Exam 12: Analyzing Project Cash Flows

The depreciation method used in capital budgeting is irrelevant because any depreciation not taken during the life of the project will add to the book value when assets are sold.

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

Blue Ocean Co.will purchase a machine that will cost $2,575,000.Required modifications will cost $375,000.Blue Ocean will need to invest $75,000 for additional inventory.The machine has an IRS approved useful life of seven years; it is presumed to have no salvage value.Blue Ocean plans to depreciate the machine by using the straight-line method.The machine is expected to increase Blue Ocean's sales revenues by $1,890,000 per year; operating costs excluding depreciation are estimated at $454,600 per year.Assume that the firm's tax rate is 40%.What is the annual operating cash flow?

In year 3 of project Gamma sales were $3,000,0000, cost of goods sold was $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%.Calculate operating cash flow for year 3 of project Gamma.

Depreciation expenses affect capital budgeting analysis by increasing

Blue Ocean Co.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.Blue Ocean will need to invest $75,000 for additional inventory.The machine has an IRS approved useful life of seven years; it is presumed to have no salvage value.It will only be operated for three years, after which it will be sold for $600,000.What is the total investment amount required for the project?

Cash flows are the source of value.

Which of the following would cause free cash flow to differ from operating cash flow when an investment project is terminated?

Anderson-EOG Inc.is evaluating the construction of a gas pipeline to bring natural gas from Western New York to New York City.The controller argues that every project of the company has to absorb a portion of administrative overhead including corporate headquarters and executive salaries.The Treasurer argues that these costs are irrelevant because they are merely being shifted from part of the company to another.Who is correct?

Kelvin Crackers will finance a new organic cracker 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?

Enviro Co.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?

Kahnemann Kookies is evaluating the replacement of an old oven with a new, more energy-efficient model.The old oven cost $50,000, is five years old and is being depreciated over a life of 10 years to a value of $0.00.The new oven costs $60,000 and will be depreciated over five years with no salvage value.Kahnemann uses straight line depreciation, its tax rate is 40%.If the old oven is sold for $10,000, calculate the net cost of the new oven.

The machine's after-tax incremental cash flow in year 5 is [blank].

Slate Corp is considering a new project with the following projections for year 2. Year 2 Projections Calculate the operating cash flow for year 2.

A marketing survey completed last year to determine a project's feasibility would be included as part of the project's initial cash outflow.

Holding all other variables constant, which of the following would INCREASE net working capital for given year on a project?

The machine's NPV is [blank].

The capital budgeting decision-making process involves estimating the expected incremental cash flows of a proposal and comparing the present value of these cash flows to the project's cost.

Which of the following expenses should be included when estimating cash flows for investment projects?

Kahnemann Kookies is evaluating the replacement of an old oven with a new, more energy-efficient model.The old oven cost $50,000, is five years old and is being depreciated over a life of 10 years to a value of $0.00.The new oven costs $60,000 and will be depreciated over five years with no salvage value.Kahnemann uses straight line depreciation, its tax rate is 40%.Calculate: a.the change in annual depreciation that would result from purchasing the new machine. b.the change in taxes each year that would result from purchasing the new machine.