Exam 12: Estimating Cash Flows on Capital Budgeting Projects

You are evaluating a project for your company.You estimate the sales price to be $25 per unit and sales volume to be 4,000 units in year 1; 7,000 units in year 2; and 1,000 units in year 3.The project has a three-year life.Variable costs amount to $10 per unit and fixed costs are $50,000 per year.The project requires an initial investment of $10,000 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 $1,000.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 10 percent.What change in NWC occurs at the end of year 1?

The process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements is referred to as:

Accelerated depreciation allows firms to:

KADS,Inc.,has spent $400,000 on research to develop a new computer game.The firm is planning to spend $50,000 on a machine to produce the new game.Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000.The machine has an expected life of three years,a $15,000 estimated resale value,and falls under the MACRS five-year class life.Revenue from the new game is expected to be $500,000 per year,with costs of $300,000 per year.The firm has a tax rate of 35 percent,an opportunity cost of capital of 15 percent,and it expects net working capital to increase by $55,000 at the beginning of the project.What will the year 3 free cash flow for this project be?

As new capital budgeting projects arise,we must estimate:

Which of these is used as a measure of the total amount of available cash flow from a project?

Which of the following is NOT included when calculating the depreciable basis for real property?

Your firm needs a machine which costs $100,000,and requires $25,000 in maintenance for each year of its three-year life.After three years,this machine will be replaced.The machine falls into the MACRS three-year class life category.Assume a tax rate of 35 percent and a discount rate of 14 percent.What is the depreciation tax shield for this project in year 3?

You are evaluating a product for your company.You estimate the sales price of product to be $375 per unit and sales volume to be 500 units in year 1; 1,000 units in year 2; and 200 units in year 3.The project has a three-year life.Variable costs amount to $200 per unit and fixed costs are $100,000 per year.The project requires an initial investment of $175,000 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 $20,000.NWC requirements at the beginning of each year will be approximately 25 percent of the projected sales during the coming year.The tax rate is 34 percent and the required return on the project is 10 percent.What will the year 2 free cash flow for this project be?

How would you compute the equity flotation cost if a firm were going to use a mixture of retained earnings and new equity to finance a project? Give an example.

KADS,Inc.,has spent $400,000 on research to develop a new computer game.The firm is planning to spend $250,000 on a machine to produce the new game.Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000.The machine has an expected life of three years,a $75,000 estimated resale value,and falls under the MACRS seven-year class life.Revenue from the new game is expected to be $600,000 per year,with costs of $250,000 per year.The firm has a tax rate of 35 percent,an opportunity cost of capital of 15 percent,and it expects net working capital to increase by $100,000 at the beginning of the project.What will the year 0 free cash flow for this project be?

Everything held constant,would you rather depreciate a project with straight-line depreciation or with DDB?

Your firm needs a computerized machine tool lathe that costs $50,000,requires $10,000 in installation,$5,000 in freight charges,and another $12,000 in maintenance for each year of its three-year life.After three years,this machine will be replaced.The machine falls into the MACRS three-year class life category.Assume a tax rate of 30 percent and a discount rate of 12 percent.Calculate the depreciation tax shield for this project in year 1.

Your firm needs a machine which costs $60,000,and requires $15,000 in maintenance for each year of its five-year life.After five years,this machine will be replaced.The machine falls into the MACRS five-year class life category.Assume a tax rate of 35 percent and a discount rate of 10 percent.If this machine can be sold for $8,000 at the end of year 5,what is the after-tax salvage value?

AB Mining Company just commissioned a firm to identify if an unused portion of their mine contains any silver or gold at a cost of $125,000.This is an example of a(n):

KADS,Inc.,has spent $400,000 on research to develop a new computer game.The firm is planning to spend $50,000 on a machine to produce the new game.Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000.The machine has an expected life of three years,a $75,000 estimated resale value,and falls under the MACRS five-year class life.Revenue from the new game is expected to be $500,000 per year,with costs of $200,000 per year.The firm has a tax rate of 35 percent,an opportunity cost of capital of 15 percent,and it expects net working capital to increase by $100,000 at the beginning of the project.What will the year 2 free cash flow for this project be?

You are evaluating a product for your company.You estimate the sales price of product to be $200 per unit and sales volume to be 2,000 units in year 1; 5,000 units in year 2; and 1,000 units in year 3.The project has a three-year life.Variable costs amount to $75 per unit and fixed costs are $200,000 per year.The project requires an initial investment of $360,000 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 $40,000.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 13 percent.What will the year 2 free cash flow for this project be?

A financial analyst calculated that the after-tax salvage value for a machine was $10,200.The current book value of the asset is $12,000 and the firm's tax rate is 30 percent.How much could the machine be sold for today?

Which of the following measures the operating cash flow a project produces minus the necessary investment in operating capital,and is as valid for proposed new projects as it is for the firm's current operations?

To correctly project cash flows,we need to consider all of the factors EXCEPT: