Exam 12: Analyzing Project Cash Flows

Sales captured from the firm's competitors can be relevant to the capital-budgeting decision.

ABC purchased a machine for $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. ABC plans to depreciate the machine by using the straight-line method. Assume that the firm's tax rate is 40%. What is the termination (non-operating) cash flow from the machine in year three?

It is possible for after-tax operating cash flows to be positive when accounting income is negative.

Jain's Pharmaceuticals is installing new lab equipment at a cost of $5 million with an economic life of 5 years. Jain's marginal tax rate is 35%. What is the difference in tax expense in the second year if depreciation is computed using MACRS rates rather than straight line?

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.

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

Clean-up and restoration costs required by government regulations are negative cash flows associated with a project's termination .

Increased taxes on the sale of the old machine are

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

If the federal income tax rate were increased, the impact of the tax increase on acceptable investment proposals would be to (ignore the impact of the tax change on the cost of capital)

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

Depreciation expenses affect capital budgeting analysis by increasing

A firm purchased an asset with a 5-year life for $90,000, and it cost $10,000 for shipping and installation. According to the current tax laws the cost basis of the asset at time of purchase is

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.

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

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.

The relevant depreciation expense for a replacement investment is the difference between depreciation on the new asset(s) and the old asset(s).

Which of the following is NOT one of the categories for a project's relevant after-tax cash flows?

Which of the following is an example of a sunk cost?

Jefferson Corporation is considering an expansion project. The necessary equipment could be purchased for $15 million and shipping and installation costs are another $500,000. The project will also require an initial $2 million investment in net working capital. The company's tax rate is 40%. What is the project's initial investment outlay (in millions)?