked in clear water before they are dried.
GERMAN CHERRY SAUCE.
Beat four eggs thoroughly, mix with them half a pint of milk, and
pass them through a sieve, add them by degrees to half a pound of
flour, and when the batter is perfectly smooth, thin it with another half
pint of milk. Shake out a wet pudding cloth, flour it well, pour the
batter in, leave it room to swell, tie it securely, and put it immediately
into plenty of fast-boiling water. An hour and ten minutes will boil it.
Send it to table the instant it is dished, with wine sauce, a hot
compôte of fruit, or raspberry vinegar: this last makes a delicious
pudding sauce. Unless the liquid be added very gradually to the
flour, and the mixture be well stirred and beaten as each portion is
poured to it, the batter will not be smooth: to render it very light, a
portion of the whites of the eggs, or the whole of them, should be
whisked to a froth and stirred into it just before it is put into the cloth.
Flour, 1/2 lb.; eggs, 4; salt, 3/4 teaspoonful; milk, 1 pint: 1 hour and
10 minutes.
Obs.—Modern taste is in favour of puddings boiled in moulds, but,
as we have already stated, they are seldom or ever so light as those
which are tied in cloths only.
ANOTHER BATTER PUDDING.
Make a good light thin batter, and just before it is poured into the
cloth stir to it half a pound of currants, well cleaned and dried: these
will sink to the lower part of the pudding and blacken the surface.
Boil it the usual time, and dish it with the dark side uppermost; send
very sweet sauce to table with it. Some cooks butter a mould thickly,
strew in the currants, and pour the batter on them, which produces
the same appearance as when the ingredients are tied in a cloth.
All batter puddings should be despatched quickly to table when
they are once ready to serve, as they speedily become heavy if
allowed to wait.
BATTER FRUIT PUDDING.
Butter thickly a basin which holds a pint and a half, and fill it nearly
to the brim with good boiling apples pared, cored, and quartered;
pour over them a batter made with four tablespoonsful of flour, two
large or three small eggs, and half a pint of milk. Tie a buttered and
floured cloth over the basin, which ought to be quite full, and boil the
pudding for an hour and a quarter. Turn it into a hot dish when done,
and strew sugar thickly over it: this, if added to the batter at first,
renders it heavy. Morella cherries make a very superior pudding of
this kind; and green gooseberries, damsons, and various other fruits,
answer for it extremely well: the time of boiling it must be varied
according to their quality and its size.
For a pint and a half mould or basin filled to the brim with apples or
other fruit; flour, 4 tablespoonsful; eggs, 2 large or 3 small; milk, 1/2
pint: 1-1/4 hour.
Obs.—Apples cored, halved, and mixed with a good batter, make
an excellent baked pudding, as do red currants, cherries, and plums
of different sorts likewise.
KENTISH SUET PUDDING.
Flour, 1-1/2 lb.; suet, 1/2 lb.; salt 1/2 teaspoonful; half as much
pepper; 1 egg; little milk or water: boiled 2 hours.
ANOTHER SUET PUDDING.
Make into a somewhat lithe but smooth paste, half a pound of fine
stale bread-crumbs, three quarters of a pound of flour, from ten to
twelve ounces of beef-suet chopped extremely small, a large half-
teaspoonful of salt, and rather less of pepper, with two eggs and a
little milk. Boil it for two hours and a quarter.
APPLE, CURRANT, CHERRY, OR OTHER FRESH FRUIT
PUDDING.
Make a light crust with one pound of flour, and six ounces of very
finely minced beef-suet; roll it thin, and fill it with one pound and a
quarter of good boiling apples; add the grated rind and strained juice
of a small lemon, tie it in a cloth, and boil it one hour and twenty
minutes before Christmas, and from twenty to thirty minutes longer
after Christmas. A small slice of fresh butter, stirred into it when it is
sweetened will, to many tastes, be an acceptable addition; grated
nutmeg, or a little cinnamon in fine powder, may be substituted for
the lemon-rind when either is preferred. To convert this into a richer
pudding use half a pound of butter for the crust, and add to the
apples a spoonful or two of orange or quince marmalade.
Crust: flour, 1 lb.; suet, 6 oz. Fruit, pared and cored, 1-1/2 lb.; juice
and rind of 1 small lemon (or some nutmeg or cinnamon in powder).
Richer pudding: flour, 1 lb.; butter, 1/2 lb.; in addition to fruit, 1 or 2
tablespoonsful of orange or quince marmalade.