1. Riordan Manufacturing Company is considering replacing a machine. The machine was purchased 6 years ago for $80,000 and has been depreciated straight line over an 8-year life. The old machine will be sold for a market value of $14,500. The new machine costs $55,000. Assuming a tax rate of 28%, calculate the initial outlay.
a) $38,960
b) $42,040
c) $45,460
d) $51,760
2. Storage USA is considering expanding their operations. The company owns a lot near the present facility on which a new building can be constructed. The land was purchased 10 years ago for $50,000 and now has a market value of $180,000. Assuming a tax rate of 35%, calculate the opportunity cost of the land.
a) $130,000
b) $134,500
c) $ 84,500
d) $180,000
3. The cost of capital is used primarily in
a) negotiations with banks because it reflects the company's overall borrowing power
b) setting the firm's basic risk level
c) capital budgeting because it reflects what the firm pays for the money it invests
d) negotiations with investment bankers because it establishes an overall return on which the market can base prices for the firm's securities