Exam 12: Analyzing Project Cash Flows

What is meant by "real dollars" and the "real" discount rate? How can they be used to account for inflation when evaluating capital budgeting proposals?

SpaceTech is considering a new project with the following projections for Year 2. If the projected net working capital needs for Year 1 was $150,000,calculate the free cash flow for Year 2.

Thaler & Co.anticipates an increase of $1,000,0000 in Net Operating Income from first year sales of a new product.Taxes will be $350,000 and the company took $150,000 in depreciation expense.Operating cash flow equals

Which of the following would be considered a termination cash flow?

Sunk costs are a type of incremental cash flow that should be included in all capital-budgeting decisions.

Working capital for a project includes investment in fixed assets.

ABC already spent $85,000 on a feasibility study for a machine that will produce a new product.The machine will cost $2,575,000.Required modifications will cost $375,000.ABC will need to invest $75,000 for additional inventory.The machine has an IRS approved useful life of 7 years;it is presumed to have no salvage value.It will only be operated for 3 years,after which it will be sold for $600,000.What is the total investment amount required for the machine?

Cape Cod Cranberries will finance a new organic juice production facility with a $10,000,000 bond issue.Interest on the bonds will be $637,500 per year for the life of the project.Should the interest payments be subtracted from the project's incremental cash flows?

Kahnemann Kookies is evaluating the replacement of an old oven with a new,more energy efficient model.The old oven cost $50,000,is 5 years old and is being depreciated over a life of 10 years to a value of $0.00.The new oven costs $60,000 and will be depreciated over 5 years with no salvage value.Kahnemann uses straight line depreciation,its tax rate is 40%.Compute: a.the change in annual depreciation that would result from purchasing the new machine. b.the change in taxes each year that would result from purchasing the new machine.

ABC purchased a machine for $2,575,000.Required modifications will cost $375,000.ABC will need to invest $75,000 for additional inventory.The machine has an IRS approved useful life of 7 years;it is presumed to have no salvage value.It will only be operated for 3 years,after-which it will be sold for $600,000.ABC plans to depreciate the machine by using the straight-line method.Assume that the firm's tax rate is 40%.What is the termination (non-operating)cash flow from the machine in year three?

Which of the following would decrease free cash flows? A decrease in:

Which of the following would cause free cash flow to differ from operating cash flow when an investment project is terminated?

The initial outlay of an asset does not include installation costs.

If Morgan Tool & Die Co.acquires a new turret lathe,the lathe will cost $80,000,transportation $6,000,installation $7,500.Installing the new lathe will allow Morgan to reduce its finished goods inventory by $10,000.For capital budgeting purposes,the initial investment required for the new lathe is:

Increased taxes on the sale of the old machine are:

It is not necessary to consider depreciation in estimating cash flows for a new capital project.

Cash flows associated with a project's termination generally include the salvage value of the project plus or minus any taxable gains or losses associated with its sale.

The pertinent issue for determining whether overhead costs should be part of a project's relevant after-tax cash flow is whether the project benefits from the overhead items.

Burr Habit Corporation is considering a new product line.The company currently manufactures several lines of snow skiing apparel.The new products,insulated ski shorts,are expected to generate sales less cost of goods sold of $1 million per year for the next five years.They expect that during this five year period,they will lose about $250,000 per year in sales less cost of goods sold on their existing lines of longer ski pants as a result of the introduction of the new product line.The new line will require no additional equipment or space in the plant and can be produced in the same manner as the existing apparel products.The new project will,however,require that the company spend an additional $80,000 per year on insurance in case customers sue for frostbite.Also,a new marketing director would be hired to oversee the line at $45,000 per year in salary and benefits.Because of the different construction of the shorts,an increase in inventory of 3,800 would be required initially.If the marginal tax rate is 30%,compute the incremental after tax cash flows per year for years 1-5.

Krugman Construction Company is considering the purchase of a new crane at a cost of $600,000.If the new crane is purchased the old crane will sold.It was purchased 5 years ago at a cost of $450,000.To date,the company has taken $200,000 in depreciation on the old crane.Compute the cash flow that would be realized from selling the old crane under each of the following scenarios.Krugman's marginal tax rate is 30%. a.The crane is sold for $200,000 b.The crane is sold for $250,000 c.The crane is sold for $300,000