Exam 10: Capital Budgeting and Cash Flow Analysis

The effect of a one-dollar increase in depreciation expenses is to ____ the typical firm's net cash flows by ____ one dollar.

Seduck has just replaced a set of hydraulic screens that had been in operation for 6 years with a newer screening system that cost $180,000 installed. The old system cost $140,000 and had been depreciated as a 10-year MACRS asset. Its salvage value is $10,000. What is the NINV for the new equipment? Assume a 40% tax rate. Use the rounded MACRS schedule listed below: (10-Year Depreciation Schedule: 10%, 18%, 14%, 12%, 9%, 7%, 7%, 7%, 7%, 6%, 3%)

Most existing products become obsolete. For a firm to continue to grow, it must do all of the following EXCEPT ____.

The difference between a capital expenditure and an operating expenditure is that a capital expenditure ____.

Depreciation ____ reported profits and it ____ taxes paid by a firm.

LISP Inc. is planning to purchase a new mixer for $50,000 that will qualify as MACRS 3-year property (first-year depreciation rate = 33.33%). The new mixer should increase revenues by $20,000 per year, with no increase in operating cost. If LISP's marginal tax rate is 40 percent, what is the net cash flow in the first year?

In classifying investment projects, there are several types of capital expenditures. List them.

Martin Tartans Inc. is considering the purchase of a new argyle sock knitting machine to replace a less automated one. The new machine will cost $220,000 plus $30,000 for shipping and installation. The machine being replaced was purchased five years ago for $140,000 and depreciated as a 7-year MACRS property. It can be sold for $24,000. Martin has a marginal tax rate of 35%. Compute the NINV for the project. Use the rounded MACRS schedule listed below: (7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

The management of Jasper Equipment Company is planning to purchase a new milling machine that will cost $160,000 installed. The old milling machine has been fully depreciated but can be sold for $15,000. The new machine will be depreciated on a straight-line basis over its 10-year economic life to an estimated salvage value of $10,000. If this milling machine will save Jasper $20,000 a year in production expenses, what are the annual net cash flows associated with the purchase of this machine? Assume a marginal tax rate of 40 percent.

____ have cash flow patterns with more than one sign change.

A term meaning that the firm has limited funds and must choose only those projects that will be profitable is ____.

Pixaire purchased a new mixer to replace an older system. The older system, which cost $100,000, is 5 years old now and was being depreciated over a MACRS life at 7 years. The new mixer, which will cost $270,000, will also be depreciated as a 7-year asset for MACRS purposes. The new mixer is expected to increase revenues by $64,000 with no additional operating expenses. Determine the net operating cash flows in year 2 for the new mixer. Assume a 40% tax rate. Use the rounded MACRS schedule listed below: (7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

The ____ of an asset are the cash flows that the asset could generate if it were not used in the project under consideration.

Capital Foods purchased an oven 5 years ago for $45,000. The oven is being depreciated over its estimated 10-year life using the straight-line method to a salvage value of $5,000. Capital is planning to replace the oven with a more automated one that will cost $150,000 installed. If the old oven can be sold for $30,000, what is the tax liability? Assume a marginal tax rate of 40 percent.

What is the net investment required for a pitting machine that will cost $35,000 including installation? The machine replaces a machine that cost $5,000 when purchased five years ago. The old machine has been fully depreciated but has a market value of $6,000. Assume the marginal tax rate is 40 percent.

The determination of net cash flows (NCF) should NEVER include

The total accumulated net working capital of a project is normally recovered in the project's ____ year.

Consider a capital expenditure project with an expected 10-year economic life and forecasted revenues equal to $40,000 per year; cash expenses are estimated to be $29,000 per year. The cost of the project equipment is $23,000, and the equipment's estimated salvage value at the end of the project is $9,000. The equipment's $23,000 cost will be depreciated using MACRS depreciation (7-year asset). The project requires a $7,000 working capital investment in year 0 and another $5,000 in year 5. The company's marginal tax rate is 40%. Calculate the expected net cash flow in year 10 of the project.

The value of resources used in an investment project should be measured in terms of their ____ cost.

Rupp Pumps is purchasing an extruder for $80,000. The extruder will require an expenditure of $12,000 for installation and $4,000 for training new operators. The new equipment will require an increase of $5,000 in inventory, $4,000 in accounts receivable, and $3,000 in accounts payable. What is the net investment for this project?