Exam 12: Analysing Project Cash Flows

Which of the following should be considered in the estimation of free cash flows?

The owner of a convenience store is considering adding a take-away 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?

AGL Limited is evaluating the construction of a gas pipeline to bring natural gas from Western New South Wales to Sydney.The controller argues that depreciation has to be included among the expenses.The Treasurer argues that depreciation is irrelevant because it does not affect cash flow.Who is correct?

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

Wright's Warehouse has the following projections for Year 1 of a capital budgeting project. Year 1 Incremental Projections: Sales $200,000 Variable Costs $120,000 Fixed Costs $40,000 Depreciation Expense $20,000 Tax Rate 40% Calculate the operating cash flow for Year 1.

When computing project cash flows,it is necessary to apply the same rate of inflation to all costs and revenues.

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)?

When an old asset is sold for exactly its depreciated value,the only taxable income is the difference between the initial cost of the machine and the selling price.

Depreciation expenses affect tax-related cash flows by

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.

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

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

If Morgan Tool & Die Co.acquires a new turret lathe,the lathe will cost $80,000,transportation $6,000,installation $7,500.Installing the new lathe will allow Morgan to reduce its finished goods inventory by $10,000.For capital budgeting purposes,the initial investment required for the new lathe is

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

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 NPV is

When determining how much overhead cost to include in incremental cash flows for a capital budgeting decision,the allocation of overhead by the accounting department based on percentage of space used by a project should always be used.

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 IRR is

Determining whether an investment adds value starts with estimating the incremental cash flows of a project.

Famous Danish Corp.is replacing an old cookie cutter with a new one.The cookie cutter is being sold for $25,000 and it has a net book value of $75,000.Assume that Famous Danish is in the 34% income tax bracket.How much will Famous Danish net from the sale?

To be conservative,capital budgeting analysis assumes that projects cannot add sales to existing lines of business.