Exam 11: Cash Flow Estimation

The initial outlay calculation for an asset replacement decision normally includes any:

"Mr. Stone, I must say you are making a mistake. I know you have spent $6,000 on research and development to develop this project, but that money must not be used as a negative cash flow of the project." Apparently, Mr. Stone does not understand the concept of:

Tribune Company purchases an inventory of paper for $1,000 on credit. All other working capital items remain the same. The change in net working capital that results from this transaction is:

What type of benefits is hard to quantify and lead to favorable biases when estimated by people who want project approval?

A piece of machinery can be further depreciated $2,000.00 annually for the next four years. Assuming a 10% discount rate and a 40% tax rate, what is the current value of the benefit of depreciation?

Taxes are important in capital investment evaluation because they affect the accounting profits generated by an investment.

Decreases in working capital have to be funded with cash outflows just like the acquisition of any other asset.

Holding all other variables constant, which of the following would decrease incremental cash flows for a capital budgeting project?

Capital budgeting results are no more accurate than the projections of the future used as inputs.

Use the following information for questions 8-a through 8-c. You have been asked to evaluate the purchase of a new machine for your company. It will cost $60,000, and it falls into the MACRS 3-year class (Yr. 1 - 33.3%; Yr. 2 - 44.4%; Yr. 3 - 14.8%; Yr. 4 - 7.5%). The purchase will require a $6,000 increase in repair parts inventory. Parts are expensed for tax purposes at the time they are acquired. The machine will replace one $25,000/year operator. It is expected to last for four years when it can be sold including any spare parts still on hand for $5,000. The tax rate is 40% and your company's cost of capital is 12%. a. What is the initial outlay for this project? a. $46,000 b. $48,000 c. $54,000 d. $60,000 e. $66,000 b. What is the (operating) cash flow in Year 2? a. $10,656 b. $15,000 c. $25,656 d. $26,640 e. $41,640 c. What is the cash flow in year 4? a. $30,000 b. $18,000 c. $17,000 d. $19,800 e. $11,000

A capital budgeting project is expected to generate earnings before taxes (EBT) of $60,000 per year. Annual depreciation from the project is $30,000 and the firm's tax rate is 40 percent. Determine the project's annual net cash flows.

Which of the following capital budgeting techniques might not consider the terminal value of a project?

In estimating the cost of a new project, the firm should exclude:

According to the incremental cash flow principle, a firm should include both variable costs and fixed costs in the project's cash flows.

The management of Jasper Equipment Company is planning to purchase a new milling machine that will cost $160,000 installed. The old milling machine has been fully depreciated but can be sold for $15,000. The new machine will be depreciated on a straight-line basis over its 10-year economic life to an estimated salvage value of $10,000. If this milling machine will save Jasper $20,000 a year in production expenses, what are the annual net cash flows associated with the purchase of this machine? Assume a marginal tax rate of 40 percent.

In estimating cash flows, the firm should include:

According to the Modified Accelerated Cost Recovery System (MACRS), automobiles are to be placed with other assets that have a five-year class life. Assume Dallmeyer Digital bought a car in December 2004. What would be the last year in which it would take recognize depreciation on the vehicle?

Subjective benefits are based on opinions and can be easily quantified without any kind of biases.

A drill press costs $30,000 and is expected to have a 10-year life. The drill press will be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. This machine is expected to reduce the firm's cash operating costs by $4,500 per year. If the firm is in the 40 percent marginal tax bracket, determine the annual net cash flows generated by the drill press.

There is neither a gain nor a loss on the sale of a depreciable asset for an amount exactly equal to its: