Exam 12: Estimating Cash Flows on Capital Budgeting Projects

You are evaluating a project for The Ultimate recreational tennis racket,guaranteed to correct that wimpy backhand.You estimate the sales price of The Ultimate to be $300 per unit and sales volume to be 1,000 units in year 1; 1,250 units in year 2; and 1,325 units in year 3.The project has a three-year life.Variable costs amount to $200 per unit and fixed costs are $50,000 per year.The project requires an initial investment of $150,000 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 30 percent and the required return on the project is 10 percent.What will the free cash flow for this project be in year 2?

Your firm needs a machine which costs $20,000,and requires $1,000 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 40 percent and a discount rate of 9 percent.What is the depreciation tax shield for this project in year 3?

Suppose you sell a fixed asset for $112,000 when its book value is $112,000.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)?

A new project would require an immediate increase in raw materials in the amount of $1,000.The firm expects that accounts payable will automatically increase $800.How much must the firm expect its investment in net working capital to change if they accept this project?

Which of these is the concept that a unit's sales will follow an approximate bell-shaped curve versus a steady sales life?

Suppose you sell a fixed asset for $90,000 when its book value is $95,000.If your company's marginal tax rate is 40 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)?

Your company is considering the purchase of a new machine.The original cost of the old machine was $25,000; it is now five years old,and it has a current market value of $10,000.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 $12,500 and an annual depreciation expense of $2,500.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 $20,000 and whose estimated salvage value is zero.Expected before-tax cash savings from the new machine are $3,500 a year over its full MACRS depreciable life.Depreciation is computed using MACRS over a five-year life,and the cost of capital is 13 percent.Assume a 40 percent tax rate.What will the year 1 operating cash flow for this project be?

You are evaluating a project for your company.You estimate the sales price to be $50 per unit and sales volume to be 5,000 units in year 1; 10,000 units in year 2; and 2,500 units in year 3.The project has a three-year life.Variable costs amount to $10 per unit and fixed costs are $75,000 per year.The project requires an initial investment of $25,000 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 $5,000.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 change in NWC occurs at the end of year 1?

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 firm's flotation-adjusted cash flow in year 0?

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:

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:

You are evaluating a project for your company.You estimate the sales price to be $100 per unit and sales volume to be 5,000 units in year 1; 10,000 units in year 2; and 2,500 units in year 3.The project has a three-year life.Variable costs amount to $50 per unit and fixed costs are $75,000 per year.The project requires an initial investment of $250,000 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 35 percent and the required return on the project is 14 percent.What change in NWC occurs at the end of year 1?

You are trying to pick the least-expensive machine for your company.You have two choices: machine A,which will cost $50,000 to purchase and which will have OCF of −$3,500 annually throughout the machine's expected life of three years; and machine B,which will cost $75,000 to purchase and which will have OCF of −$4,900 annually throughout that machine's four-year life.Both machines will be worthless at the end of their life.If you intend to replace whichever type of machine 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 14 percent,which one should you choose?

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?

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: ________.

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)?

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?

A manufacturing firm is planning on expanding its existing operations.The expansion project is significant and will require the firm to house the expansion in a different location.The firm is considering building on a lot they own across town.The lot is currently vacant and it was paid for nearly 20 years ago.Given this information,which of the following statements is correct?

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 12 percent,what is the difference in the EAC of the two cars?

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 $10,000 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 $25,000 at the beginning of the project.What will the year 3 free cash flow for this project be?