Exam 12: Analyzing Project Cash Flows

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?

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

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?

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

If depreciation expense is taken over 5 years rather than 3 years,all things equal,

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

The initial outlay involves the immediate cash outflow necessary to purchase the asset and put it in operating order.

To be conservative,capital budgeting analysis assumes that projects cannot add sales to existing lines of business.

LaVigne Wineries is purchasing a new wine press.The equipment will cost $250,000.Transportation and installation will cost another $35,000.Because of increased production,inventories will increase by $15,000.The press will be depreciated using the straight line method to a book value of $0.00 over its useful life of 7 years.Compute depreciation for each year of the project.

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?

Al's Fabrication Shop is purchasing a new rivet machine to replace an existing one.The new machine costs $8,000 and will require an additional cost of $1,000 for modification and training.It will be depreciated using simplified straight line depreciation over five years.The new machine operates much faster than the old machine and with better quality.Consequently,sales are expected to increase by $2,100 per year for the next five years.While it is faster,it is fully automated and will result in increased electricity costs for the firm by $700 per year.It will,however,save about $850 per year in labor costs.The old machine is 20 years old and has already been fully depreciated.If the firm's marginal tax rate is 28%,compute the after tax incremental cash flows for the new machine for years 1 through 5.

Thaler & Co.anticipates an increase of $1,000,000 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

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

Which of the following should be considered in the estimation of free cash flows?

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.

Working capital for a project includes investment in fixed assets.

Which of the following is NOT part of a project's initial cash outflow?

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

Depreciation expenses affect capital budgeting analysis by increasing

Cape Cod Cranberry Products is evaluating the introduction of a new line of juice drinks consisting of cranberry juice blended with sweeter juices such as apple or grape.In the first year the product line is introduced,sales are forecasted at $2,000,000,Cost of Goods Sold at $1,200,000,other cash expenses at $300,000,depreciation expense at $800,000.The company has many other profitable product lines.It's marginal tax rate is 35%.Compute operating cash flow for the first year.