Chapter 8 - Pearson Learning Solutions

348 PART THREE Long-Term Investment DecisionsLG3LG4LG4E8–3 Iridium Corp. has spent $3.5 billion over the past decade developing a satellitebasedtelecommunication system. It is currently trying to decide whether to spend anadditional $350 million on the project. The firm expects that this outlay will finishthe project and will generate cash flow of $15 million per year over the next 5 years.A competitor has offered $450 million for the satellites already in orbit. Classify thefirm’s outlays as sunk costs or opportunity costs, and specify the relevant cash flows.E8–4 A few years ago, Largo Industries implemented an inventory auditing system at aninstalled cost of $175,000. Since then, it has taken depreciation deductions totalling$124,250. What is the system’s current book value? If Largo sold the system for$110,000, how much recaptured depreciation would result?E8–5 Bryson Sciences is planning to purchase a high-powered microscopy machine for$55,000 and incur an additional $7,500 in installation expenses. It is replacing similarmicroscopy equipment that can be sold to net $35,000, resulting in taxes from again on the sale of $11,250. Because of this transaction, current assets will increaseby $6,000 and current liabilities will increase by $4,000. Calculate the initial investmentin the high-powered microscopy machine.Problems A blue box (■) indicates problems available in .LG1LG2P8–1 Classification of expenditures Given the following list of outlays, indicate whethereach is normally considered a capital expenditure or an operating expenditure.Explain your answers.a. An initial lease payment of $5,000 for electronic point-of-sale cash registersystems.b. An outlay of $20,000 to purchase patent rights from an inventor.c. An outlay of $80,000 for a major research and development program.d. An $80,000 investment in a portfolio of marketable securities.e. A $300 outlay for an office machine.f. An outlay of $2,000 for a new machine tool.g. An outlay of $240,000 for a new building.h. An outlay of $1,000 for a marketing research report.P8–2 Basic terminology A firm is considering the following three separate situations.Situation A Build either a small office building or a convenience store on a parcelof land located in a high-traffic area. Adequate funding is available, and both projectsare known to be acceptable. The office building requires an initial investmentof $620,000 and is expected to provide operating cash inflows of $40,000 per yearfor 20 years. The convenience store is expected to cost $500,000 and to provide agrowing stream of operating cash inflows over its 20-year life. The initial operatingcash inflow is $20,000, and it will increase by 5% each year.Situation B Replace a machine with a new one that requires a $60,000 initialinvestment and will provide operating cash inflows of $10,000 per year for the first2008935971Principles of Managerial Finance, Brief Fifth Edition, by Lawrence J. Gitman. Copyright © 2009 by Lawrence J. Gitman. Published by Prentice Hall.