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Quick
Computing currently sells 16 million computer chips each year at a price of
$30 per chip. It is about to introduce a new chip, and it forecasts annual
sales of 18 million of these improved chips at a price of $38 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 $15 each to manufacture,
and the new ones will cost $18 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.)
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2.
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Tubby
Toys estimates that its new line of rubber ducks will generate sales of $7.80
million, operating costs of $4.80 million, and a depreciation expense of
$1.80 million. Assume the tax rate is 30%.
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a.
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Calculate
the operating cash flow for the year by using all three methods: (a) adjusted
accounting profits; (b) cash inflow/cash outflow analysis; and (c) the
depreciation tax shield approach. (Enter your answers in millions rounded to 2 decimal places.)
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Method
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Cash Flow
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Adjusted
accounting profits
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$ million
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Cash
inflow/cash outflow analysis
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million
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Depreciation
tax shield approach
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million
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b.
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Are the
above answers equal?
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Yes
No
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3.
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The
owner of a bicycle repair shop forecasts revenues of $164,000 a year.
Variable costs will be $51,000, and rental costs for the shop are $31,000 a
year. Depreciation on the repair tools will be $11,000. Prepare an income
statement for the shop based on these estimates. The tax rate is 40%. (Input all amounts as positive values.)
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INCOME STATEMENT
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$
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Rental
costs
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$
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4.
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Laurel’s
Lawn Care, Ltd., has a new mower line that can generate revenues of $168,000
per year. Direct production costs are $56,000, and the fixed costs of
maintaining the lawn mower factory are $23,000 a year. The factory originally
cost $1.4 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 40%. (Enter your answer in dollars not in millions.)
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5.
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Gluon Inc. is considering the purchase of a new high pressure
glueball. It can purchase the glueball for $180,000 and sell its old
low-pressure glueball, which is fully depreciated, for $32,000. The new
equipment has a 10-year useful life and will save $40,000 a year in expenses.
The opportunity cost of capital is 8%, and the firm’s tax rate is 40%. What
is the equivalent annual savings from the purchase if Gluon uses
straight-line depreciation? Assume the new machine will have no salvage
value. (Do not round intermediate
calculations. Round your answer to 2 decimal places.)
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Equivalent
annual savings
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$
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6.
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Johnny’s
Lunches is considering purchasing a new, energy-efficient grill. The grill
will cost $45,000 and will be depreciated according to the 3-year MACRS
schedule. It will be sold for scrap metal after 3 years for $11,250. The
grill will have no effect on revenues but will save Johnny’s $22,500 in
energy expenses per year. The tax rate is 30%. Use the MACRS depreciation
schedule.
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a.
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What
are the operating cash flows in each year? (Do not round intermediate calculations. Round your answers to 2
decimal places.)
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Year
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Operating Cash Flows
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1
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$
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2
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3
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b.
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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.)
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Time
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Total Cash Flows
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0
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$
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1
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2
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3
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c.
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If the
discount rate is 10%, should the grill be purchased?
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Yes
No
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7.
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Revenues
generated by a new fad product are forecast as follows:
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Year
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Revenues
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1
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$44,000
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2
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30,000
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3
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20,000
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4
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10,000
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Thereafter
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0
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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 $48,000 in plant and equipment.
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a.
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What is
the initial investment in the product? Remember working capital.
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b.
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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 40%, 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.)
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c.
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If the
opportunity cost of capital is 15%, 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.)
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d.
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What is
project IRR? (Do not
round intermediate calculations. Enter your answer as a percent rounded to 2
decimal places.)
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8.
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Kinky
Copies may buy a high-volume copier. The machine costs $60,000 and will be
depreciated straight-line over 5 years to a salvage value of $10,000. Kinky
anticipates that the machine actually can be sold in 5 years for $22,000. The
machine will save $10,000 a year in labor costs but will require an increase
in working capital, mainly paper supplies, of $5,000. The firm’s marginal tax
rate is 35%, and the discount rate is 11%. (Assume the net working capital
will be recovered at the end of Year 5.)
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Calculate
the NPV. (Negative
amount should be indicated by a minus sign. Do not round intermediate
calculations. Round your answer to 2 decimal places.)
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Should
Kinky buy the machine?
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Yes
No
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9.
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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 $38 million, has been depreciated
straight-line over an assumed tax life of 5 years, but it can be sold now for
$17.6 million. The firm’s tax rate is 30%. What is the after-tax cash flow
from the sale of the equipment? (Enter your answer in millions rounded to 2 decimal places.)
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After-tax
cash flow
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$ million
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10.
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Bottoms Up Diaper Service is considering the purchase of a new
industrial washer. It can purchase the washer for $4,800 and sell its old
washer for $1,200. The new washer will last for 6 years and save $1,400 a
year in expenses. The opportunity cost of capital is 18%, and the firm’s tax
rate is 40%.
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a.
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If the firm uses straight-line depreciation to an assumed
salvage value of zero over a 6-year life, what is the annual operating cash flow
of the project in years 1 to 6? The new washer will in fact have zero salvage
value after 6 years, and the old washer is fully depreciated.
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Annual
operating cash flow
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$
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b.
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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.)
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c.
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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.)
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11
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Canyon
Tours showed the following components of working capital last year:
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Beginning
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End of Year
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Accounts
receivable
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$24,800
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$23,400
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Inventory
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12,400
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13,300
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Accounts
payable
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14,900
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17,300
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a.
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What
was the change in net working capital during the year? (A negative amount should be indicated by a
minus sign.)
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Change
in net working capital
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$
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b.
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If
sales were $36,400 and costs were $24,400, what was cash flow for the year?
Ignore taxes.
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12.
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A house
painting business had revenues of $16,200 and expenses of $9,200 last summer.
There were no depreciation expenses. However, the business reported the
following changes in working capital:
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Beginning
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End
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Accounts
receivable
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$1,400
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$4,700
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Accounts
payable
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740
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320
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Calculate
net cash flow for the business for this period.
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13
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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.
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Year:
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0
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1
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2
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3
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4
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5
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6
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Thereafter
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Sales
(millions of traps)
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0
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.4
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.5
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.6
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.6
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.4
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.2
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0
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a.
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What is
project NPV? (Do not
round intermediate calculations. Enter your answer in millions rounded to 4
decimal places.)
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b.
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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.)
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14.
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The efficiency gains resulting from a just-in-time inventory
management system will allow a firm to reduce its level of inventories
permanently by $581,000. What is the most the firm should be willing to pay
for installing the system?
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Firm
should willing to pay
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$
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15.
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Better
Mousetraps has developed a new trap. It can go into production for an initial
investment in equipment of $6.3 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 $538,000. The firm believes that working capital at each
date must be maintained at a level of 15% of next year’s forecast sales. The
firm estimates production costs equal to $1.00 per trap and believes that the
traps can be sold for $4 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.
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Year:
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0
|
1
|
2
|
3
|
4
|
5
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6
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Thereafter
|
|
Sales
(millions of traps)
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0
|
.4
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.5
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.7
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.7
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.5
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.4
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0
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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.)
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