Exam 12: Analyzing Project Cash Flows

Which of the following overhead expenses is a relevant, incremental cash flow?

Krugman Construction Company is considering the purchase of a new crane at a cost of $600,000.If the new crane is purchased the old crane will be sold.It was purchased five years ago at a cost of $450,000.To date, the company has taken $200,000 in depreciation on the old crane.Calculate the cash flow that would be realized from selling the old crane under each of the following scenarios.Krugman's marginal tax rate is 30%. a.The crane is sold for $200,000 b.The crane is sold for $250,000 c.The crane is sold for $300,000

Which of the following is the first step in calculating project cash flows?

Because installation costs of a new asset are a current cash expense, they are excluded from the initial outlay.

The machine's incremental after-tax cash inflow for year 1 is [blank].

Calculating project cash flows is a [blank] step procedure.

A firm purchased an asset with a five-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 [blank].

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 five-year depreciable life.Operating costs of the new machine are expected to be $1,100,000 per year.The existing assembly line has five 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% marginal tax bracket and has a required rate of return of 12%. 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

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 [blank].

Depreciation expenses affect tax-related cash flows by

The initial investment for this decision is [blank].

The owner of a convenience shop 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 $9000 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?

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%.How much is the initial cash outlay of the processor?

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

Incremental project cash flows=

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.

Terra Corp 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)?

The pertinent issue for determining whether overhead costs should be part of a project's relevant after-tax cash flow is whether the project benefits from the overhead items.

Sunk costs are a type of incremental cash flow that should be included in all capital-budgeting decisions.

Blue Ocean Co.purchased a machine for $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.Blue Ocean 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 3?