Exam 12: Estimating Cash Flows on Capital Budgeting Projects

In a cost-cutting proposal,what might cause you to sometimes have a negative EBIT?

Effects that arise from a new product or service that increase sales of the firm's existing products or services are referred to as:

Which of the following statements is correct with respect to Section 179 deductions?

You are trying to pick the least expensive car for your new delivery service.You have two choices: the Scion xA,which will cost $15,000 to purchase and which will have OCF of -$1,600 annually throughout the vehicle's expected life of four years as a delivery vehicle; and the Toyota Prius,which will cost $27,000 to purchase and which will have OCF of -$750 annually throughout that vehicle's expected six-year life.Both cars will be worthless at the end of their life.If you intend to replace whichever type of car 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 10 percent,what is the EAC of the most expensive car?

Suppose you sell a fixed asset for $99,000 when its book value is $129,000.If your company's marginal tax rate is 39 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)?

Explain how accelerated depreciation affects project cash flows.

All of the following can be included in the depreciable basis of an asset EXCEPT:

You are evaluating a product for your company.You estimate the sales price of product to be $50 per unit and sales volume to be 50,000 units in year 1; 75,000 units in year 2; and 10,000 units in year 3.The project has a three-year life.Variable costs amount to $15 per unit and fixed costs are $100,000 per year.The project requires an initial investment of $275,000 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 $25,000.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 34 percent and the required return on the project is 9 percent.What will the year 2 free cash flow for this project be?

Give an example of each of the following: (a)opportunity cost,(b)substitutionary effect,(c)complementary effect and (d)sunk cost.

Coke is planning on marketing a new drink called Very Berry Coke which is a mixture of raspberry and blackberry flavors blended to perfection and added to the highly secret Coca-Cola formula.This new product is expected to reduce the sales of their existing product,Cherry Coke,by $10 million dollars per year.This is an example of a:

Equipment was purchased for $45,000 plus $2,000 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 is the IRS convention that requires that all property placed in service during a given period is assumed to be placed in service at the midpoint of that period?

You are evaluating a product for your company.You estimate the sales price of product to be $300 per unit and sales volume to be 8,000 units in year 1; 10,000 units in year 2; and 2,000 units in year 3.The project has a three-year life.Variable costs amount to $125 per unit and fixed costs are $150,000 per year.The project requires an initial investment of $225,000 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 $25,000.NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year.The tax rate is 34 percent and the required return on the project is 14 percent.What will the year 2 free cash flow for this project be?

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 34 percent.Estimate the present value of the tax benefits from depreciation.

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $75,000.The truck falls into the MACRS three-year class,and it will be sold after three years for $13,000.Use of the truck will require an increase in NWC (spare parts inventory)of $5,000.The truck will have no effect on revenues,but it is expected to save the firm $20,000 per year in before-tax operating costs,mainly labor.The firm's marginal tax rate is 40 percent.What will the operating cash flow for this project be during year 3?

Explain why we use pro forma statements to analyze project cash flows.

The research chemists at MegaClean created a new cleaner that keeps car and truck tires shiny and clean for one year.They believe that this product will be highly successful and will attract customers to purchase their existing line of household cleaning products.This is an example of:

Which of the following expenditures qualify for the Section 179 deduction? a.Machinery and equipment b.Furniture and fixtures c.Buildings d.Off-the-shelf computer software e.Property purchased from related parties f.Furniture held in a trust g.Property acquired by inheritance

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $50,000.The truck falls into the MACRS three-year class,and it will be sold after three years for $5,000.Use of the truck will require an increase in NWC (spare parts inventory)of $2,000.The truck will have no effect on revenues,but it is expected to save the firm $25,000 per year in before-tax operating costs,mainly labor.The firm's marginal tax rate is 40 percent.What will the operating cash flow for this project be during year 2?

A new project would require an immediate increase in raw materials in the amount $17,000.The firm expects that accounts payable will automatically increase $7,000.How much must the firm expect its investment in net working capital to increase if they accept this project?