Exam 12: Analyzing Project Cash Flows

ABC purchased a machine for $2,575,000.Required modifications will cost $375,000.ABC will need to invest $75,000 for additional inventory.The machine has an IRS approved useful life of 7 years;it is presumed to have no salvage value.It will only be operated for 3 years,after-which it will be sold for $600,000.ABC plans to depreciate the machine by using the straight-line method.Assume that the firm's tax rate is 40%.What is the termination (non-operating)cash flow from the machine in year three?

ABC already spent $85,000 on a feasibility study for a machine that will produce a new product.The machine will cost $2,575,000.Required modifications will cost $375,000.ABC will need to invest $75,000 for additional inventory.The machine has an IRS approved useful life of 7 years;it is presumed to have no salvage value.It will only be operated for 3 years,after which it will be sold for $600,000.What is the total investment amount required for the project?

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

When computing the NPV of a project,it is important to consistently use either nominal dollars and nominal rates or real dollars and real rates.

The Board of Directors of Waste Free Chemicals is considering the acquisition of a new chemical processor.The processor is priced at $600,000 but would require $60,000 in transportation costs and $40,000 for installation.The processor will have a useful life of 10 years.The project will require Waste Free to increase its investment in accounts receivable by $80,000 and will also require an additional investment in inventory of $150,000.The firm's marginal tax rate is 40 percent.How much is the initial cash outlay of the processor?

Which of the following cash flows are NOT considered in the calculation of the initial outlay for a capital investment proposal?

Nominal cash flows are expressed in terms of their purchasing power in a base year.

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 incremental after-tax cash inflow for year 1 is

Burr Habit Corporation is considering a new product line.The company currently manufactures several lines of snow skiing apparel.The new products,insulated ski shorts,are expected to generate sales less cost of goods sold of $1 million per year for the next five years.They expect that during this five year period,they will lose about $250,000 per year in sales less cost of goods sold on their existing lines of longer ski pants as a result of the introduction of the new product line.The new line will require no additional equipment or space in the plant and can be produced in the same manner as the existing apparel products.The new project will,however,require that the company spend an additional $80,000 per year on insurance in case customers sue for frostbite.Also,a new marketing director would be hired to oversee the line at $45,000 per year in salary and benefits.Because of the different construction of the shorts,an increase in inventory of 3,800 would be required initially.If the marginal tax rate is 30%,compute the incremental after tax cash flows per year for years 1-5.

Sales captured from the firm's competitors can be relevant to the capital-budgeting decision.

Tversky and Co.have devised a new psychological test for investors' risk tolerance.They expect to sell 10,000 tests in the first year at $150 each.Cash costs associated with producing,administering and scoring the test are $50 per unit.In the second year,volume is expected to be the same,but both the price and the costs will increase 2.5%.Forecast gross profit in the second year.

If SuperMart decides to offer a line of groceries at its discount retail outlet,inventories are expected to increase by $1,200,000,accounts receivable by $300,000 and accounts payable by $500,000.What is the cash outflow for working capital requirements?

The calculation of differential cash flows over a project's life should include which of the following?

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)?

It is possible for after-tax operating cash flows to be positive when accounting income is negative.

How is interest expense that is associated with a project treated in the capital budgeting process?

If the new machine is purchased,operating cash flow for years 1 through 5 will increase or decrease by how much?

Which of the following would decrease after-tax operating cash flows? A decrease in

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?

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 after-tax incremental cash flow in year five is