Exam 12: Analyzing Project Cash Flows

The depreciation method used in capital budgeting is irrelevant because any depreciation not taken during the life of the project will add to the book value when assets are sold.

Because installation costs of a new asset are a current cash expense,they are excluded from the initial outlay.

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

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

When replacing an existing asset,the cash inflow associated with the sale of the old asset and any related tax effects must be considered and accounted for in the analysis.

In 2013,Sunny Electronics expects to sell 100,000 3-D television sets for an average price of $1,000.Expected production costs are $600 per unit.In 2014,volume is expected to increase by 10%,while inflation will increase both the sales price and the cost per unit by 3%.In real dollars,expected gross profit for 2014 is

A project under consideration by Bizet Co.will require the purchase of machinery for $50,000 and additional inventory for $15,000.Accounts receivable will increase by $12,000 and accounts payable by $14,000.Liability insurance will increase by $2,500 per year and utilities expense by $1,500 per year.What is the investment in working capital required by this project?

Use the following information to answer the following question(s). Delta Inc.is considering the purchase of a new machine which is expected to increase sales by $10,000 in addition to increasing non-depreciation expenses by $3,000 annually.Due to the sales increase,Delta will need to increase working capital by $1,000 at the beginning of the project.Delta will depreciate the machine using the straight-line method over the project's five year life to a salvage value of zero.The machine's purchase price is $20,000.The firm has a marginal tax rate of 34 percent,and its required rate of return is 12 percent. -The machine's initial cash outflow is

SpaceTech is considering a new project with the following projections for Year 2. Year 2 Projections EBIT $400,000 Interest Expense $20,000 Depreciation Expense $40,000 Tax Rate 40% Incremental Net Working Capital Needs $200,000

Depreciation expenses affect tax-related cash flows by

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

ABC will purchase a machine that 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.ABC plans to depreciate the machine by using the straight-line method.The machine is expected to increase ABC's sales revenues by $1,890,000 per year;operating costs excluding depreciation are estimated at $454,600 per year.Assume that the firm's tax rate is 40%.What is the annual operating cash flow?

Accounting profits represents free cash flows that are available for reinvestment.

When replacing old assets with new assets,it is safe to assume that working capital requirements will remain the same.

Taxes may have a significant effect on the cost of replacing an old asset with a new asset.

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

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

XYZ,Inc.is considering adding a product line that would utilize floor space in their manufacturing plant which is currently used for storage.XYZ will need to rent new storage space elsewhere.The floor space would be considered a(n)

Marguerite's Florist is considering the purchase of a new delivery van.It will cost $25,000 plus another $3,000 to have it painted in the company's characteristic floral motif.The van will be depreciated over 5 years using MACRS percentages and a half year convention.Compute depreciation for the second year in the life of the van.

What is the advantage,if any,to using MACRS rather than straight line depreciation?