1. You work for Athens Inc., and you must estimate the Year 1 operating cash flow for...
Question:
1. You work for Athens Inc., and you must estimate the Year 1 operating cash flow for a project with the following data. What is the Year 1 operating cash flow?
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Sales revenues | $15,000 | |
Capital cost allowance | $4,000 | |
Cash operating costs | $6,000 | |
Tax rate | 35.0% | |
2. You work for the Sing Oil Company, which is considering a new project whose data are shown below. What is the project’s net operating cash flow for Year 1?
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| | Sales revenues, each year | | $55,000 | | | |
| | Capital cost allowance | | $8,000 | | | |
| | Cash operating costs | | $25,000 | | | |
| | Interest expense | | $8,000 | | | |
| | Tax rate | | 35.0% | | |
3. Fool Proof Software is considering a new project whose data are shown below. The equipment has an economic life of 3 years, and is in the CCA class 10 (30%). Revenues and cash operating costs are expected to be constant over the project’s 3-year life. What is the net operating cash flow for Year 1?
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| Equipment cost | $65,000 | | ||||
| Annual sales revenues | $60,000 | | ||||
| Annual cash operating costs | $25,000 | | ||||
| Tax rate | 35.0% | |
4. California Hideaways is considering a new project whose data are shown below. The equipment has a 4-year project life. This equipment falls into class 43 with a CCA rate of 30% and would have zero salvage value. No new working capital would be required. Revenues and cash operating costs are expected to be constant over the project’s 4-year life. What is the project’s NPV? ( Hint: Cash flows are constant in Years 1 to 4.)
| WACC | 10.0% | |
| Net investment cost | $65,000 | |
| Sales revenues, each year | $60,000 | |
| Cash operating costs | $25,000 | |
| Tax rate | 35.0% | |
5. Bing Services is now in the final year of a project. The equipment originally cost $20,000. The existing UCC is $5,000. Bing can sell the used equipment today for $6,000, and its tax rate is 40%. What is the equipment’s net after-tax salvage value for use in a capital budgeting analysis? Note that the recapture is fully taxable.
6. Moore & Moore (MM) is considering the purchase of a new machine for $50,000, installed. MM will use the CCA method to depreciate the machine. This machine is included in CCA class 8 (20%). MM expects to sell the machine at the end of its 4-year operating life for $10,000. If MM’s marginal tax rate is 40%, what will be the present value of the CCA tax shield when it disposes of the machine at the end of Year 4? Assume that the relevant discount rate is 10%.
Foundations of Finance The Logic and Practice of Financial Management
ISBN: 978-0132994873
8th edition
Authors: Arthur J. Keown, John D. Martin, J. William Petty