Exam 8: Net Present Value and Capital Budgeting

Bluedo's has sales of $435,000, depreciation of $35,000, and net working capital of $56,000. The firm has a tax rate of 34% and a profit margin of 8%. The firm has no interest expense. What is the amount of the operating cash flow?

A decrease in a firm's current cash flows resulting from the implementation of a new project is referred to as:

The cash flow in dollars received in year 3 is expected to be $12,372. The firm uses a real discount rate of 4% and the inflation rate is expected to be 2.5%. What is the present value of the year 3 cash flow?

A reduction in the sales of an existing product caused by the introduction of a new product is an example of a(n):

A project's operating cash flow will increase when:

A firm purchases a new truck for $30,000. It will be depreciated over 5 years at $6,000 per year. If the tax rate is 30% what is the time 0 cash flow?

The bottom-up approach to computing the operating cash flow applies only when:

Money that the firm has already spent or is committed to spend regardless of whether a project is taken is called a(n):

Bruno's, Inc. is analyzing two machines to determine which one it should purchase. The company requires a 14% rate of return and uses straight-line depreciation to a zero book value. Machine A has a cost of $290,000, annual operating costs of $8,000, and a 3-year life. Machine B costs $180,000, has annual operating costs of $12,000, and has a 2-year life. Whichever machine is purchased will be replaced at the end of its useful life. Which machine should Bruno's purchase and why? (Round your answer to whole dollars.)

A project will produce an operating cash flow of $7,300 a year for three years. The initial cash investment in the project will be $11,600. The net after-tax salvage value is estimated at $3,500 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 11%?

The equivalent annual cost method is useful in determining:

You are considering replacing your current dado cutter with a new machine. The current machine is expected to last three more years but faces increasing repair costs of $2,500; $3,500; and $4,000 over the three years. You could salvage the machine now for $5,000; and then $3,000; $1,500; and 0 thereafter. The new dado cutter would cost $12,000 and require upkeep of $1,500 a year. The machine would last six years and be salvaged for $1,000. Should you replace the old machine now or wait one year? (Assume the tax rate is 0% and the cost of capital is 11%).

The Expresso Roast Corporation is considering the purchase of a new bean roaster and grinder. The revenues are expected to be the same for Expresso Roast no matter which machine is acquired. The Quick-Roast machine has a cost of $75,000 and is expected to last 4 years with operating costs of $12,000 per year. The Mellow-Roast Co. machine has a cost of $50,000 and operating costs of $4,500 per year but will last for only 2 years. The discount rate is 8%. What is the present value of the costs? What is the EAC and which machine should be chosen?

RoadRollers Paving Company is considering buying a new asphalt laying machine. The machine costs $1,300,000 and can be depreciated to zero on a straight-line basis over its life of 10 years. The machine is expected to have no salvage value. Revenues are expected to be $600,000 per year, and cost are estimated at $220,000 per year. Operating cash flows are expected to rise with inflation, forecasted at 4% per year. The risk free rate of interest is 2% and the real interest rate is 4.0%, and given the expected inflation rate, the nominal rate is 8.16%. The firm is in the 34% tax bracket. Should the investment be undertaken? A._04,10 = $1,955,974.73 Depreciation tax shield = (8.1109) ($130,000) (.34) = $358,501.78 NPV = $2,314,476.51 - 1,300,000 = $1,014,476.51); Accept.

This chapter introduced three new methods for calculating project operating cash flow (OCF). Under what circumstances is each method appropriate?

Cash revenues in a particular year are equal to sales less:

The top-down approach to computing the operating cash flow:

Peter's Boats has sales of $760,000 and a profit margin of 5%. The annual depreciation expense is $80,000. What is the amount of the operating cash flow if the company has no long-term debt?

The value of a previously purchased building used by a proposed project is an example of a(n):

The incremental cash flow from projects for a company is computed as the: