Exam 12: Analyzing Project Cash Flows

Incremental cash flows from a project =

Anderson-EOG Inc.is evaluating the construction of a gas pipeline to bring natural gas from Western New York state to New York City.The controller argues that every project of the company has to absorb a portion of administrative overhead including corporate headquarters and executive salaries.The Treasurer argues that these costs are irrelevant because they are merely being shifted from part of the company to another.Who is correct?

When computing project cash flows,it is necessary to apply the same rate of inflation to all costs and revenues.

Regal Enterprises is considering the purchase of a new embroidering machine.It is expected to generate additional sales of $400,000 per year.The machine will cost $295,000,plus $3,000 to install it.The embroiderer will save $12,000 in labor expense each year.Regal is in the 34% income tax bracket.The machine will be depreciated on a straight-line basis over five years (it has no salvage value).The embroiderer will require annual operating expenses of $136,000.What is the annual operating cash flow that the machine will generate?

Which of the following is the best example of an incremental cash inflow/outflow?

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

Which of the following cash flows are NOT considered in the calculation of the initial outlay for a capital investment proposal?

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.

Anderson-EOG Inc.is evaluating 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?

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.

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

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.

Which of the following would increase the net working capital for a project? An increase in

Which of the following is included in the terminal cash flow?

Schiller Construction Inc.has estimated the following revenues and expenses related to phase I of a proposed new housing development.Incremental sales= $5,000,000,total cash operating expenses $3,500,000,depreciation $500,000,taxes 35%,interest expense,$200,000.Operating cash flow equals

Increased taxes on the sale of the old machine are

Relevant incremental cash flows include

Cape Cod Cranberries is evaluating the introduction of a new line of organic cranberry products.Market research suggests that approximates 1/3 of sales of the new products will come at the expense of existing product lines.How should this "cannibalization effect" be incorporated into the analysis.

The original cost and expected life of old assets are critical considerations in replacement decisions.

In the fourth and final year of a project,SVC expects operating cash flow of $440,000.The project required an $80,000 investment in working capital at the beginning.Of that amount,$60,000 will be recovered in year 4.Machinery associated with the project will be sold for exactly its undepreciated value of $15,000.Total free cash flow for the fourth year is