Exam 12: Analyzing Project Cash Flows

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?

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

If the new machine is purchased, depreciation expense will increase or decrease by

The owner of a convenience store is considering adding a take-out sandwich section to her offerings. The new activity will occupy 25% of the space and account for 30% of total revenues. Property insurance on the building is $9,000 per year and will not change because of the new activity. How much of the insurance premium should be allocated to the new product line?

ABC already spent $85,000 on a feasibility study for a machine that will produce a new product. The machine 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. It will only be operated for 3 years, after which it will be sold for $600,000. What is the depreciable cost basis of the machine?

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

Working capital for a project includes investment in fixed assets.

The method of depreciation generally used for tax reporting purposes is

Tversky and Co. have devised a new psychological test for investors' risk tolerance. They expect to sell 10,000 tests in the first year at $150 each. Cash costs associated with producing, administering and scoring the test are $50 per unit. In the second year, volume is expected to be the same, but both the price and the costs will increase 2.5%. Forecast gross profit in the second year.

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

It is more common in practice for companies to use cash flows estimated in real dollars discounted at the real rate of interest than to use nominal dollars and the nominal discount rate.

Which of the following may affect initial investment, interim operating cash flows and terminal cash flows?

Holding all other variables constant, which of the following would INCREASE net working capital for given year on a project?

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 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

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.

ABC already spent $85,000 on a feasibility study for a machine that will produce a new product. The machine 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. It will only be operated for 3 years, after which it will be sold for $600,000. What is the total investment amount required for the project?

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

Famous Danish Corp. is replacing an old cookie cutter with a new one. The cookie cutter is being sold for $25,000 and it has a net book value of $75,000. Assume that Famous Danish is in the 34% income tax bracket. How much will Famous Danish net from the sale?