Exam 12: Analyzing Project Cash Flows

Cape Cod Cranberries will finance a new organic juice production facility with a $10,000,000 bond issue.Interest on the bonds will be $637,500 per year for the life of the project.Should the interest payments be subtracted from the project's incremental cash flows?

Use the following information to answer the following question(s). A firm is trying to determine whether to replace an existing asset.The proposed asset has a purchase price of $50,000 and has installation costs of $3,000.The asset will be depreciated over its five year life using the straight-line method.The new asset is expected to increase sales by $17,000 and non-depreciation expenses by $2,000 annually over the life of the asset.Due to the increase in sales,the firm expects an increase in working capital during the asset's life of $1,500,and the firm expects to be able to sell the asset for $6,000 at the end of its life.The existing asset was originally purchased three years ago for $25,000,has a remaining life of five years,and is being depreciated using the straight-line method.The expected salvage value at the end of the asset's life (i.e. ,five years from now)is $5,000;however,the current sale price of the existing asset is $20,000,and its current book value is $15,625.The firm's marginal tax rate is 34 percent and its required rate of return is 12 percent. -If the new machine is purchased,depreciation expense will increase or decrease by

National Geographic is replacing an old printing press with a new one.The old press is being sold for $350,000 and it has a net book value of $75,000.Assume that National Geographic is in the 40% income tax bracket.How much will National Geographic pay in income taxes from the sale?

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

Bull Gator Industries is considering a new assembly line costing $6,000,000.The assembly line will be fully depreciated by the simplified straight line method over its 5 year depreciable life.Operating costs of the new machine are expected to be $1,100,000 per year.The existing assembly line has 5 years remaining before it will be fully depreciated and has a book value of $3,000,000.If sold today the company would receive $2,400,000 for the existing machine.Annual operating costs on the existing machine are $2,100,000 per year.Bull Gator is in the 46 percent marginal tax bracket and has a required rate of return of 12 percent. a.Calculate the net present value of replacing the existing machine. b.Explain the impact on NPV of the following: i.Required rate of return increases ii.Operating costs of new machine are increased iii.Existing machine sold for less

In 2013,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 2014,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 2014 is

In making a capital budgeting decision we only include the incremental cash flows resulting from the investment decision.

Incremental cash flows include all of the following EXCEPT

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?

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

Famous Danish Corp.is replacing an old cookie cutter with a new one.The cookie cutter is being sold for $25,000 and it has a net book value of $75,000.Assume that Famous Danish is in the 34% income tax bracket.How much will Famous Danish net from the sale?

In measuring cash flows we are interested only in the incremental or differential after-tax cash flows that are attributed to the investment proposal being evaluated.

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?

If the federal income tax rate were increased,the impact of the tax increase on acceptable investment proposals would be to (ignore the impact of the tax change on the cost of capital)

Use the following information to answer the following question(s). Delta Inc.is considering the purchase of a new machine which is expected to increase sales by $10,000 in addition to increasing non-depreciation expenses by $3,000 annually.Due to the sales increase,Delta will need to increase working capital by $1,000 at the beginning of the project.Delta will depreciate the machine using the straight-line method over the project's five year life to a salvage value of zero.The machine's purchase price is $20,000.The firm has a marginal tax rate of 34 percent,and its required rate of return is 12 percent. -The machine's NPV is

When computing the NPV of a project,if cash flows are discounted at the real cost of capital,then the cash flows should not be adjusted for inflation.

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

In 2013,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 2014,volume is expected to increase by 10%,Inflation will increase the cost per unit by 3%,but to attract more buyers,Sunny will reduce the price to $950.In nominal dollars,expected gross profit for 2014 is

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

Use the following information to answer the following question(s). Delta Inc.is considering the purchase of a new machine which is expected to increase sales by $10,000 in addition to increasing non-depreciation expenses by $3,000 annually.Due to the sales increase,Delta will need to increase working capital by $1,000 at the beginning of the project.Delta will depreciate the machine using the straight-line method over the project's five year life to a salvage value of zero.The machine's purchase price is $20,000.The firm has a marginal tax rate of 34 percent,and its required rate of return is 12 percent. -The machine's IRR is