Exam 11: Capital Budgeting Cash Flows

Table 11.3 Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate. -The incremental depreciation expense for year 5 is ________. (See Table 11.3)

Table 11.2 Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent. __________________________________________________________ *Not applicable -For Proposal 2, the initial outlay equals ________. (See Table 11.2)

The relevant cash flows for a proposed capital expenditure are the incremental after-tax cash outflows and resulting subsequent inflows.

Table 11.3 Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate. -The annual incremental after-tax cash flow from operations for year 1 is ________. (See Table 11.3)

Benefits expected from proposed capital expenditures must be on an after-tax basis because

An asset was purchased three years ago for $100,000 and can be sold for $40,000 today. The asset has been depreciated using the MACRS 5-year recovery period and the firm pays 40 percent taxes on both ordinary income and capital gain. (a) Compute recaptured depreciation and capital gain (loss), if any. (b) Find the firm's tax liability.

Table 11.4 Degnan Dance Company, Inc., a manufacturer of dance and exercise apparel, is considering replacing an existing piece of equipment with a more sophisticated machine. The following information is given. The firm pays 40 percent taxes on ordinary income and capital gains. -Given the information in Table 11.4, compute the payback period.

In computing after-tax operating cash flows, only operating costs but not financing costs must be deducted from any cash inflows received.

Table 11.2 Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent. __________________________________________________________ *Not applicable -For Proposal 3, the book value of the existing asset is ________. (See Table 11.2)

All of the following must be considered in computing the terminal value of a replacement project EXCEPT

A mixer was purchased two years ago for $120,000 and can be sold for $125,000 today. The mixer has been depreciated using the MACRS 5-year recovery period and the firm pays 40 percent taxes on both ordinary income and capital gain. (a) Compute recaptured depreciation and capital gain (loss), if any. (b) Find the firm's tax liability.

An important cash inflow in the analysis of initial cash flows for a replacement project is

Compute the depreciation values for an asset which costs $55,000 and requires $5,000 in installation costs using MACRS 5-year recovery period.

To calculate the initial investment, we subtract all cash inflows occurring at time zero from all cash outflows occurring at time zero.

Cash outlays that had been previously made and have no effect on the cash flows relevant to a current decision are called

Table 11.2 Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent. __________________________________________________________ *Not applicable -For Proposal 1, the cash flow pattern for the expansion project is ________. (See Table 11.2)

A loss on the sale of an asset that is depreciable and used in business is ________; a loss on the sale of a non-depreciable asset is ________.

Please explain the difference between a sunk cost and an opportunity cost and give an example of each type of cost.

Under MACRS depreciation, the depreciable value of an asset is equal to the asset's purchase price minus any installation costs.

A corporation is considering expanding operations to meet growing demand. With the capital expansion, the current accounts are expected to change. Management expects cash to increase by $20,000, accounts receivable by $40,000, and inventories by $60,000. At the same time accounts payable will increase by $50,000, accruals by $10,000, and long-term debt by $100,000. The change in net working capital is