5. Why do we focus on cash flows rather than accounting profits in making our capital-budgeting decisions?

6. What is a sunk cost? How do sunk costs affect the determination of cash flows associated with an investment proposal?

7. You are the leading manager in a project that will generate revenues of $250,000 annually. The fixed and variable costs for the year are $140,000. Depreciation will be $15,000 a your company operates on the 34% tax bracket. Calculate the operating cash flows.

8. You Corp., just introduced a brand new product. The product has an EBIT of $500,000 and the company has a 40 percent marginal tax rate. The product will produce $95,000 in depreciation a year and has the following changes.

With the Project Without the Project

Accounts Receivable $40,000 $73,000

Inventory $60,000 $81,000

Accounts Payable $71,000 $89,000

What is the project's free cash flow in year 1?

9. You are leading new project that will generate $1.5 million of revenue. Cash expenses including both fixed and variable costs will be $500,000 and depreciation will increase by $50,000 a year. In addition, let's assume the firm's marginal tax rate is 34%. Calculate the operating cash flows.

10. From the information below: Determine each project's risk adjusted net present value.

	Project A	Project B
Initial outlay	(10,000)	(10,000)
Year 1	5,000	6,000
Year 2	5,000	6,000
Year 3	5,000	6,000
Year 4	5,000	6,000
Year 5	5,000	6,000

Required Rate of Return for project A: 12%

Required Rate of Return for project B: 15%