Exam 12: Analyzing Project Cash Flows

The machine's after-tax incremental cash flow in year five is

Briefly explain why each of the following should or should not be considered in forecasting incremental cash flows from a project: a. the cost of building a prototype of a new product to see if it was feasible. b. market research suggests that after buying a company's "smart phone" customers will begin to buy more of the same company's notebook computers. c. a company decides to use existing space for storage. The company could have rented the space to another business for $2,500 a month.

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 included in the initial outlay?

The Board of Directors of Waste Free Chemicals is considering the acquisition of a new chemical processor. The processor is priced at $600,000 but would require $60,000 in transportation costs and $40,000 for installation. The processor will have a useful life of 10 years. The project will require Waste Free to increase its investment in accounts receivable by $80,000 and will also require an additional investment in inventory of $150,000. The firm's marginal tax rate is 40 percent. How much is the initial cash outlay of the processor?

When using MACRS depreciation, after-tax cash flows will generally be higher in the early years and lower in the later years than if straight-line depreciation had been used.

Cape Cod Cranberries is evaluating the introduction of a new line of organic cranberry products. Market research suggests that approximates 1/3 of sales of the new products will come at the expense of existing product lines. How should this "cannibalization effect" be incorporated into the analysis.

Which of the following would increase the net working capital for a project? An increase in

How is interest expense that is associated with a project treated in the capital budgeting process?

Which of the following is NOT considered in the calculation of incremental cash flows?

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

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

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

By examining cash flows, we are correctly able to analyze the timing of the benefits.

Nominal cash flows are expressed in terms of their purchasing power in a base year.

What would cause the initial cash outlay of an investment decision to be affected by the sale of an existing asset?

The introduction of a new product at Elia Pharmaceuticals will require a $450,000 increase in inventory, a $730,000 increase in Accounts Receivable, and a $180,000 increase in Accounts Payable. Introduction of the product will also require a $700,000 expenditure for advertising. The increase in net working capital required for the introduction of this product is

Stoneberg Printers purchased a press 4 years ago at a cost of $500,000. They are evaluating a more efficient replacement press which will cost $750,000. Both the old press and the replacement would be depreciated using 5 year MACRS. What would be the change in depreciation expense in the first year if the new press is purchased?

The Director of Capital Budgeting of Capital Assets Corp. is considering the acquisition of a new high speed photocopy machine. The photocopy machine is priced at $85,000 and would require $2,000 in transportation costs and $4,000 for installation. The equipment will have a useful life of 5 years. The proposal will require that Capital Assets Corp. send a technician for training at a cost of $5,000. The firm's marginal tax rate is 40 percent. How much is the initial cash outlay of the photocopy machine?

Regal Enterprises is considering the purchase of a new embroidering machine. It is expected to generate additional sales of $400,000 per year. The machine will cost $295,000, plus $3,000 to install it. The embroiderer will save $12,000 in labor expense each year. Regal is in the 34% income tax bracket. The machine will be depreciated on a straight-line basis over five years (it has no salvage value). The embroiderer will require annual operating expenses of $136,000. What is the annual operating cash flow that the machine will generate?