Exam 12: Analyzing Project Cash Flows

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?

The machine's IRR is

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?

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

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

The initial investment for this decision is

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

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

National Geographic is replacing an old printing press with a new one. The old press is being sold for $350,000 and it has a net book value of $75,000. Assume that National Geographic is in the 40% income tax bracket. How much will National Geographic pay in income taxes from the sale?

Bull Gator Industries is considering a new assembly line costing $6,000,000. The assembly line will be fully depreciated by the simplified straight line method over its 5 year depreciable life. Operating costs of the new machine are expected to be $1,100,000 per year. The existing assembly line has 5 years remaining before it will be fully depreciated and has a book value of $3,000,000. If sold today the company would receive $2,400,000 for the existing machine. Annual operating costs on the existing machine are $2,100,000 per year. Bull Gator is in the 46 percent marginal tax bracket and has a required rate of return of 12 percent. a. Calculate the net present value of replacing the existing machine. b. Explain the impact on NPV of the following: i. Required rate of return increases ii. Operating costs of new machine are increased iii. Existing machine sold for less

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%. If the old oven is sold for $10,000, compute the net cost of the new oven.

If SuperMart decides to offer a line of groceries at its discount retail outlet, inventories are expected to increase by $1,200,000, accounts receivable by $300,000 and accounts payable by $500,000. What is the cash outflow for working capital requirements?

Tully's Tool and Die has the following projections for Year 1 of a capital budgeting project. Year 1 Incremental Projections: Sales $400,000 Variable Costs $240,000 Fixed Costs $80,000 Depreciation Expense $40,000 Tax Rate 35% Calculate the operating cash flow for Year 1.

Which of the following cash flows should not be included as incremental costs or revenues 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 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?

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

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

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)

A company converts space to use as a manufacturing facility. Previously it was rented to another company as a warehouse. This is an example of a sunk cost.

Which of the following expenses should be included when estimating cash flows for investment projects?