1. Why do we focus on cash flows rather than accounting profits in making our capital-budgeting decisions? Why are we interested only in incremental cash flows rather than total cash flows?

2. If depreciation is not a cash-flow expense, does it affect the level of cash flows from a project in any way? Why?

3.(Calculating free cash flows) Racin' Scooters is introducing a new product and has an expected change in EBIT of $475,000. Racin' Scooters has a 34 percent marginal tax rate. The project will produce $100,000 of depreciation per year. In addition, the project will cause the following changes in year 1:

WITHOUT THE PROJECT WITH THE PROJECT Accounts receivable $45,000 $63,000 Inventory 65,000 80,000 Accounts payable 70,000 94,000 What is the project's free cash flow in year 1?

4. (Calculating operating cash flows) Assume that a new project will annually generate revenues of $2 million. Cash expenses including both fixed and variable costs will be $800,000, and depreciation will increase by $200,000 per year. In addition, let's assume that the firm's marginal tax rate is 34 percent. Calculate the operating cash flows.

5. (Calculating free cash flows) Vandelay Industries is considering a new project with a 4-year life with the following cost and revenue data. This project will require an investment of $140,000 in new equipment. This new equipment will be depreciated down to zero over 4 years using the simplified straight-line method and has no salvage value. This new project will generate additional sales revenue of $112,000, whereas additional operating costs, excluding depreciation, will be $68,000. Vandelay's marginal tax rate is 35 percent. What is the project's free cash flow in year 1?