Exam 11: Capital Budgeting Cash Flows

A sunk cost is a cash outlay that has already been made and cannot be recovered.

Compute the initial purchase price for an asset with book value of $34,800 and total accumulated depreciation of $85,200.

Sunk costs are cash outlays that have already been made and therefore have no effect on the cash flows relevant to the current decision.

Table 11.2 Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2014. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent. ________________________________________________________ *Not applicable -For Proposal 2, the initial outlay equals ________. (See Table 11.2)

When making replacement decisions, the development of relevant cash flows is complicated when compared to expansion decisions, due to the need to calculate ________ cash inflows.

Which of the following would be used in the computation of an initial investment?

If accounts receivable increase by $1,000,000, inventory decreases by $500,000, and accounts payable increase by $500,000, net working capital would ________.

The book value of an asset is equal to the ________.

An important cash inflow in the analysis of initial cash flows for a replacement project is ________.

Cash outlays that had been previously made and have no effect on the cash flows relevant to a current decision are called ________.

A firm is selling an existing asset for $5,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is ________.

Relevant cash flows are the incremental cash outflows and inflows associated with a proposed capital expenditure.

Table 11.1 Fine Press is considering replacing the existing press with a more efficient press. The new press costs $55,000 and requires $5,000 in installation costs. The old press was purchased 2 years ago for an installed cost of $35,000 and can be sold for $20,000 net of any removal costs today. Both presses are depreciated under the MACRS 5-year recovery schedule. The firm is in 40 percent marginal tax rate. -Calculate the initial investment of the new asset. (See Table 11.1)

Table 11.2 Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2014. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent. ________________________________________________________ *Not applicable -For Proposal 3, the incremental depreciation expense for year 3 is ________. (See Table 11.2)

Table 11.3 Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate. -The tax effect on the sale of the existing asset results in ________. (See Table 11.3)

Table 11.3 Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate. -The incremental depreciation expense for year 1 is ________. (See Table 11.3)

The three major cash flow components include the initial investment, operating cash flows, and terminal cash flow.

Table 11.2 Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2014. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent. ________________________________________________________ *Not applicable -For Proposal 2, the tax effect on the sale of the existing asset at the end of the fifth year results in ________. (See Table 11.2)

Table 11.3 Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate. -The cash flow pattern for the capital investment proposal is ________. (See Table 11.3)

Table 11.1 Fine Press is considering replacing the existing press with a more efficient press. The new press costs $55,000 and requires $5,000 in installation costs. The old press was purchased 2 years ago for an installed cost of $35,000 and can be sold for $20,000 net of any removal costs today. Both presses are depreciated under the MACRS 5-year recovery schedule. The firm is in 40 percent marginal tax rate. -Calculate the book value of the existing press being replaced. (See Table 11.1)