Exam 12: Analysing Project Cash Flows

Use the following information to answer the following question(s). Delta Inc.is considering the purchase of a new machine that 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 useful 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

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 5 years ago at a cost of $450,000.To date,the company has taken $200,000 in depreciation on the old crane.Compute the cash flow that would be realised 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 should be included in the initial outlay?

Use the following information to answer the following question(s). Delta Inc.is considering the purchase of a new machine that 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 useful 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

In the fourth and final year of a project,SVC expects operating cash flow of $440,000.The project required an $80,000 investment in working capital at the beginning.Of that amount,$60,000 will be recovered in year 4.Machinery associated with the project will be sold for exactly its undepreciated value of $15,000.Total free cash flow for the fourth year is

Victoria Citrus is evaluating the introduction of a new line of organic juice products.Market research suggests that approximates 1/3 of sales of the new products will come at the expense of existing product lines.How should this "cannibalization effect" be incorporated into the analysis?

SpaceTech is considering a new project with the following projections for Year 2. Year 2 Projections EBIT $400,000 Interest Expense $20,000 Depreciation Expense $40,000 Tax Rate 40% Incremental Net Working Capital Needs $200,000

Brookfield Multiplex 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?

XYZ,Inc.is considering adding a product line that would utilise floor space in their manufacturing plant that is currently used for storage.XYZ will need to rent new storage space elsewhere.When calculating free cash flows,XYZ management should:

When evaluating Capital Budgeting decisions,which of the following items should NOT be included in the construction of cash flow projections for purposes of analysis?

In capital budgeting,interest is excluded from cash flows.

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)

Additional cash needed to fill increased working capital requirements should be included in the initial cost of a product when analysing an investment.

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

Thaler & Co.anticipates an increase of $1,000,000 in Net Operating Income from first year sales of a new product.Taxes will be $350,000 and the company took $150,000 in depreciation expense.Operating cash flow equals

What is meant by "real dollars" and the "real" discount rate? How can they be used to account for inflation when evaluating capital budgeting proposals?

By examining cash flows,we are correctly able to analyse the timing of the benefits.

Which of the following is an example of a sunk cost?

Suppose the initial capital cost of a new piece of equipment was $250,000 and the old piece of equipment was sold at a salvage value of $20,000.If the net initial outlay was -$235,000,then the depreciated value of the old asset must have been ______ the salvage value.

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 useful 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 useful life of the asset.Due to the increase in sales,the firm expects an increase in working capital during the asset's useful life of $1,500,and the firm expects to be able to sell the asset for $6,000 at the end of its useful life.The existing asset was originally purchased three years ago for $25,000,has a remaining useful life of five years,and is being depreciated using the straight-line method.The expected salvage value at the end of the asset's useful 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