LabraDo is considering launching a new toy for Labradors. After conducting a $1000 survey across its customers,

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Question:

LabraDo is considering launching a new toy for Labradors. After conducting a $1000 survey across its customers, the company expects that the new product will be in high demand and generate sales of $125,000 a year. The production costs of the toys are 30% of sales per year. Production of the toys will require an initial capital investment of $300,000 and will be depreciated straight-line over the life of the project (5 years). Assuming a tax rate of 35%, what is the after-tax cash flow in year 3?

Which of the following cash flows are not relevant to analysing a project?

- Normal cash flow item

- Opportunity cost

- Financing costs

- Side-effects

You are the CEO of Apple. You are considering the launch of the newest iPhone, the iPhone 12. Market research shows that the launch of the iPhone 12 will decrease demand for the iPhone 11 by 25%. When evaluating this project, should you consider the decreased demand for the iPhone 11?

- No. It is not a relevant consideration.

- Yes, because the market research costs are relevant cash flows.

- No, because the market research has already occurred.

- Yes. It's a side effect.

Tank Ltd is considering undertaking the purchase of a new piece of equipment. The equipment costs $35,000 to purchase today and for tax purposes must be depreciated down zero over its 5 year useful life using the straight-line method. If Tank is actually forecasting a salvage value of $9,000 after 4 years, what is the net cash flow (after tax) from selling the equipment in year 4? Assume the tax rate is 30%.