Exam 11: Cash Flows and Other Topics in Capital Budgeting

Tillamook Farms invests in a new kind of frozen dessert called polar cream that becomes very popular.So many new customers come to the store that the sales of existing ice cream products are increased.The extra sales revenue

Blackjack Inc.wants to replace a 9-year-old machine with a new machine that is more efficient.The old machine cost $70,000 when new and has a current book value of $15,000.Blackjack can sell the machine to a foreign buyer for $14,000.Blackjack's tax rate is 35%.The effect of the sale of the old machine on the initial outlay for the new machine is

If depreciation expense in year one of a project increases for a highly profitable company

XYZ,Inc.has developed a project which results in additional accounts receivable of $400,000,additional inventory of $180,000,and additional accounts payable of $70,000.What is the additional investment in net working capital?

Interest payments on a loan obtained specifically to fund a new project should be considered an incremental cash flow for the new project when determining the accept/reject decision.

Bill and Mary own a small chain of high fashion boutiques that represent almost 100% of their net worth.When considering capital budgeting projects for their boutiques,the appropriate measure of risk is

The risk-adjusted discount rate method implicitly assumes that distant cash flows have the same risk as near cash flows.

A project's annual free cash flow is the change in operating cash flow less any change in net working capital and less any change in capital spending.

Alloy Corp.is considering the acquisition of a new processing line.The processor can be purchased for $3,750,000; it will have a 10-year useful life.It will cost $165,000 to ship and $85,250 to install the processor.A recently completed feasibility study that was performed at a cost of $65,000 indicated that the processor would produce a positive NPV.The processor will be depreciated using the straight-line method to zero expected salvage value.Studies have shown that employee-training expenses will be $125,000.What will be the annual depreciation expense of the processing line for capital budgeting purposes?

Additional investment in working capital,even if it may be recovered at the end of a project,must be included in capital budgeting analysis because of the time value of money.

Proceeds from the issuance of new debt and principal payments upon maturity of debt used to finance a project should be included in the calculation of the project's after-tax cash flows.

Your company is considering the replacement of an old delivery van with a new one that is more efficient.The old van cost $40,000 when it was purchased 5 years ago.The old van is being depreciated using the simplified straight-line method over a useful life of 8 years.The old van could be sold today for $7,000.The new van has an invoice price of $80,000,and it will cost $6,000 to modify the van to carry the company's products.Cost savings from use of the new van are expected to be $28,000 per year for 5 years,at which time the van will be sold for its estimated salvage value of $18,000.The new van will be depreciated using the simplified straight-line method over its 5-year useful life.The company's tax rate is 35%.Working capital is expected to increase by $5,000 at the inception of the project,but this amount will be recaptured at the end of year five.What is the terminal cash flow?

Dave Company,Inc.is considering purchasing a new grinding machine with a useful life of five years.The initial outlay for the machine is $165,000.The expected cash inflows are as follows: Given that the firm has a 10% required rate of return,what is the NPV?

The initial outlay for a new project is an example of an opportunity cost.

The risk-adjusted discount rate for a replacement decision will be less than the rate used by the same firm when considering a new product line.

Which of the following cash flows are NOT considered in the calculation of the initial outlay for a capital investment proposal?

The initial outlay includes the cost of purchasing the asset and getting is operational,but this excludes any training costs for employees which should be included as part of differential cash flows over the life of the project.

Free cash flow calculations can be broken down into three parts: cash flows from operations,cash flows associated with working-capital requirements,and financing cash flows relating to interest and dividend payments.

Smith Manufacturing Inc.expects the following results in year one of a new project: The annual change in operating cash flow is equal to

Bellington,Inc.is considering the purchase of new,sophisticated machinery for a special three-year project.The machinery requires a special lubricating oil that probably will never be used,but must be available at all times should the machine break down.Bellington purchases $2,000 of lubricating oil to keep on hand just in case it is needed.At the end of the three-year project,it is expected the lubricating oil can be sold back to the distributor for $2,000.Which of the following statements is MOST correct?