Exam 12: Estimating Cash Flows on Capital Budgeting Projects

You are evaluating a product for your company.You estimate the sales price of the 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?

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?

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.

Equipment was purchased for $100,000 plus $1,000 in freight charges.Installation costs were $500 and sales tax totaled $7,500.Hiring a special consultant to provide advice during the selection of the equipment cost $1,000.What is this asset's depreciable basis?

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?

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

You are trying to pick the least expensive car for your new delivery service.You have two choices: the Scion xA,which will cost $13,000 to purchase and which will have OCF of −$1,200 annually throughout the vehicle's expected life of three years as a delivery vehicle; and the Toyota Prius,which will cost $23,000 to purchase and which will have OCF of −$550 annually throughout that vehicle's expected five-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 16 percent,what is the difference in the EAC of the two cars?

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?

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.

You are evaluating a product for your company.You estimate the sales price of the 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?

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

All of the following are incremental cash flows attributable to the project EXCEPT:

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?

Which of the following statements is correct?

A decrease in net working capital (NWC)is treated as a:

Section 179 allows a business,with certain restrictions,to do which of the following?

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 0.40.The flotation cost for equity is 3 percent,the flotation cost for debt is 2 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?

You are evaluating a project for your company.You estimate the sales price to be $500 per unit and sales volume to be 2000 units in year 1; 3000 units in year 2; and 1500 units in year 3.The project has a three-year life.Variable costs amount to $300 per unit and fixed costs are $200,000 per year.The project requires an initial investment of $325,000 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 $50,000.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 12 percent.What is the operating cash flow for the project in year 2?

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):

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.