Exam 9: Capital Budgeting and Cash Flow Analysis

Com-Cat is considering expanding their current production facility.This year Com-Cat had an operating income (EBIT) of $760,000, interest expenses of $120,000, depreciation expenses of $45,000, and capital expenditures of $160,000.Next year, after the expansion is completed, operating income is expected to be $880,000, interest expenses will remain at $120,000, but depreciation will increase to $61,000.To support the expansion, cash is expected to increase by $5,000, accounts receivable by $12,000, inventories by $8,000, and accounts payable by $7,000.What is the change in Com-Cat's net operating cash flows attributable to this project, if the tax rate is 40%?

In terms of the capital budgeting process, net cash flows are

Rough & Tumble Clothiers is considering the purchase of a new loom to replace a less efficient one.The new machine will cost $240,000 including installation.The machine being replaced was purchased 5 years ago for $150,000 and is being depreciated as a 7-year MACRS property.It can be sold for $40,000.Compute the NINV for this project if KC has a marginal tax rate of 40%.Use the rounded MACRS schedule listed below: (7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

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 $9000.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.

Airstat is replacing an old stamping line that cost $80,000 five years ago, with a new, more efficient machine that will cost $225,000.Shipping and installation will cost an additional $20,000.The old machine has a book value of $15,000 but will be sold as scrap for $5,000.The new machine will be depreciated with a 7 year life under MACRS guidelines.With the increased production, inventories will increase $4,000, accounts receivable will increase $16,000, and accounts payable will increase $14,000.If Airstat has a marginal tax rate of 40 percent, what is the net investment?

is the term used when the initial cost of all acceptable capital budgeting projects is greater than the total funds the firm has available.

Anderson Clayton will purchase a new pellet mill that replace an older, less efficient, mill.The new mill costs $360,000 and shipping costs are $10,000.Improving the steam lines to the new mill will cost an additional $22,000.The old mill has a book value of $25,000 and can be sold for $12,000.The installation of the new mill will cause inventories to increase by $8,000, accounts receivable will go up $20,000, and accounts payable will increase $10,000.If Anderson Clayton has a marginal tax rate of 40%, what is the NINV for the new mill?

What is the marginal cost of capital and why does the MCC schedule increase as more funds are sought in the capital markets?

Which of the following are (is) generally considered problems associated with cash flow estimation?

Shunt Technology will spend $800,000 on a piece of equipment that will manufacture fine wire for the electronics industries.The shipping and installation charges will be $240,000 and net working capital will increase $48,000.The equipment will replace an existing machine that has a salvage value of $75,000 and a book value of $125,000.If Shunt has a current marginal tax rate of 34 percent, what is the net investment?

have cash flow patterns with more than one sign change.

Outback is purchasing a new machine that will cost $98,000.The machine will qualify as MACRS 5-year property but has an economic life of 8 years.The new machine is expected to increase revenues by $35,000 per year and operating costs are expected to increase by $15,000 per year.If the firm's marginal tax rate is 34 percent and the first year's depreciation rate is 20 percent, what is the net cash flow in the first year.

The decision by the Municipal Transportation Authority to either refurbish existing buses, to buy new large buses, or to supplement the existing fleet with mini-buses is an example of:

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

An investment project is expected to generate earnings before taxes (EBT) of $60,000 per year.Annual depreciation from the project is $30,000 and the firm's tax rate is 40 percent.Determine the project's annual net cash flows.

Ripstart is replacing an old, fully depreciated stamping line with a more efficient machine that will cost $245,000.The line will be depreciated as a 7-year MACRS asset.With the increased production, Ripstart expects revenues to increase by $55,000, and operating expenses to increase by $20,000.If Ripstart expects to sell the new machine at the end of year 5 for $40,000, compute the net cash flow in the fifth year.The MACRS depreciation rate during the fifth year is 8.93% and the accumulated MACRS depreciation after five years totals 77.69 percent of the cost of the asset.Assume the firm's marginal tax rate is 40 percent and that company does get to take the full benefit of year 5 depreciation.