Exam 12: Estimating Cash Flows on Capital Budgeting Projects

Equipment was purchased for $50,000 plus $2,500 in freight charges. Installation costs were $1,500 and sales tax totaled $1,000. Hiring a special consultant to provide advice during the selection of the equipment cost $3,000. What is this asset's depreciable basis?

Which of the following measures the operating cash flow a project produces minus the necessary investment in operating capital, and is as valid for proposed new projects as it is for the firm's current operations?

You are evaluating a project for your company. You estimate the sales price to be $25 per unit and sales volume to be 4,000 units in year 1; 7,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $10 per unit and fixed costs are $50,000 per year. The project requires an initial investment of $10,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $1,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 10 percent. What change in NWC occurs at the end of year 1?

A financial analyst calculated that the after-tax salvage value for a machine was $10,200. The current book value of the asset is $12,000 and the firm's tax rate is 21 percent. How much could the machine be sold for today?

You are evaluating a project for your company. You estimate the sales price to be $25 per unit and sales volume to be 4,000 units in year 1; 7,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $10 per unit and fixed costs are $50,000 per year. The project requires an initial investment of $10,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $1,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 21 percent and the required return on the project is 10 percent. What is the operating cash flow for the project in year 2?

Your company is considering a new project that will require $100,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $25,000 using straight-line depreciation. The cost of capital is 11 percent, and the firm's tax rate is 21 percent. Estimate the present value of the tax benefits from depreciation.

All of the following are incremental cash flows attributable to the project EXCEPT

Your firm needs a machine which costs $50,000, and requires $2,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 21 percent and a discount rate of 10 percent. What is the depreciation tax shield for this project in year 3?

A new project would require an immediate increase in raw materials in the amount of $1,000. The firm expects that accounts payable will automatically increase $800. How much must the firm expect its investment in net working capital to change if they accept this project?

Your firm needs a computerized machine tool lathe that costs $50,000 and another $12,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 21 percent and a discount rate of 12 percent. If the lathe can be sold for $6,000 at the end of year 3, what is the after-tax salvage value?

Which statement is true regarding cost-cutting proposals?

Which of these is the process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements?

A local bank is contemplating adding a new ATM to their lobby. They will need another phone line to provide communications that has a monthly cost of $50 per month. This is an example of

Suppose you sell a fixed asset for $90,000 when its book value is $95,000. If your company's marginal tax rate is 21 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?

A financial analyst calculated that the after-tax salvage value for a machine was $10,200. The current book value of the asset is $25,000 and the firm's tax rate is 20 percent. How much could the machine be sold for today?

KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is planning to spend $50,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an expected life of three years, a $75,000 estimated resale value, and falls under the MACRS five-year class life. Revenue from the new game is expected to be $500,000 per year, with costs of $200,000 per year. The firm has a tax rate of 21 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $100,000 at the beginning of the project. What will the year 2 operating cash flow for this project be?

AB Mining Company just commissioned a firm to identify if an unused portion of their mine contains any silver or gold at a cost of $125,000. This is an example of a(n)

Suppose you sell a fixed asset for $112,000 when its book value is $112,000. If your company's marginal tax rate is 21 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?

Your company has spent $200,000 on research to develop a new computer game. The firm is planning to spend $40,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $5,000. The machine has an expected life of five years, a $25,000 estimated resale value, and falls under the MACRS five-year class life. Revenue from the new game is expected to be $300,000 per year, with costs of $100,000 per year. The firm has a tax rate of 21 percent, an opportunity cost of capital of 14 percent, and it expects net working capital to increase by $50,000 at the beginning of the project. What will be the operating cash flow for year one of this project?

You are trying to pick the least-expensive machine for your company. You have two choices: machine A, which will cost $100,000 to purchase and which will have OCF of −$7,000 annually throughout the machine's expected life of three years; and machine B, which will cost $125,000 to purchase and which will have OCF of −$2,600 annually throughout that machine's four-year life. Both machines will be worthless at the end of their life. If you intend to replace whichever type of machine you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 15 percent, using EAC which one should you choose?