Exam 12: Analyzing Project Cash Flows

The Board of Directors of Waste Free Chemicals is considering the acquisition of a new chemical processor.The processor is priced at $600,000 but would require $60,000 in transportation costs and $40,000 for installation.The processor will have a useful life of 10 years.The project will require Waste Free to increase its investment in accounts receivable by $80,000 and will also require an additional investment in inventory of $150,000.The firm's marginal tax rate is 40 percent.How much is the initial cash outlay of the processor?

Which of the following best describes why cash flows are utilized rather than accounting profits when evaluating capital projects?

Anderson-EOG Inc.is evaluating the the construction of a gas pipeline to bring natural gas from Western New York state to New York City.The controller argues that depreciation has to be included among the expenses.The Treasurer argues that depreciation is irrelevant because it does not affect cash flow.Who is correct?

In measuring cash flows we are interested only in the incremental or differential after-tax cash flows that are attributed to the investment proposal being evaluated.

Which of the following is NOT considered in the calculation of incremental cash flows?

If an investment project would make use of land which the firm currently owns,the project should be charged with:

Working capital requirements are considered a cash flow even though they do not leave the company.

Which of the following cash flows should be included as incremental costs when evaluating capital projects?

A marketing survey completed last year to determine a project's feasibility would be included as part of the project's initial cash outflow.

The hardest step in capital budgeting analysis is calculating the cash flows of a project.

How is interest expense that is associated with a project treated in the capital budgeting process?

Greenspan Inc.discounts cash flows at a nominal rate of 10%.Inflation over the next few years is expected to average 3%.Which of the following would be a correct adjustment for inflation when computing net present value?

When determining how much overhead cost to include in incremental cash flows for a capital budgeting decision,the allocation of overhead by the accounting department based on percentage of space used by a project should always be used.

Additional cash needed to fill increased working capital requirements should be included in the initial cost of a product when analyzing an investment.

Which of the following should be included in the initial outlay?

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

When evaluating Capital Budgeting decisions,which of the following items should NOT be included in the construction of cash flow projections for purposes of analysis?

Briefly explain why each of the following should or should not be considered in forecasting incremental cash flows from a project: a.the cost of building a prototype of a new product to see if it was feasible. b.market research suggests that after buying a company's "smart phone" customers will begin to buy more of the same company's notebook computers. c.a company decides to use existing space for storage.The company could have rented the space to another business for $2,500 a month.

Woodstock Inc.expects to own a building for five years,then sell it for $1,500,000 net of taxes,sales commissions and other selling costs.Woodstock's cost of capital is 11%.How much will the sale of the building contribute to the NPV of the project?

What would cause the initial cash outlay of an investment decision to be affected by the sale of an existing asset?