Exam 12: Estimating Cash Flows on Capital Budgeting Projects

A financial analyst calculated that the after-tax salvage value for a machine was $10,200.The current book value of the asset is $25,000 and the firm's tax rate is 20 percent.How much could the machine be sold for today?

An asset's cost plus the amounts you paid for items such as sales tax,freight charges,and installation and testing fees is referred to as the: ___________________.

Which of the following statements is correct?

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

You are evaluating a project for The Tiff-any golf club,guaranteed to correct that nasty slice.You estimate the sales price of The Tiff-any to be $375 per unit and sales volume to be 1,000 units in year 1; 1,400 units in year 2; and 1,325 units in year 3.The project has a three-year life.Variable costs amount to $225 per unit and fixed costs are $100,000 per year.The project requires an initial investment of $165,000 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 $35,000.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?

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $60,000.The truck falls into the MACRS three-year class,and it will be sold after three years for $14,000.Use of the truck will require an increase in NWC (spare parts inventory)of $3,000.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?

When calculating operating cash flow for a project,why would one treat EBIT as a negative for tax purposes when there is an operating loss?

Your company has spent $200,000 on research to develop a new computer game.The firm is planning to spend $40,000 on a machine to produce the new game.Shipping and installation costs of the machine will be capitalized and depreciated; they total $5,000.The machine has an expected life of five years,a $25,000 estimated resale value,and falls under the MACRS five-year class life.Revenue from the new game is expected to be $300,000 per year,with costs of $100,000 per year.The firm has a tax rate of 35 percent,an opportunity cost of capital of 14 percent,and it expects net working capital to increase by $50,000 at the beginning of the project.What will be the operating cash flow for year one of this project?

When calculating operating cash flow for a project,one would calculate it as being mathematically equal to which of the following?

If a firm has already paid an expense or is obligated to pay one in the future,regardless of whether a particular project is undertaken,that expense is a:

Your firm needs a computerized machine tool lathe that costs $50,000,requires $10,000 in installation,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.

A new project would require an immediate increase in raw materials in the amount of $12,000.The firm expects that accounts payable will automatically increase $8,500.How much must the firm expect its investment in net working capital to change if they accept this project?

To compute and use the Equivalent Annual Cost (EAC)approach of two or more alternative assets,what would one need?

If a firm has already paid an expense or is obligated to pay one in the future,regardless of whether a particular project is undertaken,that expense is a(n):

A local bank is contemplating adding a new ATM to their lobby.They will need another phone line to provide communications that has a monthly cost of $50 per month.This is an example of:

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

You are evaluating two different cookie-baking ovens.The Pillsbury 707 costs $25,000,has a six-year life,and has an annual OCF (after tax)of -$5,000 per year.The Keebler CookieMunster costs $40,000,has a seven-year life,and has an annual OCF (after tax)of -$500 per year.If your discount rate is 10 percent,what is each machine's EAC?

Your firm needs a computerized machine tool lathe that costs $50,000,requires $10,000 in installation,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.If the lathe can be sold for $7,000 at the end of year 3,what is the after-tax salvage value?

You are considering the purchase of one of two machines used in your manufacturing plant.Machine A has a life of two years,costs $100 initially,and then $150 per year in maintenance costs.Machine B costs $200 initially,has a life of three years,and requires $120 in annual maintenance costs.Either machine must be replaced at the end of its life with an equivalent machine.Which is the better machine for the firm? The discount rate is 12 percent and the tax rate is zero.

A local bank is contemplating opening a new branch bank in a large superstore across town from their main office.It is estimated that the new branch will generate $20,000 after expenses each month.The manager wonders if all these revenues should be considered an incremental cash flow.Given this information,which of the following statements is correct?