Exam 11: Capital Budgeting Cash Flows

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 annual incremental after-tax cash flow from operations for year 2 is ________. (See Table 11.2)

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. -Calculate the initial investment required for the new asset. (See Table 11.4)

The tax treatment regarding the sale of existing assets that are sold for less than the book value results in

Should financing costs such as the returns paid to bondholders and stockholders be considered in computing after tax operating cash flows? Why or why not?

Capital gain is the portion of the sale price that is in excess of the initial purchase price.

Companies involved in international capital budgeting projects can minimize political risks by structuring the investment as a joint venture and selecting a well-connected local partner.

Recaptured depreciation is the portion of the sale price that is below book value and has not been depreciated.

The three major cash flow components include the initial investment, non-operating cash inflows, and terminal cash flows.

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. -Calculate the incremental depreciation. (See Table 11.4)

Table 11.5 Nuff Folding Box Company, Inc. is considering purchasing a new gluing machine. The gluing machine costs $50,000 and requires installation costs of $2,500. This outlay would be partially offset by the sale of an existing gluer. The existing gluer originally cost $10,000 and is four years old. It is being depreciated under MACRS using a five-year recovery schedule and can currently be sold for $15,000. The existing gluer has a remaining useful life of five years. If held until year 5, the existing machine's market value would be zero. Over its five-year life, the new machine should reduce operating costs (excluding depreciation) by $17,000 per year. Training costs of employees who will operate the new machine will be a one-time cost of $5,000 which should be included in the initial outlay. The new machine will be depreciated under MACRS using a five-year recovery period. The firm has a 12 percent cost of capital and a 40 percent tax on ordinary income and capital gains. -The initial outlay for this project is ________. (See Table 11.5)

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 incremental depreciation expense for year 6 is ________. (See Table 11.2)

In evaluating a proposed project, incremental operating cash inflows are relevant cash flows.

Incremental cash flows represent the additional cash flows expected as a direct result of the proposed project.

Opportunity costs should be included as cash cash flows when determining a project's incremental cash flows.

A corporation is selling an existing asset for $1,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is

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 cash flow pattern for the replacement project is ________. (See Table 11.2)

The book value of an asset is equal to its depreciable value minus the accumulated depreciation.

If accounts receivable increase by $1,000,000, inventory decreases by $500,000, and accounts payable increase by $500,000, net working capital would

One basic technique used to evaluate after-tax operating cash flows is to

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 initial investment.