Exam 12: Analyzing Project Cash Flows

When computing the NPV of a project, it is important to consistently use either nominal dollars and nominal rates or real dollars and real rates.

Additional cash needed to fill increased working capital requirements should be included in the initial cost of a product when analyzing an investment.

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?

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

When an old asset is sold for exactly its depreciated value, the only taxable income is the difference between the initial cost of the machine and the selling price.

The salvage value of equipment should not be considered when replacing it with new equipment.

The calculation of differential cash flows over a project's life should include which of the following?

A project under consideration by Khalia Corporation will require the purchase of new equipment at a cost of $1,000,000 with a 3 year economic life. Kalia's marginal tax rate is 25%. What is the difference in tax expense in the second year if depreciation is computed using MACRS rates rather than straight line?

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.

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

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

Mr. Smith included the cost of test marketing before production in the calculation of the initial outlay. Apparently, Mr. Smith does not understand the concept of

Because installation costs of a new asset are a current cash expense, they are excluded from the initial outlay.

In 2017, Sunny Electronics expects to sell 100,000 3-D television sets for an average price of $1,000. Expected production costs are $600 per unit. In 2018, volume is expected to increase by 10%, while inflation will increase both the sales price and the cost per unit by 3%. In nominal dollars, expected gross profit for 2018 is

Which of the following is included in the calculation of the initial outlay for a capital investment?

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

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

Cape Cod Cranberries will finance a new organic juice production facility with a $10,000,000 bond issue. Interest on the bonds will be $637,500 per year for the life of the project. Should the interest payments be subtracted from the project's incremental cash flows?

ABC will purchase a machine that 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. ABC plans to depreciate the machine by using the straight-line method. The machine is expected to increase ABC's sales revenues by $1,890,000 per year; operating costs excluding depreciation are estimated at $454,600 per year. Assume that the firm's tax rate is 40%. What is the annual operating cash flow?

The real discount rate includes expected inflation.