Exam 12: Estimating Cash Flows on Capital Budgeting Projects

Your company is considering a new project that will require $250,000 of new equipment at the start of the project.The equipment will have a depreciable life of eight years and will be depreciated to a book value of $10,000 using straight-line depreciation.The cost of capital is 12 percent,and the firm's tax rate is 34 percent.Estimate the present value of the tax benefits from depreciation.

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?

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

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

When looking at which of these types of projects,one must consider any cash flows that arise from surrendering old equipment before the end of its useful life?

Your company is considering the purchase of a new machine.The original cost of the old machine was $75,000; it is now five years old,and it has a current market value of $20,000.The old machine is being depreciated over a 10-year life toward a zero estimated salvage value on a straight-line basis,resulting in a current book value of $37,500 and an annual depreciation expense of $7,500.The old machine can be used for six more years but has no market value after its depreciable life is over.Management is contemplating the purchase of a new machine whose cost is $60,000 and whose estimated salvage value is zero.Expected before-tax cash savings from the new machine are $10,000 a year over its full MACRS depreciable life.Depreciation is computed using MACRS over a five-year life,and the cost of capital is 9 percent.Assume a 40 percent tax rate.What will the year 1 operating cash flow for this project be?

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?

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?

Your firm needs a machine which costs $90,000,and requires $30,000 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 13 percent.What is the depreciation tax shield for this project in year 5?

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?

Which of these is the process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements?

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 $5,000 using straight-line depreciation.The cost of capital is 14 percent,and the firm's tax rate is 30 percent.Estimate the present value of the tax benefits from depreciation.

A new project would require an immediate increase in raw materials in the amount $6,000.The firm expects that accounts payable will automatically increase $2,000.How much must the firm expect its investment in net working capital to increase if they accept this project?

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

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

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?

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

Your firm needs a computerized machine tool lathe that costs $50,000 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 $6,000 at the end of year 3,what is the after-tax salvage value?

Equipment was purchased for $50,000 plus $2,500 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?

Your company is considering a project that will cost $100.The project will generate after-tax cash flows of $37.50 per year for five years.The WACC is 10 percent and the firm's D/A ratio is 0.70.The flotation cost for equity is 6 percent,the flotation cost for debt is 3 percent,and your firm does not plan on issuing any preferred stock within its capital structure.If your firm follows the practice of incorporating flotation costs into the project's initial investment,what is the weighted-average flotation cost for the firm?