Exam 12: Analyzing Project Cash Flows

Wright's Warehouse has the following projections for Year 1 of a capital budgeting project. Calculate the operating cash flow for Year 1.

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.

Your company is considering replacing an old steel cutting machine with a new one.Two months ago,you sent the company engineer to a training seminar demonstrating the new machine's operation and efficiency.The $2,500 cost for this training session has already been paid.If the new machine is purchased,it would require $5,000 in installation and modification costs to make it suitable for operation in your factory.The old machine originally cost $50,000 five years ago and has been depreciated by $7,000 per year for five years up to now.The new machine will cost $75,000 before installation and modification.It will be depreciated by $5,000 per year.The old machine can be sold today for $10,000.The marginal tax rate for the firm is 40%.Compute the relevant initial outlay in this capital budgeting decision.

In 2010,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 2011,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 2011 is:

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 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?

A firm purchased an asset with a 5-year life for $90,000,and it cost $10,000 for shipping and installation.According to the current tax laws the cost basis of the asset at time of purchase is:

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

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

Diamond Inc.has estimated that a new building will cost $2,500,000 to construct.Land was purchased a year ago for $500,000 and could be sold today for $550,000.An environmental impact study required by the state was performed at a cost of $48,000.For capital budgeting purposes,what is the relevant cost of the new building?

Depreciation expenses affect capital budgeting analysis by increasing:

Jefferson Corporation is considering an expansion project.The necessary equipment could be purchased for $15 million and shipping and installation costs are another $500,000.The project will also require an initial $2 million investment in net working capital.The company's tax rate is 40%.What is the project's initial investment outlay (in millions)?

In year 3 of project Gamma.sales were $3,000,0000,cost of goods sold $1,500,000,other cash costs were $400,000,depreciation was $600,000 and interest expense was $250,000.The company's marginal tax rate is 35%.Compute operating cash flow for year 3 of project Gamma.

A project under consideration by Bizet Co.will require the purchase of machinery for $50,000 and additional inventory for $15,000? Accounts receivable will increase by $12,000 and accounts payable by $14,000.Liability insurance will increase by $2,500 per year and utilities expense by $1,500 per year.What is the investment in working capital required by this project?

The machine's incremental after-tax cash inflow for year 1 is:

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 owner of a convenience store is considering adding a take-out sandwich section to her offerings.The new activity will occupy 25% of the space and account for 30% of total revenues.Property insurance on the building is $9,000 per year and will not change because of the new activity.How much of the insurance premium should be allocated to the new product line?

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

What is the advantage,if any,to using MACRS rather than straight line depreciation?

Al's Fabrication Shop is purchasing a new rivet machine to replace an existing one.The new machine costs $8,000 and will require an additional cost of $1,000 for modification and training.It will be depreciated using simplified straight line depreciation over five years.The new machine operates much faster than the old machine and with better quality.Consequently,sales are expected to increase by $2,100 per year for the next five years.While it is faster,it is fully automated and will result in increased electricity costs for the firm by $700 per year.It will,however,save about $850 per year in labor costs.The old machine is 20 years old and has already been fully depreciated.If the firm's marginal tax rate is 28%,compute the after tax incremental cash flows for the new machine for years 1 through 5.

Which of the following is NOT one of the categories for a project's relevant after-tax cash flows?