Deck 12: Estimating Cash Flows on Capital Budgeting Projects

Question 1

Accelerated depreciation allows firms to:

A)receive less of the dollars of depreciation earlier in the asset's life.
B)receive more of the dollars of depreciation earlier in the asset's life.
C)not pay any taxes during an asset's life.
D)receive more of the dollars of depreciation later in the asset's life.

Answer 1

receive more of the dollars of depreciation earlier in the asset's life.

Question 2

For which situation below would one need to "smooth out" the variation in each set of cash flows so that each becomes a perpetuity?

A)Choosing between projects with differing risks
B)Choosing between independent projects
C)Choosing between alternative assets with differing lives
D)Choosing between alternative assets with equal lives

Answer 2

Choosing between alternative assets with differing lives

Question 3

If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a:

A)committed cost.
B)complementary cost.
C)obligated cost.
D)sunk cost.

Answer 3

sunk cost.

Question 4

When looking at which of these types of projects, one must consider any cash flows that arise from surrendering old equipment before the end of its useful life?

A)Incremental projects
B)Replacement projects
C)Cost-cutting projects
D)New projects

Question 5

Which of these is used as a measure of the total amount of available cash flow from a project?

A)Free cash flow
B)Operating cash flow
C)Investment in operating capital
D)Sunk cash flow

Question 6

Which of the following is the IRS convention that requires that all property placed in service during a given period is assumed to be placed in service at the midpoint of that period?

A)Mid-point convention
B)Mid-month convention
C)Mid-quarter convention
D)Half-year convention

Question 7

A decrease in net working capital (NWC) is treated as a:

A)cash inflow.
B)cash outflow.
C)sunk cost.
D)historical cost.

Question 8

One way to account for flotation costs of raising capital is to:

A)adjust all the project's cash flows so that each year it will reflect the flotation costs.
B)adjust the project's initial cash flow so that it will reflect the flotation costs.
C)adjust only the project's operating cash flows to account for paying back the shareholders.
D)adjust the project's tax burden to account for the tax implications of raising capital.

Question 9

Which of the following measures the operating cash flow a project produces minus the necessary investment in operating capital, and is as valid for proposed new projects as it is for the firm's current operations?

A)Free cash flow
B)Operating cash flow
C)Investment in operating capital
D)Sunk cash flow

Question 10

As new capital budgeting projects arise, we must estimate:

A)the float costs for financing the project.
B)when such projects will require cash flows.
C)the cost of the loan for the specific project.
D)the cost of the stock being sold for the specific project.

Question 11

Concerning incremental project cash flow, which of these is a cost one would never count as an expense of the project?

A)Initial investment
B)Taxes paid
C)Operating expenses of the project
D)Financing costs

Question 12

Section 179 allows a business, with certain restrictions, to do which of the following?

A)Offset the tax liability with the cost of the asset in the year of purchase.
B)Expense the asset immediately in the year of purchase.
C)Expense the asset using double declining balance depreciation during the life of the asset.
D)Get a government grant to purchase the asset.

Question 13

Effects that arise from a new product or service that decrease sales of the firm's existing products or services are referred to as:

A)complementary effects.
B)substitutionary effects.
C)sunk effects.
D)marginal effects.

Question 14

When calculating operating cash flow for a project, one would calculate it as being mathematically equal to which of the following?

A)EBIT - Interest -Taxes + Depreciation
B)EBIT - Taxes
C)EBIT + Depreciation
D)EBIT - Taxes + Depreciation

Question 15

With regard to depreciation, the time value of money concept tells us that:

A)delaying the depreciation expense is always better.
B)taking the depreciation expense sooner is always better.
C)delaying the depreciation expense is sometimes better.
D)taking the depreciation expense sooner is sometimes better.

Question 16

Which of the following is NOT included when calculating the depreciable basis for real property?

A)Freight charges for item
B)Sales tax paid for item
C)Financing fees
D)Installation and testing fees

Question 17

Which of these is the process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements?

A)Incremental cash flows
B)Cash flow analysis
C)Pro forma analysis
D)Substitutionary analysis

Question 18

Effects that arise from a new product or service that increase sales of the firm's existing products or services are referred to as:

A)complementary effects.
B)substitutionary effects.
C)sunk effects.
D)marginal effects.

Question 19

Which of these is the concept that a unit's sales will follow an approximate bell-shaped curve versus a steady sales life?

A)Bell curve cycle
B)Coefficient of variation
C)Product life cycle
D)NWC life cycle

Question 20

The best approach to convert an infinite series of asset purchases into a perpetuity is known as the:

A)net working capital approach
B)net present value approach
C)equivalent annual cost approach
D)equivalent annual cash flow approach

Question 21

You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $100 initially, and then $150 per year in maintenance costs. Machine B costs $200 initially, has a life of three years, and requires $120 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine. Which is the better machine for the firm? The discount rate is 12 percent and the tax rate is zero.

A)Machine A
B)Machine B
C)Both machines A and B
D)Neither machine A nor B

Question 22

Your company has spent $200,000 on research to develop a new computer game. The firm is planning to spend $40,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $5,000. The machine has an expected life of five years, a $25,000 estimated resale value, and falls under the MACRS five-year class life. Revenue from the new game is expected to be $300,000 per year, with costs of $100,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 14 percent, and it expects net working capital to increase by $50,000 at the beginning of the project. What will be the operating cash flow for year one of this project?

A)(-$49,150)
B)$3,150
C)$123,400
D)$133,150

Question 23

Suppose you sell a fixed asset for $75,000 when its book value is $80,000. If your company's marginal tax rate is 35 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?

A)$5,000
B)$48,750
C)$76,750
D)$80,000

Question 24

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $250,000. The truck falls into the MACRS three-year class, and it will be sold after three years for $50,000. Use of the truck will require an increase in NWC (spare parts inventory) of $5,000. The truck will have no effect on revenues, but it is expected to save the firm $80,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent. What will the operating cash flow for this project be during year 3?

A)$25,785
B)$62,810
C)$81,333
D)$85,025

Question 25

You are evaluating two different machines. Machine A costs $10,000, has a five-year life, and has an annual OCF (after tax) of -$2,500 per year. Machine B costs $15,000, has a seven-year life, and has an annual OCF (after tax) of -$2,000 per year. If your discount rate is 14 percent, using EAC which machine would you choose?

A)Machine A
B)Machine B
C)Both machines A and B
D)Neither machine A nor B

Question 26

Your company is considering a new project that will require $2,000,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $250,000 using straight-line depreciation. The cost of capital is 12 percent, and the firm's tax rate is 39 percent. Estimate the present value of the tax benefits from depreciation.

A)$68,250
B)$106,750
C)$175,000
D)$385,628

Question 27

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $50,000. The truck falls into the MACRS three-year class, and it will be sold after three years for $5,000. Use of the truck will require an increase in NWC (spare parts inventory) of $2,000. The truck will have no effect on revenues, but it is expected to save the firm $25,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent. What will the operating cash flow for this project be during year 2?

A)$21,890
B)$22,225
C)$22,690
D)$23,890

Question 28

Your firm needs a machine which costs $125,000, and requires $5,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 35 percent and a discount rate of 10 percent. If this machine can be sold for $15,000 at the end of year 3, what is the after-tax salvage value?

A)$9,262.50
B)$9,750.00
C)$11,692.69
D)$12,991.88

Question 29

Your company is considering a new project that will require $10,000 of new equipment at the start of the project. The equipment will have a depreciable life of five years and will be depreciated to a book value of $3,000 using straight-line depreciation. The cost of capital is 9 percent, and the firm's tax rate is 34 percent. Estimate the present value of the tax benefits from depreciation.

A)$476
B)$924
C)$1,400
D)$1,851

Question 30

You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $20,000 initially, and then $4,000 per year in maintenance costs. Machine B costs $25,000 initially, has a life of three years, and requires $3,500 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine. Which is the better machine for the firm? The discount rate is 14 percent and the tax rate is zero.

A)Machine A
B)Machine B
C)Both machines A and B
D)Neither machine A nor B

Question 31

Suppose you sell a fixed asset for $90,000 when its book value is $95,000. If your company's marginal tax rate is 40 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?

A)$3,000
B)$5,000
C)$92,000
D)$95,000

Question 32

Your firm needs a machine which costs $60,000, and requires $15,000 in maintenance for each year of its five-year life. After five years, this machine will be replaced. The machine falls into the MACRS five-year class life category. Assume a tax rate of 35 percent and a discount rate of 10 percent. If this machine can be sold for $8,000 at the end of year 5, what is the after-tax salvage value?

A)$3,456.00
B)$4,544.00
C)$5,200.00
D)$6,409.60

Question 33

Which statement is true regarding cost-cutting proposals?

A)The main benefits are from changes in sales and changes in costs.
B)The main benefits come only from changes in sales.
C)The main benefits come only from changes in costs.
D)The main benefits come from the change in sales due to the response from the cost-cutting proposal.

Question 34

You are trying to pick the least-expensive machine for your company. You have two choices: machine A, which will cost $50,000 to purchase and which will have OCF of -$3,500 annually throughout the machine's expected life of three years; and machine B, which will cost $75,000 to purchase and which will have OCF of -$4,900 annually throughout that machine's four-year life. Both machines will be worthless at the end of their life. If you intend to replace whichever type of machine you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 14 percent, which one should you choose?

A)Machine A
B)Machine B
C)Both machines A and B
D)Neither machine A nor B

Question 35

You are evaluating two different machines. Machine A costs $25,000, has a five-year life, and has an annual OCF (after tax) of -$6,000 per year. Machine B costs $30,000, has a seven-year life, and has an annual OCF (after tax) of -$5,500 per year. If your discount rate is 10 percent, using EAC which machine would you choose?

A)Machine A
B)Machine B
C)Both machines A and B
D)Neither machine A nor B

Question 36

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $70,000. The truck falls into the MACRS three-year class, and it will be sold after three years for $5,000. Use of the truck will require an increase in NWC (spare parts inventory) of $10,000. The truck will have no effect on revenues, but it is expected to save the firm $32,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent. What will the operating cash flow for this project be during year 2?

A)$531
B)$885
C)$31,646
D)$50,315

Question 37

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $60,000. The truck falls into the MACRS three-year class, and it will be sold after three years for $14,000. Use of the truck will require an increase in NWC (spare parts inventory) of $3,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent. What will the operating cash flow for this project be during year 3?

A)$6,668.40
B)$11,114.00
C)$12,554.40
D)$15,554.40

Question 38

Your firm needs a machine which costs $90,000, and requires $30,000 in maintenance for each year of its five-year life. After five years, this machine will be replaced. The machine falls into the MACRS five-year class life category. Assume a tax rate of 35 percent and a discount rate of 13 percent. What is the depreciation tax shield for this project in year 5?

A)$471.74
B)$1,347.84
C)$3,628.80
D)$6,739.20

Question 39

Your firm needs a machine which costs $100,000, and requires $25,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 35 percent and a discount rate of 14 percent. What is the depreciation tax shield for this project in year 3?

A)$2,073.40
B)$5,183.50
C)$9,626.50
D)$14,810.00

Question 40

Your firm needs a machine which costs $500,000, and requires $10,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 35 percent and a discount rate of 15 percent. What is the depreciation tax shield for this project in year 3?

A)$7,219.88
B)$24,500.00
C)$25,917.50
D)$48,132.50

Question 41

Your company is considering a new project that will require $100,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $5,000 using straight-line depreciation. The cost of capital is 14 percent, and the firm's tax rate is 30 percent. Estimate the present value of the tax benefits from depreciation.

A)$14,865.93
B)$14,030.79
C)$15,017.25
D)$15,997.13

Question 42

You are evaluating a product for your company. You estimate the sales price of the product to be $300 per unit and sales volume to be 8,000 units in year 1; 10,000 units in year 2; and 2,000 units in year 3. The project has a three-year life. Variable costs amount to $125 per unit and fixed costs are $150,000 per year. The project requires an initial investment of $225,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $25,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 14 percent. What will the year 2 free cash flow for this project be?

A)$940,710
B)$961,500
C)$1,081,500
D)$1,561,500

Question 43

You are evaluating a project for your company. You estimate the sales price to be $10 per unit and sales volume to be 3,000 units in year 1; 10,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $3 per unit and fixed costs are $25,000 per year. The project requires an initial investment of $50,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $10,000. NWC requirements at the beginning of each year will be approximately 25 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 15 percent. What change in NWC occurs at the end of year 1?

A)$11,550
B)$14,875
C)$17,500
D)$23,167

Question 44

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $75,000. The truck falls into the MACRS three-year class, and it will be sold after three years for $13,000. Use of the truck will require an increase in NWC (spare parts inventory) of $5,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent. What will the operating cash flow for this project be during year 3?

A)$5,335.50
B)$8,892.50
C)$9,443.00
D)$16,443.00

Question 45

You are evaluating a project for your company. You estimate the sales price to be $50 per unit and sales volume to be 5,000 units in year 1; 10,000 units in year 2; and 2,500 units in year 3. The project has a three-year life. Variable costs amount to $10 per unit and fixed costs are $75,000 per year. The project requires an initial investment of $25,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $5,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 13 percent. What change in NWC occurs at the end of year 1?

A)$13,000
B)$34,000
C)$50,000
D)$75,000

Question 46

You are evaluating a project for your company. You estimate the sales price to be $25 per unit and sales volume to be 4,000 units in year 1; 7,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $10 per unit and fixed costs are $50,000 per year. The project requires an initial investment of $10,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $1,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 10 percent. What is the operating cash flow for the project in year 2?

A)$34,100
B)$37,093
C)$37,433
D)$39,700

Question 47

Your company is considering the purchase of a new machine. The original cost of the old machine was $25,000; it is now five years old, and it has a current market value of $10,000. The old machine is being depreciated over a 10-year life toward a zero estimated salvage value on a straight-line basis, resulting in a current book value of $12,500 and an annual depreciation expense of $2,500. The old machine can be used for six more years but has no market value after its depreciable life is over. Management is contemplating the purchase of a new machine whose cost is $20,000 and whose estimated salvage value is zero. Expected before-tax cash savings from the new machine are $3,500 a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a five-year life, and the cost of capital is 13 percent. Assume a 40 percent tax rate. What will the year 1 operating cash flow for this project be?

A)$984
B)$1,200
C)$2,700
D)$5,000

Question 48

Your company is considering the purchase of a new machine. The original cost of the old machine was $100,000; it is now five years old, and it has a current market value of $40,000. The old machine is being depreciated over a 10-year life toward a zero estimated salvage value on a straight-line basis, resulting in a current book value of $50,000 and an annual depreciation expense of $10,000. The old machine can be used for six more years but has no market value after its depreciable life is over. Management is contemplating the purchase of a new machine whose cost is $80,000 and whose estimated salvage value is zero. Expected before-tax cash savings from the new machine are $13,000 a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a five-year life, and the cost of capital is 10 percent. Assume a 40 percent tax rate. What will the year 1 operating cash flow for this project be?

A)$2,200
B)$4,900
C)$10,200
D)$14,200

Question 49

Suppose you sell a fixed asset for $99,000 when its book value is $129,000. If your company's marginal tax rate is 39 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?

A)$80,700
B)$110,700
C)$77,300
D)$84,800

Question 50

Suppose you sell a fixed asset for $112,000 when its book value is $112,000. If your company's marginal tax rate is 39 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?

A)$0
B)$68,320
C)$112,000
D)$34,720

Question 51

You are evaluating a product for your company. You estimate the sales price of the product to be $375 per unit and sales volume to be 500 units in year 1; 1,000 units in year 2; and 200 units in year 3. The project has a three-year life. Variable costs amount to $200 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $175,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $20,000. NWC requirements at the beginning of each year will be approximately 25 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 10 percent. What will the year 2 free cash flow for this project be?

A)$8,933
B)$22,458
C)$69,333
D)$144,333

Question 52

You are evaluating a project for your company. You estimate the sales price to be $25 per unit and sales volume to be 4,000 units in year 1; 7,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $10 per unit and fixed costs are $50,000 per year. The project requires an initial investment of $10,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $1,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 10 percent. What change in NWC occurs at the end of year 1?

A)$1,750
B)$7,500
C)$11,550
D)$17,500

Question 53

Your company is considering a new project that will require $100,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $25,000 using straight-line depreciation. The cost of capital is 11 percent, and the firm's tax rate is 34 percent. Estimate the present value of the tax benefits from depreciation.

A)$13,607.52
B)$14,841.29
C)$15,017.54
D)$16,997.13

Question 54

You are evaluating a project for your company. You estimate the sales price to be $10 per unit and sales volume to be 3,000 units in year 1; 10,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $3 per unit and fixed costs are $25,000 per year. The project requires an initial investment of $50,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $10,000. NWC requirements at the beginning of each year will be approximately 25 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 15 percent. What is the operating cash flow for the project in year 2?

A)$18,700
B)$18,867
C)$35,367
D)$40,317

Question 55

You are evaluating a product for your company. You estimate the sales price of the product to be $200 per unit and sales volume to be 2,000 units in year 1; 5,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $75 per unit and fixed costs are $200,000 per year. The project requires an initial investment of $360,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $40,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 13 percent. What will the year 2 free cash flow for this project be?

A)$170,412
B)$192,500
C)$201,300
D)$481,300

Question 56

Your company is considering the purchase of a new machine. The original cost of the old machine was $75,000; it is now five years old, and it has a current market value of $35,000. The old machine is being depreciated over a 10-year life toward a zero estimated salvage value on a straight-line basis, resulting in a current book value of $37,500 and an annual depreciation expense of $7,500. The old machine can be used for six more years but has no market value after its depreciable life is over. Management is contemplating the purchase of a new machine whose cost is $80,000 and whose estimated salvage value is zero. Expected before-tax cash savings from the new machine are $15,000 a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a five-year life, and the cost of capital is 15 percent. Assume a 40 percent tax rate. What will the year 1 operating cash flow for this project be?

A)$3,900
B)$4,480
C)$12,400
D)$16,600

Question 57

You are evaluating a project for your company. You estimate the sales price to be $500 per unit and sales volume to be 2000 units in year 1; 3000 units in year 2; and 1500 units in year 3. The project has a three-year life. Variable costs amount to $300 per unit and fixed costs are $200,000 per year. The project requires an initial investment of $325,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $50,000. NWC requirements at the beginning of each year will be approximately 25 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 12 percent. What is the operating cash flow for the project in year 2?

A)$74,167
B)$192,500
C)$300,833
D)$374,500

Question 58

You are evaluating a product for your company. You estimate the sales price of the product to be $50 per unit and sales volume to be 50,000 units in year 1; 75,000 units in year 2; and 10,000 units in year 3. The project has a three-year life. Variable costs amount to $15 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $275,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $25,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 9 percent. What will the year 2 free cash flow for this project be?

A)$1,556,332
B)$1,572,667
C)$1,697,667
D)$2,022,667

Question 59

Your company is considering the purchase of a new machine. The original cost of the old machine was $75,000; it is now five years old, and it has a current market value of $20,000. The old machine is being depreciated over a 10-year life toward a zero estimated salvage value on a straight-line basis, resulting in a current book value of $37,500 and an annual depreciation expense of $7,500. The old machine can be used for six more years but has no market value after its depreciable life is over. Management is contemplating the purchase of a new machine whose cost is $60,000 and whose estimated salvage value is zero. Expected before-tax cash savings from the new machine are $10,000 a year over its full MACRS depreciable life. Depreciation is computed using MACRS over a five-year life, and the cost of capital is 9 percent. Assume a 40 percent tax rate. What will the year 1 operating cash flow for this project be?

A)$3,300
B)$4,236
C)$7,800
D)$13,200

Question 60

Your company is considering a new project that will require $250,000 of new equipment at the start of the project. The equipment will have a depreciable life of eight years and will be depreciated to a book value of $10,000 using straight-line depreciation. The cost of capital is 12 percent, and the firm's tax rate is 34 percent. Estimate the present value of the tax benefits from depreciation.

A)$63,617.52
B)$50,669.93
C)$75,017.54
D)$86,997.13

Question 61

You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $300 per unit and sales volume to be 1,000 units in year 1; 1,250 units in year 2; and 1,325 units in year 3. The project has a three-year life. Variable costs amount to $200 per unit and fixed costs are $50,000 per year. The project requires an initial investment of $150,000 in assets which will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $25,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 30 percent and the required return on the project is 10 percent. What will the free cash flow for this project be in year 3?

A)$142,000
B)$167,000
C)$130,000
D)$204,000

Question 62

A new project would require an immediate increase in raw materials in the amount of $12,000. The firm expects that accounts payable will automatically increase $8,500. How much must the firm expect its investment in net working capital to change if they accept this project?

A)+$20,000
B)+$3,500
C)(-$20,500)
D)(-$3,500)

Question 63

You are evaluating a project for The Tiff-any golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Tiff-any to be $375 per unit and sales volume to be 1,000 units in year 1; 1,400 units in year 2; and 1,325 units in year 3. The project has a three-year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $35,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 10 percent. What change in NWC occurs at the end of year 1?

A)$25,000
B)$15,000
C)$10,000
D)$17,500

Question 64

KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is planning to spend $250,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an expected life of three years, a $75,000 estimated resale value, and falls under the MACRS seven-year class life. Revenue from the new game is expected to be $600,000 per year, with costs of $250,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $100,000 at the beginning of the project. What will the year 0 free cash flow for this project be?

A)(-10$400,000)
B)(-$350,000)
C)(-$250,000)
D)(-$300,000)

Question 65

Your firm needs a computerized machine tool lathe that costs $50,000, requires $10,000 in installation, and another $12,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 30 percent and a discount rate of 12 percent. If the lathe can be sold for $7,000 at the end of year 3, what is the after-tax salvage value?

A)$6,233.80
B)$6,311.90
C)$5,927.20
D)$6,154.20

Question 66

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $50,000. The truck falls into the MACRS three-year class, and it will be sold after three years for $20,000. Use of the truck will require an increase in NWC (spare parts inventory) of $2,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent. What will the free cash flows for this project be?

A)Year 0 Cash flow: -$50,000; Year 1 Cash flow: $18,666; Year 2 Cash flow: $20,890; Year 3 Cash flow: $28,444
B)Year 0 Cash flow: -$50,000; Year 1 Cash flow: $18,666; Year 2 Cash flow: $21,890; Year 3 Cash flow: $28,444
C)Year 0 Cash flow: -$52,500; Year 1 Cash flow: $18,666; Year 2 Cash flow: $20,890; Year 3 Cash flow: $30,944
D)Year 0 Cash flow: -$52,500; Year 1 Cash flow: $18,666; Year 2 Cash flow: $22,890; Year 3 Cash flow: $30,944

Question 67

A new project would require an immediate increase in raw materials in the amount $17,000. The firm expects that accounts payable will automatically increase $7,000. How much must the firm expect its investment in net working capital to increase if they accept this project?

A)$17,000
B)$7,000
C)$10,000
D)$24,000

Question 68

KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is planning to spend $50,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an expected life of three years, a $15,000 estimated resale value, and falls under the MACRS five-year class life. Revenue from the new game is expected to be $500,000 per year, with costs of $300,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $55,000 at the beginning of the project. What will the year 3 free cash flow for this project be?

A)$222,670
B)$211,550
C)$252,920
D)$243,640

Question 69

KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is planning to spend $250,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an expected life of three years, a $75,000 estimated resale value, and falls under the MACRS seven-year class life. Revenue from the new game is expected to be $500,000 per year, with costs of $200,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $100,000 at the beginning of the project. What will the year 1 free cash flow for this project be?

A)$195,000
B)$167,134.50
C)$210,004.50
D)$300,000

Question 70

Your firm needs a computerized machine tool lathe that costs $50,000, requires $10,000 in installation, and another $12,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 30 percent and a discount rate of 12 percent. Calculate the depreciation tax shield for this project in year 1.

A)$7,199.20
B)$8,886.00
C)$5,999.40
D)$6,554.40

Question 71

You are trying to pick the least expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $15,000 to purchase and which will have OCF of -$1,600 annually throughout the vehicle's expected life of four years as a delivery vehicle; and the Toyota Prius, which will cost $27,000 to purchase and which will have OCF of -$750 annually throughout that vehicle's expected six-year life. Both cars will be worthless at the end of their life. If you intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 10 percent, what is the EAC of the most expensive car?

A)(-$6,949.40)
B)(-$6,332.06)
C)(-$7,008.27)
D)(-$7,371.81)

Question 72

Your firm needs a computerized machine tool lathe that costs $50,000 and another $12,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 30 percent and a discount rate of 12 percent. If the lathe can be sold for $6,000 at the end of year 3, what is the after-tax salvage value?

A)$3,470.50
B)$4,344.50
C)$5,499.50
D)$5,311.50

Question 73

You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $300 per unit and sales volume to be 1,000 units in year 1; 1,250 units in year 2; and 1,325 units in year 3. The project has a three-year life. Variable costs amount to $200 per unit and fixed costs are $50,000 per year. The project requires an initial investment of $150,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $25,000. NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year. The tax rate is 30 percent and the required return on the project is 10 percent. What will the free cash flow for this project be in year 2?

A)$94,450
B)$49,950
C)$102,450
D)$65,250

Question 74

KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is planning to spend $150,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an expected life of three years, a $75,000 estimated resale value, and falls under the MACRS seven-year class life. Revenue from the new game is expected to be $600,000 per year, with costs of $250,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $100,000 at the beginning of the project. What will the year 0 free cash flow for this project be?

A)(-$250,000)
B)(-$150,000)
C)(-$200,000)
D)(-$300,000)

Question 75

KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is planning to spend $50,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an expected life of three years, a $10,000 estimated resale value, and falls under the MACRS five-year class life. Revenue from the new game is expected to be $500,000 per year, with costs of $200,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $25,000 at the beginning of the project. What will the year 3 free cash flow for this project be?

A)$222,600
B)$197,400
C)$212,200
D)$243,300

Question 76

You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $25,000, has a six-year life, and has an annual OCF (after tax) of -$5,000 per year. The Keebler CookieMunster costs $40,000, has a seven-year life, and has an annual OCF (after tax) of -$500 per year. If your discount rate is 10 percent, what is each machine's EAC?

A)Pillsbury: -$11,594.94; Keebler: $8,716.22
B)Pillsbury: -$11,594.94; Keebler: -$9,145.62
C)Pillsbury: -$10,740.18; Keebler: -$9,145.62
D)Pillsbury: -$10,740.18; Keebler: -$8,716.22

Question 77

To correctly project cash flows, we need to consider all of the factors EXCEPT:

A)use of assets or employees already employed by the firm.
B)the likely impact that the new service or product will have on the firm's existing products' cost and revenues.
C)the new product's or service's costs and revenues.
D)All of the options are factors that need to be considered.

Question 78

KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is planning to spend $50,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an expected life of three years, a $75,000 estimated resale value, and falls under the MACRS five-year class life. Revenue from the new game is expected to be $500,000 per year, with costs of $200,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $100,000 at the beginning of the project. What will the year 2 free cash flow for this project be?

A)$206,200
B)$174,200
C)$194,200
D)$195,000

Question 79

Your firm needs a computerized machine tool lathe that costs $50,000, requires $10,000 in installation, $5,000 in freight charges, and another $12,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 30 percent and a discount rate of 12 percent. Calculate the depreciation tax shield for this project in year 1.

A)$6,499.35
B)$6,886.00
C)$5,999.40
D)$5,554.40

Question 80

Your firm needs a computerized machine tool lathe that costs $50,000, requires $10,000 in installation, $5,000 in freight charges, and another $12,000 in maintenance for each year of its three-year life. After three years, this machine will be replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of 30 percent and a discount rate of 12 percent. If the lathe can be sold for $7,000 at the end of year 3, what is the after-tax salvage value?

A)$6,499.35
B)$6,344.95
C)$5,999.45
D)$6,554.95