II23M8Aux
Score:0/15Points0%
1.
Award: 0 out of 1.00 point
Quick Computing currently sells 8 million computer chips each year at
a price of $15 per chip. It is about to introduce a new chip, and it
forecasts annual sales of 11 million of these improved chips at a price
of $19 each. However, demand for the old chip will decrease, and
sales of the old chip are expected to fall to 2 million per year. The old
chip costs $8 each to manufacture, and the new ones will cost $11
each. What is the proper cash flow to use to evaluate the present
value of the introduction of the new chip? (Enter your answer in
millions.)
Cash flow $ n/r million
References
WorksheetLearning Objective: 09-01 Identify the cash flows from a proposed new project.
Quick Computing currently sells 8 million computer chips each year at
a price of $15 per chip. It is about to introduce a new chip, and it
forecasts annual sales of 11 million of these improved chips at a price
of $19 each. However, demand for the old chip will decrease, and
sales of the old chip are expected to fall to 2 million per year. The old
chip costs $8 each to manufacture, and the new ones will cost $11
each. What is the proper cash flow to use to evaluate the present
value of the introduction of the new chip? (Enter your answer in
millions.)
Cash flow $ million
Explanation:
Some values below may show as rounded for display purposes,
though unrounded numbers should be used for actual calculations.
Gross revenues from new chip = 11 million × $19 = $209 million
Cost of new chip = 11 million × $11 = $121 million
Lost sales of old chip = 6 million × $15 = $90 million
46 ± 1%
Saved costs of old chip = 6 million × $8 = $48 million
Increase in cash flow = ($209 – 121) – ($90 – 48) = $46 million
2.
Award: 0 out of 1.00 point
Tubby Toys estimates that its new line of rubber ducks will generate
sales of $6.90 million, operating costs of $3.90 million, and a
depreciation expense of $.90 million. Assume the tax rate is 30%.
a.Calculate the operating cash flow for the year by using all three
methods: (a) adjusted accounting profits; (b) cash inflow/cash
outflow analysis; and (c) the depreciation tax shield
approach. (Enter your answers in millions rounded to 2 decimal
places.)
Method Cash Flow
Adjusted accounting
profits $ n/r million
Cash inflow/cash
outflow analysis n/r million
Depreciation tax shield
approach n/r million
b.Are the above answers equal?
n/r
References
WorksheetLearning Objective: 09-02 Calculate the cash flows of a project from
standard financial statements.
Tubby Toys estimates that its new line of rubber ducks will generate
sales of $6.90 million, operating costs of $3.90 million, and a
depreciation expense of $.90 million. Assume the tax rate is 30%.
a.Calculate the operating cash flow for the year by using all three
methods: (a) adjusted accounting profits; (b) cash inflow/cash
outflow analysis; and (c) the depreciation tax shield
approach. (Enter your answers in millions rounded to 2 decimal
places.)
Method Cash Flow
Adjusted accounting
profits
$ million
Cash inflow/cash
outflow analysis
million
Depreciation tax shield
approach
million
b.Are the above answers equal?
Yes
Explanation:
Some values below may show as rounded for display purposes,
though unrounded numbers should be used for actual calculations.
Adjusted accounting profits:
Operating cash flow = After-tax profit + Depreciation
= [($6.90m – 3.90m – .90m) × (1 – .30)] + $.90m
= $2.37m
Cash inflow/cash outflow analysis:
Operating cash
flow
= Revenues – Cash expenses – Taxes
= $6.90m – 3.90m – [.30 ($6.90m – 3.90m – .90m)]
= $2.37m
Depreciation tax shield method:
Operating cash flow = [(Revenues – Cash expenses) × (1 – Tax rate)]
+ (Tax rate × Depreciation)
= [($6.90m – 3.90m) × (1 – .30)] + (.30 × $.90m)
= $2.37m
3.
Award: 0 out of 1.00 point
The owner of a bicycle repair shop forecasts revenues of $204,000 a
2.37 ± 1%
2.37 ± 1%
2.37 ± 1%
year. Variable costs will be $61,000, and rental costs for the shop are
$41,000 a year. Depreciation on the repair tools will be $21,000.
Prepare an income statement for the shop based on these estimates.
The tax rate is 30%. (Input all amounts as positive values.)
INCOME STATEMENT
n/r $ n/r
Rental costs n/r
n/r
n/r
n/r n/r
n/r n/r
n/r $ n/r
References
WorksheetLearning Objective: 09-02 Calculate the cash flows of a project from standard financial
statements.
The owner of a bicycle repair shop forecasts revenues of $204,000 a
year. Variable costs will be $61,000, and rental costs for the shop are
$41,000 a year. Depreciation on the repair tools will be $21,000.
Prepare an income statement for the shop based on these estimates.
The tax rate is 30%. (Input all amounts as positive values.)
INCOME STATEMENT
Revenue $
Rental costs
Variable costs
Depreciation
204,000
41,000
61,000
21,000
Pretax profit
Taxes
Net income $
Explanation:
Some values below may show as rounded for display purposes,
though unrounded numbers should be used for actual calculations.
Pretax profit = Revenue – Rental costs – Variable costs
– Depreciation
= $204,000 – 41,000 – 61,000 – 21,000
= $81,000
Taxes = Tax rate × Pretax profit
= .30 × $81,000
= $24,300
Net income = Pretax profit – Taxes
= $81,000 – 24,300
= $56,700
4.
Award: 0 out of 1.00 point
Laurel’s Lawn Care, Ltd., has a new mower line that can generate
revenues of $174,000 per year. Direct production costs are $58,000,
and the fixed costs of maintaining the lawn mower factory are
$24,000 a year. The factory originally cost $1.45 million and is being
depreciated for tax purposes over 25 years using straight-line
depreciation. Calculate the operating cash flows of the project if the
firm’s tax bracket is 35%. (Enter your answer in dollars not in
millions.)
Operating cash
flows $ n/r
81,000 ± .1%
24,300 ± .1%
56,700 ± .1
References
WorksheetLearning Objective: 09-02 Calculate the cash flows of a project from standard financial
statements.
Laurel’s Lawn Care, Ltd., has a new mower line that can generate
revenues of $174,000 per year. Direct production costs are $58,000,
and the fixed costs of maintaining the lawn mower factory are
$24,000 a year. The factory originally cost $1.45 million and is being
depreciated for tax purposes over 25 years using straight-line
depreciation. Calculate the operating cash flows of the project if the
firm’s tax bracket is 35%. (Enter your answer in dollars not in
millions.)
Operating
cash flows
$
Explanation:
Some values below may show as rounded for display purposes, though unrounded numbers should be
used for actual calculations.
Operating cash flow = [(Revenues – Cash expenses) × (1 – Tax rate)] + (Tax rate × Depreciation)
= [($174,000 – 58,000 – 24,000) × (1 – .35)] + [.35 × ($1.45m / 25)]
= $80,100
5.
Award: 0 out of 1.00 point
Gluon Inc. is considering the purchase of a new high pressure
glueball. It can purchase the glueball for $90,000 and sell its old low-
pressure glueball, which is fully depreciated, for $16,000. The new
equipment has a 10-year useful life and will save $20,000 a year in
expenses. The opportunity cost of capital is 8%, and the firm’s tax
rate is 40%. What is the equivalent annual savings from the purchase
if Gluon uses straight-line depreciation? Assume the new machine will
have no salvage value. (Do not round intermediate calculations.
Round your answer to 2 decimal places.)
Equivalent annual savings $ n/r
80,100 ± .1%
References
WorksheetLearning Objective: 09-02 Calculate the cash flows of a project from standard financial
statements.
Gluon Inc. is considering the purchase of a new high pressure
glueball. It can purchase the glueball for $90,000 and sell its old low-
pressure glueball, which is fully depreciated, for $16,000. The new
equipment has a 10-year useful life and will save $20,000 a year in
expenses. The opportunity cost of capital is 8%, and the firm’s tax
rate is 40%. What is the equivalent annual savings from the purchase
if Gluon uses straight-line depreciation? Assume the new machine will
have no salvage value. (Do not round intermediate calculations.
Round your answer to 2 decimal places.)
Equivalent annual savings $
Explanation:
Some values below may show as rounded for display purposes,
though unrounded numbers should be used for actual calculations.
First, compute the operating cash flow for the new machine. Since the
new machine will reduce expenses, the cash expense amount will be
a negative value.
Operating cash
flow
= [(Revenues – Cash expenses) × (1 – Tax rate)] +
(Tax rate × Depreciation)
= [$0 – (–$20,000) × (1 – .40)] + [.40 × ($90,000 /
10)]
= $15,600
Now, compute the net present value of purchasing the new machine.
NPV= –Cost new machine + After-tax salvage value of old machine +
OCF × PVIFA8%, 10
= –$90,000 + [$16,000 × (1 – .40)] + $15,600 × ((1 / .08) – {1 /
[.08(1 + .08)10]})
= $24,277.27
The last step is to compute the annuity payment that has the same
NPV as the new machine purchase.
NPV = C × PVIFA r%, t
$24,277.2
7
= C × ((1 / .08) – {1 / [.08(1 + .
08)10]})
C = $3,618.03
Since the annuity payment is positive, the new machine will produce
an annual cash savings of $3,618.03.
3,618.03 ± .1%
Calculator computations:
Enter 10 8 –24,277.27
N I/Y PV PMT FV
Solve
for 3,618.03
6.
Award: 0 out of 1.00 point
Johnny’s Lunches is considering purchasing a new, energy-efficient
grill. The grill will cost $37,000 and will be depreciated according to
the 3-year MACRS schedule. It will be sold for scrap metal after 3
years for $9,250. The grill will have no effect on revenues but will
save Johnny’s $18,500 in energy expenses per year. The tax rate is
40%. Use the MACRS depreciation schedule.
a.What are the operating cash flows in each year? (Do not round
intermediate calculations. Round your answers to 2 decimal
places.)
Year Operating Cash Flows
1$ n/r
2 n/r
3 n/r
b.What are the total cash flows in each year? (Negative amounts
should be indicated by a minus sign. Do not round
intermediate calculations. Round your answers to 2 decimal
places.)
Time Total Cash Flows
0$ n/r
1 n/r
2 n/r
3 n/r
c.If the discount rate is 11%, should the grill be purchased?
n/r
: 11_12_2015_QC_CS-32822
References
WorksheetLearning Objective: 09-02 Calculate the cash flows of a project from standard financial
statements.
Johnny’s Lunches is considering purchasing a new, energy-efficient
grill. The grill will cost $37,000 and will be depreciated according to
the 3-year MACRS schedule. It will be sold for scrap metal after 3
years for $9,250. The grill will have no effect on revenues but will
save Johnny’s $18,500 in energy expenses per year. The tax rate is
40%. Use the MACRS depreciation schedule.
a.What are the operating cash flows in each year? (Do not round
intermediate calculations. Round your answers to 2 decimal
places.)
Year Operating Cash Flows
1$
2
3
b.What are the total cash flows in each year? (Negative amounts
should be indicated by a minus sign. Do not round
intermediate calculations. Round your answers to 2 decimal
places.)
Time Total Cash Flows
0$
1
2
3
c.If the discount rate is 11%, should the grill be purchased?
Yes
16,032.84 ± 0.1%
17,678.60 ± 0.1%
13,291.88 ± 0.1%
-37,000.00 ± 0.1%
16,032.84 ± 0.1%
17,678.60 ± 0.1%
19,938.56 ± 0.1%
: 11_12_2015_QC_CS-32822
Explanation:
Some values below may show as rounded for display purposes,
though unrounded numbers should be used for actual calculations.
a.
First, compute the operating cash flow for each year of the grill’s life.
Since the grill will reduce expenses, the cash expense amount will be
a negative value.
Operating cash flow Year 1 = [(Revenues – Cash expenses) × (1 – Tax rate)] + (Tax rate ×
Depreciation)
= [$0 – (–$18,500) × (1 – .40)] + [.40 × ($37,000 × .3333)]
= $16,032.84
Operating cash flow Year 2 = [(Revenues – Cash expenses) × (1 – Tax rate)] + (Tax rate ×
Depreciation)
= [$0 – (–$18,500) × (1 – .40)] + [.40 × ($37,000 × .4445)]
= $17,678.60
Operating cash flow Year 3 = [(Revenues – Cash expenses) × (1 – Tax rate)] + (Tax rate ×
Depreciation)
= [$0 – (–$18,500) × (1 – .40)] + [.40 × ($37,000 × .1481)]
= $13,291.88
b.
Now, compute the annual total cash flows:
Cash flow Year 0 = Capital investment
= –$37,000
Cash flow Year 1 = OCF
= $16,032.84
Cash flow Year 2 = OCF
= $17,678.60
Cash flow Year 3 = OCF + Sale price – Tax on sale
= OCF + Sale price – [Tax rate × (Sale price – Book value)]
= $13,291.88 + 9,250 – {[$9,250 – ($37,000 × .0741)] × .40}
= $19,938.56
NPV
= –$37,000 + $16,032.84 / 1.11 +
$17,678.60 / 1.112 + $19,938.56 /
1.113
= $6,371.25
Since the NPV is positive, the grill should be purchased.
Calculator computations:
CF0 = –37,000
CO1 = 16,032.84
FO1 = 1
CO2 = 17,678.60
FO2 = 1
CO3 = 19,938.56
FO3 = 1
I = 11
CPT NPV = 6,371.25
7.
Award: 0 out of 1.00 point
Revenues generated by a new fad product are forecast as follows:
Year Revenu
es
1$50,000
240,000
320,000
410,000
Thereaft
er 0
Expenses are expected to be 50% of revenues, and working capital
required in each year is expected to be 20% of revenues in the
following year. The product requires an immediate investment of
$40,000 in plant and equipment.
a.What is the initial investment in the product? Remember working
capital.
Initial
investment $ n/r
b.
If the plant and equipment are depreciated over 4 years to a
salvage value of zero using straight-line depreciation, and the firm’s
tax rate is 30%, what are the project cash flows in each year?
Assume the plant and equipment are worthless at the end of 4
years. (Do not round intermediate calculations.)
Year Cash Flow
1$ n/r
2n/r
3n/r
4n/r
c.If the opportunity cost of capital is 12%, what is the project's
NPV? (A negative value should be indicated by a minus sign.
Do not round intermediate calculations. Round your answer to
2 decimal places.)
NPV $ n/r
d.What is project IRR? (Do not round intermediate calculations.
Enter your answer as a percent rounded to 2 decimal places.)
IRR n/r %
: 09_24_2015_QC_CS-26391, 02_03_2015_QC_CS-40091
References
WorksheetLearning Objective: 09-02 Calculate the cash flows of a project from standard financial
statements.
Revenues generated by a new fad product are forecast as follows:
Year Revenu
es
1$50,000
240,000
3 20,000
410,000
Thereaft
er 0
Expenses are expected to be 50% of revenues, and working capital
required in each year is expected to be 20% of revenues in the
following year. The product requires an immediate investment of
$40,000 in plant and equipment.
a.What is the initial investment in the product? Remember working
capital.
Initial
investment
$
b.
If the plant and equipment are depreciated over 4 years to a
salvage value of zero using straight-line depreciation, and the firm’s
tax rate is 30%, what are the project cash flows in each year?
Assume the plant and equipment are worthless at the end of 4
years. (Do not round intermediate calculations.)
Year Cash Flow
1$
2
3
4
c.If the opportunity cost of capital is 12%, what is the project's
NPV? (A negative value should be indicated by a minus sign.
Do not round intermediate calculations. Round your answer to
2 decimal places.)
50,000 ± .1%
22,500 ± .1%
21,000 ± .1%
12,000 ± .1%
8,500 ± .1%
NPV
$
d.What is project IRR? (Do not round intermediate calculations.
Enter your answer as a percent rounded to 2 decimal places.)
IRR
%
: 09_24_2015_QC_CS-26391, 02_03_2015_QC_CS-40091
Explanation:
Some values below may show as rounded for display purposes,
though unrounded numbers should be used for actual calculations.
a.
Initial
investment
= Investment in plant and equipment + Investment in net working capital
= $40,000 + (.20 × Year 1 sales)
= $40,000 + (.20 × $50,000)
= $50,000
b.
Cash flow Year
1
= OCF + Change in net working capital
= [(Revenues – Cash expenses) × (1 – Tax rate)] + (Tax rate × Depreciation) – [.20 × (Next year’s sales – This year’s sales)]
= {[$50,000 × (1 – .50)] × (1 – .30)} + [.30 × ($40,000 / 4)] – [.20 × ($40,000 – 50,000)]
= $22,500
Cash flow Year
2
= OCF + Change in net working capital
= {[$40,000 × (1 – .50)] × (1 – .30)} + [.30 × ($40,000 / 4)] – [.20 × ($20,000 – 40,000)]
= $21,000
Cash flow Year
3
= OCF + Change in net working capital
= {[$20,000 × (1 – .50)] × (1 – .30)} + [.30 × ($40,000 / 4)] – [.20 × ($10,000 – 20,000)]
= $12,000
Cash flow Year
4
= OCF + Change in net working capital
= {[$10,000 × (1 – .50)] × (1 – .30)} + [.30 × ($40,000 / 4)] – [.20 × ($0 – 10,000)]
= $8,500
c.
773.62 ± 0.1%
12.87 ± 1%
NPV = −
$50,000 +
$22,500+$21,000+$12,000+$8,500=
$773.621.12 1.1221.1231.124
d.
To compute IRR, use trial and error or a financial calculator to solve
for r in the following equation:
$22,50
0 +$21,000+
$12,00
0 +$8,500= $50,000 IRR =
12.87%
1 + r(1 + r)2(1 + r)3(1 + r)4
Calculator computations:
CF0 = –50,000
CO1 = 22,500 FO1 = 1
CO2 = 21,000 FO2 = 1
CO3 = 12,000 FO3 = 1
CO4 = 8,500 FO4 = 1
I = 12
CPT NPV = 773.62
CPT IRR = 12.87
8.
Award: 0 out of 1.00 point
Kinky Copies may buy a high-volume copier. The machine costs
$160,000 and will be depreciated straight-line over 5 years to a
salvage value of $28,000. Kinky anticipates that the machine actually
can be sold in 5 years for $38,000. The machine will save $28,000 a
year in labor costs but will require an increase in working capital,
mainly paper supplies, of $14,000. The firm’s marginal tax rate is
35%, and the discount rate is 6%. (Assume the net working capital
will be recovered at the end of Year 5.)
Calculate the NPV. (Negative amount should be indicated by a
minus sign. Do not round intermediate calculations. Round your
answer to 2 decimal places.)
NPV $ n/r
Should Kinky buy the machine?
n/r
References
WorksheetLearning Objective: 09-02 Calculate the cash flows of a project from standard financial
statements.
Kinky Copies may buy a high-volume copier. The machine costs
$160,000 and will be depreciated straight-line over 5 years to a
salvage value of $28,000. Kinky anticipates that the machine actually
can be sold in 5 years for $38,000. The machine will save $28,000 a
year in labor costs but will require an increase in working capital,
mainly paper supplies, of $14,000. The firm’s marginal tax rate is
35%, and the discount rate is 6%. (Assume the net working capital
will be recovered at the end of Year 5.)
Calculate the NPV. (Negative amount should be indicated by a
minus sign. Do not round intermediate calculations. Round your
answer to 2 decimal places.)
NPV $
Should Kinky buy the machine?
No
Explanation:
Some values below may show as rounded for display purposes,
though unrounded numbers should be used for actual calculations.
First, compute the operating cash flow for the new machine. Since the
new machine will reduce expenses, the cash expense amount will be
a negative value.
Operating
cash flow
= [(Revenues – Cash expenses) × (1 – Tax rate)] +
(Tax rate × Depreciation)
= [$0 – (–$28,000) × (1 – .35)] + {.35 × ($160,000 –
28,000) / 5}
= $27,440
Cash flow Year
0
= Capital investment – Investment in net working capital
= –$160,000 – 14,000
= –$174,000
Cash flow per year Year 1 through Year 4 = OCF
= $27,440
-22,170.72 ± 0.1%
In year 5, the machine is sold, taxes are paid on the gain from the
sale, and the net working capital is recovered. Thus, the year 5 cash
flow is:
Cash flow Year 5 = OCF + Sale price – Tax on sale price + Net working capital recovery
= OCF + Sale price – [(Sale price – Book value) × Tax rate] + Net working capital
recovery
= $27,440 + 38,000 – {[$38,000 – 28,000] × .35} + $14,000
= $75,940
NPV = –$174,000 + [$27,440 × ((1 / .06) – {1 / [.06(1 + .06)4]})] +
$75,940 / 1.065
= –$174,000 + 95,082.50 + 56,746.79
= –$22,170.72
Note: The OCF for Year 5 was included in the Year 5 cash flow, so
the annuity is only for 4 years. If you include Year 5’s OCF in the
annuity calculation, then it must be omitted from the Year 5 cash flow.
Either way is correct as long as you do not double count the OCF in
Year 5.
Since the NPV is negative, Kinky’s should not buy the new copier.
9.
Award: 0 out of 1.00 point
Quick Computing installed its previous generation of computer chip
manufacturing equipment 3 years ago. Some of that older equipment
will become unnecessary when the company goes into production of
its new product. The obsolete equipment, which originally cost $41
million, has been depreciated straight-line over an assumed tax life of
5 years, but it can be sold now for $18.2 million. The firm’s tax rate is
30%. What is the after-tax cash flow from the sale of the
equipment? (Enter your answer in millions rounded to 2 decimal
places.)
After-tax cash
flow $ n/r million
References
WorksheetLearning Objective: 09-03 Understand how the company’s tax bill is affected by
depreciation and how this affects project value.
Quick Computing installed its previous generation of computer chip
manufacturing equipment 3 years ago. Some of that older equipment
will become unnecessary when the company goes into production of
its new product. The obsolete equipment, which originally cost $41
million, has been depreciated straight-line over an assumed tax life of
5 years, but it can be sold now for $18.2 million. The firm’s tax rate is
30%. What is the after-tax cash flow from the sale of the
equipment? (Enter your answer in millions rounded to 2 decimal
places.)
After-tax cash
flow
$ million
Explanation:
Some values below may show as rounded for display purposes,
though unrounded numbers should be used for actual calculations.
After-tax cash flow from sale = Sale price – [Tax rate × (Market value – Book
value)]
= $18.20m – (.30 × {$18.20m – [($41.00m / 5) ×
2]})
= $17.66m
10.
Award: 0 out of 1.00 point
Bottoms Up Diaper Service is considering the purchase of a new
industrial washer. It can purchase the washer for $1,800 and sell its
old washer for $600. The new washer will last for 6 years and save
$500 a year in expenses. The opportunity cost of capital is 19%, and
the firm’s tax rate is 40%.
a. If the firm uses straight-line
depreciation to an assumed
salvage value of zero over a 6-
year life, what is the annual
operating cash flow of the project
in years 1 to 6? The new washer
will in fact have zero salvage value
after 6 years, and the old washer
is fully depreciated.
Annual operating cash flow $ n/r
17.66 ± 1%
b. What is project NPV? (Negative
amount should be indicated by
a minus sign. Do not round
intermediate calculations.
Round your answer to 2 decimal
places.)
NPV $ n/r
c. What is NPV if the firm uses
MACRS depreciation with a 5-year
tax life? Use the MACRS
depreciation schedule. (Do not
round intermediate calculations.
Round your answer to 2 decimal
places.)
NPV $ n/r
References
WorksheetLearning Objective: 09-03 Understand how the company’s tax bill is affected by
depreciation and how this affects project value.
Bottoms Up Diaper Service is considering the purchase of a new
industrial washer. It can purchase the washer for $1,800 and sell its
old washer for $600. The new washer will last for 6 years and save
$500 a year in expenses. The opportunity cost of capital is 19%, and
the firm’s tax rate is 40%.
a. If the firm uses straight-line
depreciation to an assumed
salvage value of zero over a 6-
year life, what is the annual
operating cash flow of the project
in years 1 to 6? The new washer
will in fact have zero salvage value
after 6 years, and the old washer
is fully depreciated.
Annual operating cash flow $
b. What is project NPV? (Negative
amount should be indicated by
a minus sign. Do not round
intermediate calculations.
Round your answer to 2 decimal
420 ± .1%
places.)
NPV $
c. What is NPV if the firm uses
MACRS depreciation with a 5-year
tax life? Use the MACRS
depreciation schedule. (Do not
round intermediate calculations.
Round your answer to 2 decimal
places.)
NPV $
Explanation:
Some values below may show as rounded for display purposes,
though unrounded numbers should be used for actual calculations.
a.
OCFYears 1 – 6 = [(Revenues – Cash expenses) ×
(1 – Tax rate)] + (Tax rate ×
Depreciation)
= {[$0 – (–$500)] × (1 – .40)} + [.40
× ($1,800 / 6)]
= $420
b.
NPV = – Cost of new washer + Sale price
of old washer – Tax on old washer
sale + OCF × PVIFAr%, t
= –$1,800 + 600 – [.40 × ($600 – 0)]
+ $420 × ((1 / .19) – {1 / [.19(1 + .
19)6]})
= –$7.89
c.
Incremental cash flow in each year (using the depreciation tax shield
approach) is:
[$500 × (1 – .40)] + (Depreciation × .40)
Year Depreciation Cash flow
0 n/a –
$
1,440.00
1 $ 360.00 444.00
2 576.00 530.40
3 345.60 438.24
4 207.36 382.94
-7.89 ± 1%
39.40 ± 1%
5 207.36 382.94
6 103.68 341.47
11.
Award: 0 out of 1.00 point
Canyon Tours showed the following components of working capital
last year:
Beginning End of
Year
Accounts
receivable $25,200 $23,600
Inventory 12,600 13,700
Accounts
payable 15,100 17,700
a.What was the change in net working capital during the year? (A
negative amount should be indicated by a minus sign.)
Change in net
working capital $ n/r
b.If sales were $36,600 and costs were $24,600, what was cash flow
for the year? Ignore taxes.
Cash flow $ n/r
References
WorksheetLearning Objective: 09-04 Understand how changes in working capital affect project cash
flows.
Canyon Tours showed the following components of working capital
last year:
Beginning End of
Year
Accounts
receivable $25,200 $23,600
Inventory 12,600 13,700
Accounts
payable 15,100 17,700
a.What was the change in net working capital during the year? (A
negative amount should be indicated by a minus sign.)
Change in net
working capital
$
b.If sales were $36,600 and costs were $24,600, what was cash flow
for the year? Ignore taxes.
Cash flow
$
Explanation:
Some values below may show as rounded for display purposes,
though unrounded numbers should be used for actual calculations.
a.
ΔNWC = Ending NWC – Beginning NWC
= (Ending current assets – Ending current liabilities) – (Beginning current assets – Beginning current
liabilities)
= ($23,600 + 13,700 – 17,700) – ($25,200 + 12,600 – 15,100)
= –$3,100
b.
Cash flow = $36,600 – 24,600 – (–$3,100)
= $15,100
The firm reduced its investment in net working capital during the year
which increased the firm’s cash flow.
-3,100 ± .1%
15,100 ± .1%
12.
Award: 0 out of 1.00 point
A house painting business had revenues of $17,300 and expenses of
$10,300 last summer. There were no depreciation expenses.
However, the business reported the following changes in working
capital:
Beginnin
g End
Accounts
receivable $2,500 $5,800
Accounts
payable 960 430
Calculate net cash flow for the business for this period.
Net cash
flow $ n/r
References
WorksheetLearning Objective: 09-04 Understand how changes in working capital affect project cash
flows.
A house painting business had revenues of $17,300 and expenses of
$10,300 last summer. There were no depreciation expenses.
However, the business reported the following changes in working
capital:
Beginnin
g End
Accounts
receivable $2,500 $5,800
Accounts
payable 960 430
Calculate net cash flow for the business for this period.
Net cash
flow
$
3,170 ± .1%
Explanation:
Some values below may show as rounded for display purposes,
though unrounded numbers should be used for actual calculations.
ΔNWC = Ending NWC – Beginning NWC
= (Ending current assets – Ending current liabilities) – (Beginning current assets – Beginning current
liabilities)
= ($5,800 – 430) – ($2,500 – 960)
= $3,830
Cash flow = $17,300 – 10,300 – 3,830
= $3,170
The firm increased its investment in net working capital during the
year which decreased the firm’s cash flow.
13.
Award: 0 out of 1.00 point
Better Mousetraps has developed a new trap. It can go into
production for an initial investment in equipment of $5.7 million. The
equipment will be depreciated straight line over 6 years to a value of
zero, but in fact it can be sold after 6 years for $518,000. The firm
believes that working capital at each date must be maintained at a
level of 10% of next year’s forecast sales. The firm estimates
production costs equal to $1.50 per trap and believes that the traps
can be sold for $6 each. Sales forecasts are given in the following
table. The project will come to an end in 6 years., when the trap
becomes technologically obsolete. The firm’s tax bracket is 35%, and
the required rate of return on the project is 9%. Use the MACRS
depreciation schedule.
Year: 0 1 2 3 4 5 6 Thereafter
Sales (millions
of traps)
0 .4 .5 .6 .6 .4 .2 0
a.What is project NPV? (Do not round intermediate calculations.
Enter your answer in millions rounded to 4 decimal places.)
NPV $ n/r million
b.By how much would NPV increase if the firm depreciated its
investment using the 5-year MACRS schedule? (Do not round
intermediate calculations. Enter your answer in whole dollars
not in millions.)
The NPV increases by $ n/r .
References
WorksheetLearning Objective: 09-02 Calculate the cash flows of a project from standard financial
statements.Learning Objective: 09-03 Understand how the company’s tax bill is affected by
depreciation and how this affects project value.
Better Mousetraps has developed a new trap. It can go into
production for an initial investment in equipment of $5.7 million. The
equipment will be depreciated straight line over 6 years to a value of
zero, but in fact it can be sold after 6 years for $518,000. The firm
believes that working capital at each date must be maintained at a
level of 10% of next year’s forecast sales. The firm estimates
production costs equal to $1.50 per trap and believes that the traps
can be sold for $6 each. Sales forecasts are given in the following
table. The project will come to an end in 6 years., when the trap
becomes technologically obsolete. The firm’s tax bracket is 35%, and
the required rate of return on the project is 9%. Use the MACRS
depreciation schedule.
Year: 0 1 2 3 4 5 6 Thereafter
Sales (millions
of traps)
0 .4 .5 .6 .6 .4 .2 0
a.What is project NPV? (Do not round intermediate calculations.
Enter your answer in millions rounded to 4 decimal places.)
NP
V
$ millio
n
b.By how much would NPV increase if the firm depreciated its
investment using the 5-year MACRS schedule? (Do not round
intermediate calculations. Enter your answer in whole dollars
not in millions.)
The NPV increases by
$ .
1.8934 ± 1%
88,294 ± .1%
Explanation:
Some values below may show as rounded for display purposes,
though unrounded numbers should be used for the actual
calculations.
All cash flows are in millions of dollars. Sales price of machinery in
year 6 is shown on an after-tax basis as a positive cash flow on the
capital investment line.
Year 0 1 2 3 4 5 6
Sales units .40 .50 .60 .60 .40 .20
Revenue 0 2.40 3.00 3.60 3.60 2.40 1.20
NWC .24 .30 .36 .36 .24 .12 0
Cash flow NWC −.24 −.06 −.06 0 .12 .12 .12
a. Straightline Depreciation
Year 0 1 2 3 4 5 6
Revenue 2.4000 3.0000 3.6000 3.6000 2.4000 1.2000
Expenses .6000 .7500 .9000 .9000 .6000 .3000
Depreciation .9500 .9500 .9500 .9500 .9500 .9500
Pretax profit .8500 1.3000 1.7500 1.7500 .8500 −.0500
Tax .2975 .4550 .6125 .6125 .2975 −.0175
Net income .5525 .8450 1.1375 1.1375 .5525 −.0325
OCF 1.5025 1.7950 2.0875 2.0875 1.5025 .9175
Cash flow investment −5.7000 .3367
Cash flow NWC −.2400 −.0600 −.0600 0.0000 .1200 .1200 .1200
OCF 0.0000 1.5025 1.7950 2.0875 2.0875 1.5025 .9175
Total cash flow −5.9400 1.4425 1.7350 2.0875 2.2075 1.6225 1.3742
PV of cash flow −5.9400 1.3234 1.4603 1.6119 1.5638 1.0545 .8194
NPV 1.8934
b. MACRS depreciation
Year 0 1 2 3 4 5 6
Revenue 2.4000 3.0000 3.6000 3.6000 2.4000 1.2000
Expenses .6000 .7500 .9000 .9000 .6000 .3000
Depreciation 1.1400 1.8240 1.0944 .6566 .6566 .3283
Pretax profit .6600 .4260 1.6056 2.0434 1.1434 .5717
Tax .2310 .1491 .5620 .7152 .4002 .2001
Net income .4290 .2769 1.0436 1.3282 .7432 .3716
OCF 1.5690 2.1009 2.1380 1.9848 1.3998 .6999
Cash flow investment −5.7000 .3367
Cash flow NWC −.2400 −.0600 –.0600 0.0000 .1200 .1200 .1200
OCF 0.0000 1.5690 2.1009 2.1380 1.9848 1.3998 .6999
Total cash flow −5.9400 1.5090 2.0409 2.1380 2.1048 1.5198 1.1566
PV of cash flow −5.9400 1.3844 1.7178 1.6510 1.4911 .9878 .6896
NPV 1.9817
Change in NPV = $88,294
14.
Award: 0 out of 1.00 point
The efficiency gains resulting from a just-in-time inventory
management system will allow a firm to reduce its level of inventories
permanently by $374,000. What is the most the firm should be willing
to pay for installing the system?
Firm should willing
to pay $ n/r
References
WorksheetLearning Objective: 09-04 Understand how changes in working capital affect project cash
flows.
The efficiency gains resulting from a just-in-time inventory
management system will allow a firm to reduce its level of inventories
permanently by $374,000. What is the most the firm should be willing
to pay for installing the system?
Firm should willing
to pay
$
Explanation:
If the savings are permanent, then the inventory system is worth
$374,000 to the firm. The firm can take $374,000 out of the project
now without ever having to replace it. So the most the firm should be
willing to pay is $374,000.
15.
Award: 0 out of 1.00 point
374,000
Better Mousetraps has developed a new trap. It can go into
production for an initial investment in equipment of $5.4 million. The
equipment will be depreciated straight line over 6 years to a value of
zero, but in fact it can be sold after 6 years for $606,000. The firm
believes that working capital at each date must be maintained at a
level of 10% of next year’s forecast sales. The firm estimates
production costs equal to $1.70 per trap and believes that the traps
can be sold for $7 each. Sales forecasts are given in the following
table. The project will come to an end in 6 years., when the trap
becomes technologically obsolete. The firm’s tax bracket is 35%, and
the required rate of return on the project is 12%. Use the MACRS
depreciation schedule.
Year: 0 1 2 3 4 5 6 Thereafter
Sales (millions
of traps)
0 .5 .7 .9 .9 .6 .3 0
Suppose the firm can cut its requirements for working capital in half
by using better inventory control systems. By how much will this
increase project NPV? (Enter your answer in millions rounded to 4
decimal places.)
NPV $ n/r million
References
WorksheetLearning Objective: 09-04 Understand how changes in working capital affect project cash
flows.
Better Mousetraps has developed a new trap. It can go into
production for an initial investment in equipment of $5.4 million. The
equipment will be depreciated straight line over 6 years to a value of
zero, but in fact it can be sold after 6 years for $606,000. The firm
believes that working capital at each date must be maintained at a
level of 10% of next year’s forecast sales. The firm estimates
production costs equal to $1.70 per trap and believes that the traps
can be sold for $7 each. Sales forecasts are given in the following
table. The project will come to an end in 6 years., when the trap
becomes technologically obsolete. The firm’s tax bracket is 35%, and
the required rate of return on the project is 12%. Use the MACRS
depreciation schedule.
Year: 0 1 2 3 4 5 6 Thereafter
Sales (millions
of traps)
0 .5 .7 .9 .9 .6 .3 0
Suppose the firm can cut its requirements for working capital in half
by using better inventory control systems. By how much will this
increase project NPV? (Enter your answer in millions rounded to 4
decimal places.)
NP
V
$ millio
n
Explanation:
Some values below may show as rounded for display purposes,
though unrounded numbers should be used for actual calculations.
All cash flows are in millions of dollars. Sales price of machinery in
year 6 is shown on an after-tax basis as a positive cash flow on the
capital investment line.
Year 0 1 2 3 4 5 6
Sales (traps) .500 .700 .900 .900 .600 .300
Revenue
0 3.50
0 4.90
0 6.300 6.300 4.200 2.100
Working capital .350 .490 .630 .630 .420 .210 0.00
Change in
working capital –.35
0 –.14
0 –.14
0 0.00 .210 .210 .210
If working capital requirements were one-half of the expected amount,
then the working capital cash-flow forecasts would change as follows:
Year 0 1 2 3 4 5 6
New NWC .175 .245 .315 .315 .210 .105 .000
New cash flow NWC
–.17
5 –.07
0 –.07
0 .000 .105 .105 .105
Change in cash flow
.175 .070 .070 .000 –.10
5 –.10
5 –.10
5
Change in NPV = $.1138 million
.1138 ± 1%
