Part III: Cash Flow Estimation

Use this information to answer questions 18 25

BearKat Enterprises is considering a project where they will make high end designer face masks. They can buy the equipment they need to make the face masks for $250,000 plus another $10,000 for training and installation. They will have to increase inventory by $5,000 and accounts payable will increase $1200. They think they can sell 50,000 masks a year at a price of $8.50 each for 4 years. The estimate variable costs at 80% of revenue. They follow a four years MACRS schedule for depreciation with the following depreciation rates:

Year 1: 33%

Year 2: 45%

Year 3: 15%

Year 4: 7%

They believe the equipment has a salvage value of $25,000. BearKat Enterprises has a tax rate of 24.6%. And a WACC of 8.3%. Once the project is done the additional inventory will not need to be purchased and the accounts payable balance will be paid.

QUESTION 18

Use part III of the information to answer this.

What are BearKat Enterprises year 0 cash flows for this project?

	A.	-$263,800
	B.	-$284,000
	C.	-$301,000
	D.	-$321,000

QUESTION 19

Use part III of the information to answer this.

What are BearKat Enterprises depreciation expenses in year 3 for this project?

	A.	$24,250
	B.	$39,000
	C.	$39,570
	D.	$51,500

QUESTION 20

Use part III of the information to answer this.

What are BearKat Enterprises operating cash flows (or free cash flows) for year 1 of this project?

	A.	$56,070
	B.	$62,190
	C.	$85,197
	D.	$110,630

QUESTION 21

Use part III of the information to answer this.

What are BearKat Enterprises terminal cash flows for this project?

	A.	-$64,200
	B.	$20,790
	C.	$22.650
	D.	$39,550

QUESTION 22

Based on the information in Part III, what is the NPV of this facemask project for BearKat Enterprises?

	A.	-$2,513.88
	B.	$18,365.19
	C.	$1,370.63
	D.	-$6,263.78

QUESTION 23

BearKat Enterprises currently sells basic face masks in drug stores and retail stores. If the sales of designer face masks will likely hurt the sales of their basic face masks,which of the following is true?

	A.	This is a negative externality and should not be considered in the business case.
	B.	This is a negative externality and should be considered in the business case.
	C.	This is a positive externality and should not be considered in the business case .
	D.	This is a positive externality and should be considered in the business case .

QUESTION 24

BearKat Enterprises spent $5,000 on a marketing survey last month to see if customers would even want to wear designer face masks. Which of the following is true?

	A.	This is an opportunity cost and should be considered in the business case.
	B.	This is an opportunity cost and should not be considered in the business case.
	C.	This is a sunk cost and should be considered in the business case.
	D.	This is a sunk cost and should not be considered in the business case.

QUESTION 25

BearKat Enterprises has a higher cost of common equity than most companies in the face mask business. Which of the following is true?

	A.	The business case needs to be adjusted for the cost of capital.
	B.	The cost of common equity is considered a flotation cost.
	C.	The cost of common equity is not relevant to business cases.
	D.	The business case is evaluated using NPV or IRR which already considers the cost of capital in the calculation or evaluation so no adjustment is needed.