Account question

Ned is considering opening a new store that specializes in left-handed gadgets. Ned bought some land 6 years ago for $7 million. If the land were sold today, Ned would net $10.2 million. Ned wants to build the new store on this land; the building will cost $16.2 million to build, and the site requires $1,326,000 worth of grading before it is suitable for construction.

What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project?

rev: 09_18_2012

$26,400,000

$29,112,300

$27,726,000    

$23,416,960

$25,074,000

References

Multiple Choice Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project.

Difficulty: Basic Section: 10.2 Incremental Cash Flows

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Winter Tyme, Inc., is considering building a plant to produce snow tires. The project would last 6 years and requires an initial fixed asset investment of $1.080 million. The fixed asset will be depreciated straight-line to zero over its 6-year tax life, after which time it will be worthless. Winter Tyme paid $75,000 for a market analysis which indicates the project will generate $960,000 in annual sales, with costs of $384,000.

Required: If the tax rate is 35 percent, what is the OCF for this project?

rev: 09_18_2012

$459,270

$576,000

$437,400

$257,400

$415,530

References

Multiple Choice Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project.

Difficulty: Basic Section: 10.3 Pro Forma Financial Statements and Project Cash Flows

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Consider the following income statement for Chocoholics Ananymous:

Sales $ 364,960 Fixed & Variable Costs $ 237,440 Depreciation $ 54,000 Taxes 31 % Dividends $ 50,000

Required: (a ) Calculate the EBIT.

(Click to select)

(b ) Calculate the net income. Recall that in this chapter the interest expense is assumed to be zero (projects are financed with equity).

(Click to select)

(c ) Calculate the OCF.

(Click to select)

(d ) What is the depreciation tax shield? That is, how much money does the depreciation save the company each year?

(Click to select)

rev: 09_18_2012

References

Worksheet Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project.

Difficulty: Basic Section: 10.3 Pro Forma Financial Statements and Project Cash Flows

Attempt(s)

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Calculating book values - Excel

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References

Excel Simulation Difficulty: 1 Basic Section: 10.4 More about Project Cash Flow

Billy Bob's Monster Trucks is considering the purchase of some new vehicles. The total cost for the vehicles is $396,000 and they are to be depreciated straight-line to zero over 8 years. The vehicles will be used for 4 years, after which they can be sold for $49,500.

If the relevant tax rate is 33 percent, what is the after-tax cash flow from the sale of this asset? (Do not round your intermediate calculations.) NOTE: Taxes are affected when the asset is sold at either a gain or loss over book value.

rev: 09_18_2012

$588,567

$98,505

$93,580

$33,165

$103,430

References

Multiple Choice Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project.

Difficulty: Basic Section: 10.4 More about Project Cash Flow

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Calculating salvage value - Excel

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References

Excel Simulation Difficulty: 1 Basic Section: 10.4 More about Project Cash Flow

Winter Tyme, Inc., produces coats and jackets for the Seattle market. The company is considering a new 3- year expansion project into the Portland market. The expansion requires an initial investment of $3.402 million in new plant and equipment. These assets will be depreciated straight-line to zero over its 3-year tax life, after which time the assets can be sold for $264,600.

The expansion also requires an initial investment in net working capital of $378,000, but this investment will be recovered at the end of the project's life. The project is estimated to generate $3,024,000 in annual sales, with costs of $1,209,600. The tax rate is 34 percent and the required return on the project is 14 percent.

Required: (a)What is the project's start-up cost, the year 0 cash flow from assets? Hint: this typically doesn't include

OCF. (Click to select)

(b) What is the project's year 1 cash flow from assets? (Click to select)

(c) What is the project's year 2 cash flow from assets? (Click to select)

(d) What is the project's year 3 cash flow from assets? (Click to select)

(e) What is the NPV? (Click to select)

rev: 09_18_2012

References

Worksheet Learning Objective: 10-01 How to determine the relevant cash flows for a proposed project.

Difficulty: Basic Section: 10.3 Pro Forma Financial Statements and Project Cash Flows

Disraeli Gears Inc. manufactures latke-shaped gears. The company is considering the purchase of a new machine press for $844,800. The press has a four-your life and is estimated to result in $281,600 in annual pretax cost savings. The press falls in the MACRS five-year class (MACRS Table), and it will have a salvage value at the end of the project of $123,200. The press also requires an initial investment of $35,200 in spare parts for inventory. An additional $5,280 in inventory will be required for each succeeding year of the project. All investments in inventory will be recovered at the end of the project.

If the shop's tax rate is 34 percent and its discount rate is 12 percent, what is the NPV for this project? (Do not round your intermediate calculations.) HINT: Calculate the depreciation for each year and use it to get the after tax-salvage value. Next, calculate OCF using the annual depreciation and then construct CFFA for each year. Now discount all cash flows to get the NPV.

rev: 09_18_2012

$-27,669.59

$-25,054.53

$-120,954.55

$-29,053.07

$-26,286.11

References

Multiple Choice Learning Objective: 10-02 How to determine if a project is acceptable.

Difficulty: Intermediate Section: 10.6 Some Special Cases of Discounted Cash Flow Analysis

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Use the PMT and NPV functions in Excel

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Calculating EAC - Excel

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References

Excel Simulation Difficulty: 1 Basic Section: 10.6 Some Special Cases of Discounted Cash Flow Analysis

(a)If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine Amaretto? (Do not round your intermediate calculations.) HINT: In EAC problems you first need to find the NPV. Using this NPV you can then calculate the annuity (annual cost) that has the same present value/cost. The lecture videos include a detailed example of this calculation. (Click to select)

Chocoholics Anonymous wants to modernize its production machinery. The company's sales are $8.84 million per year, and the choice of machine won't impact that amount. The required return is 10 percent and the tax rate is 35 percent. Both machines will be depreciated on a straight-line basis.

Machine Amaretto costs $2,370,000 and will last for 5 years. Variable costs are 35 percent of sales, and fixed costs are $144,000 per year.

Machine Baileys costs $4,420,000 and will last for 8 years. Variable costs for this machine are 26 percent of sales and fixed costs are $113,000 per year.

Required:

(b)If the company plans to replace the machine when it wears out on a perpetual basis, what is the EAC for machine Baileys? (Do not round your intermediate calculations.)

(Click to select)

rev: 09_18_2012

References

Worksheet Learning Objective: 10-04 How to evaluate the equivalent annual cost of a project.

Difficulty: Intermediate Section: 10.6 Some Special Cases of Discounted Cash Flow Analysis

Consider a project to supply 108 million Pokemon trading cards per year for the next five year to the Pokemon-R-Us Corporations. You have some undeveloped land available that cost $1,980,000 five years ago. If you sold the land today you would net $2,180,000 after taxes. You anticipate that the land can be sold in five years for $2,380,000 net of taxes.

To supply the trading cards you will need to install $5.48 million in new plant and equipment. These fixed assets will be depreciated straight-line to zero over the project’s five-year life. The plant and equipment will be sold for $580,000 before taxes at the end of five years.

You anticipate an initial investment in net working capital of $680,000, and an additional $58,000 in each subsequent year. You estimate that all net working capital will be recovered at the end of the project. Your variable production costs are 0.58 cents per card (or $0.0058), and you have fixed costs of $1,050,000 per year. Your tax rate is 30 percent and your required return on this project is 10 percent.

What is the lowest that your bid price per card should be? That is, what per-unit price gives the project an NPV = 0?

Part A: Start by calculating the operating cash flow that, when received as an annuity for 5 years, would set the NPV = 0. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) OCF* $

Part B: Now calculate the minimum bid price. (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.) Bid price $

References

Worksheet Learning Objective: 10-03 How to set a bid price for a project.

Difficulty: Intermediate Section: 10.6 Some Special Cases of Discounted Cash Flow Analysis