Finance ch 12
A capital budgeting project's costs that are associated with assets that the company already owns are known as what?
A capital budgeting project's costs that are associated with assets that the company already owns are known as opportunity costs.
A capital budgeting project's costs that were incurred in the past and cannot be recovered in the future regardless of whether the project is pursued are known as what?
A capital budgeting project's costs that were incurred in the past and cannot be recovered in the future regardless of whether the project is pursued are known as sunk costs.
In its fifth year, a project is expected to generate sales of $2,123,564. Its cost of goods sold are expected to be 60% of sales and its depreciation expense is expected to be $98,783. If the company's tax rate is 40%, what is the project's expected operating cash flow?
EBIT = 2,123,564(1 - 0.6) - 98,783 = 750,643 NOPAT = EBIT(1- tax rate) = 750,643(1 - 0.40) = 450,386 Operating cash flow = NOPAT + depreciation and amortization = 450,386 + 98,783 = 549,169
In its third year, a project is expected to generate earnings before interest, taxes, depreciation, and amortization of $283,104 and its depreciation expense is expected to be $53,228. If the company's tax rate is 38%, what is the project's expected operating cash flow?
EBIT = 283,104 - 53,228 = 229,876 NOPAT = EBIT(1- tax rate) = 229,876(1 - 0.38) = 142,523 Operating cash flow = NOPAT + depreciation and amortization = 142,523 + 53,228 = 195,751
In its second year, a project is expected to generate earnings before interest, taxes, depreciation, and amortization of $723,174 and its depreciation expense is expected to be $47,292. If the company's tax rate is 40%, what is the project's expected net operating profit after taxes for the year?
EBIT = 723,174 - 47,292 = 675,882 NOPAT = EBIT(1- tax rate) = 675,882(1 - 0.40) = 405,529
A project generated sales of $823,564 last year. Its cost of goods sold were 55% of sales and it had depreciation expenses of $68,733. If the company's tax rate is 35%, what was the project's operating cash flow?
EBIT = 823,564(1 - 0.55) - 68,733 = 301,871 NOPAT = EBIT(1- tax rate) = 301,871(1 - 0.35) = 196,216 Operating cash flow = NOPAT + depreciation and amortization = 196,216 + 68,733 = 264,949
Next year, a project is expected to produce earnings before interest, taxes, depreciation, and amortization of $910,164 and its depreciation expense is expected to be $113,272. What is the project's expected net operating profit after taxes, if the company's tax rate is 35%?
EBIT = 910,164 - 113,272 = 796,892 NOPAT = EBIT(1- tax rate) = 796,892(1 - 0.35) = 517,980
Based on the product demand scenarios shown below, what is the expected net present value? Scenario Probability Projected NPV High 35% $16,000 Normal 35% $11,000 Low 30% -$10,000
Expected NPV = (.35)(16,000) + (.35)(11,000) + (.3)(-10,000) = 6,450
Based on the three cases shown below, what is the expected net present value? Scenario Probability Projected NPV Best case 35% $22,000 Base case 45% $14,000 Worst case 20% -$12,000
Expected NPV = (.35)(22,000) + (.45)(14,000) + (.2)(-12,000) = 11,600
A project had net operating profit after tax of $231,649 last year. Depreciation expenses were $52,778, capital expenditures were $83,235, and net working capital decreased by $12,454. What was the project's free cash flow?
Free cash flow = Operating cash flow - capital expenditures - increase in net working capital Free cash flow = 231,649 + 52,778 - 83,235 + 12,454 = 213,646
A project is expected to produce net operating profit after tax of $331,843 next year. Depreciation expenses are expected to be $74,748, capital expenditures are expected to be $113,265, and net working capital is expected to decrease by $32,754. What is the project's expected free cash flow?
Free cash flow = Operating cash flow - capital expenditures - increase in net working capital Free cash flow = 331,843 + 74,748 - 113,265 + 32,754 = 326,080
In its second year, a project is expected to have operating cash flow of $783,098. Capital expenditures are expected to be $244,905 and net working capital is expected to decrease by $34,865. What is the project's expected free cash flow for the year?
Free cash flow = Operating cash flow - capital expenditures - increase in net working capital Free cash flow = 783,098 - 244,905 + 34,865 = 573,058
A project generated operating cash flow of $95,324 last year, its capital expenditures were $34,695, and its net working capital decreased by $14,012. What was the project's free cash flow?
Free cash flow = Operating cash flow - capital expenditures - increase in net working capital Free cash flow = 95,324 - 34,695 + 14,012 = 74,641
A company is considering expanding its product line. A new machine would be required that costs $317,000. The new product would cause a $44,000 increase in accounts receivable, a $35,000 increase in inventory, and a $23,000 increase in accounts payable. If the company's tax rate is 31%, what would be the initial cash outlay for this expansion project?
Increase in working capital = 44,000 + 35,000 - 23,000 = 56,000 Initial cash outlay = 317,000 + 56,000 = 373,000
In its fifth year, a project is expected to produce earnings before interest and taxes of $541,776 and its depreciation expense is expected to be $78,332. What is the project's expected net operating profit after taxes, if the company's tax rate is 37%?
NOPAT = EBIT(1- tax rate) = 541,776(1 - 0.37) = 341,319
A project requires an investment of $40,200 today and it is expected to generate free cash flows of $23,400 at the end of year 1, $17,500 at the end of year 2 and, $11,600 at the end of year 3. The company's weighted average cost of capital is 11.9% per year. What is the project's equivalent annual annuity?
NPV = -40,200 + 23,400/1.119 + 17,500/1.1192^2 + 11,600/1.1193^3 = 2,966 PV = 2,966, N = 3, I = 11.9, FV = 0, CPT PMT = 1,233
A company's weighted average cost of capital is 13.1% per year. A project requires an investment of $7.2 million today and it is expected to generate free cash flows of $3.3 million at the end of year 1, $3.1 million at the end of year 2 and, $2.8 million at the end of year 3. What is the project's equivalent annual annuity?
NPV = -7,200,000 + 3,300,000/1.131 + 3,100,000/1.131^2 + 2,800,000/1.131^3 = 76,633 PV = 76,633, N = 3, I = 13.1, FV = 0, CPT PMT = 32,511
In its fourth year, a project is expected to generate earnings before interest, taxes, depreciation, and amortization of $368,134 and its depreciation expense is expected to be $73,032. If the company's tax rate is 42%, what is the project's expected operating cash flow for the year?
Operating cash flow = NOPAT + depreciation and amortization = (368,134 - 73,032)(1 - 0.42) + 73,032 = 244,191
A project requires a capital investment investment of $300,000 today and the associated operating costs of are $105,000 at the end of year 1, $130,000 at the end of year 2, $170,000 at the end of year 3, and $110,000 at the end of year 4. If the company's weighted average cost of capital is 10.7% per year, what is the project's equivalent annual annuity of the project's costs?
Operating cost PV = 105,000/1.107 + 130,000/1.107^2 + 170,000/1.107^3 + 110,000/1.1074 = 399,499 PV = 300,000 + 399,499 = 699,499 PV = 699,499, N = 4, I = 10.7, FV = 0, CPT PMT = 224,024
A company's weighted average cost of capital is 10.9% per year. A project requires a capital investment of $26,000 today and the associated operating costs will be $11,000 per year for seven years. What is the equivalent annual annuity of the project's costs?
PMT = 11,000, N = 7, I = 10.9, FV = 0, CPT PV = 52,002 PV = 52,002 + 26,000 = 78,002 PV = 78,002, N = 7, I = 10.9, FV = 0, CPT PMT = 16,500
A project requires a capital investment of $400,000 today and the associated operating costs will be $125,000 per year for six years. The company's weighted average cost of capital is 10.2% per year. What is the equivalent annual annuity of the project's costs?
PMT = 125,000, N = 6, I = 10.2, FV = 0, CPT PV = 541,232 PV = 541,232 + 400,000 = 941,232 PV = 941,232, N = 6, I = 10.2, FV = 0, CPT PMT = 217,382
A project requires an investment of $45,000 today and it is expected to generate free cash flows of $15,000 per year for the next five years. What is the project's equivalent annual annuity, if the company's weighted average cost of capital is 13.3% per year?
PMT = 15,000, N = 5, I = 13.3, FV = 0, CPT PV = 52,375 NPV = 52,375 - 45,000 = 7,375 PV = 7,375, N = 5, I = 13.3, FV = 0, CPT PMT = 2,112
A project requires an investment of $15,000 today and it is expected to generate free cash flows of $5,000 per year for the next four years. The company's weighted average cost of capital is 10.1% per year. What is the project's equivalent annual annuity?
PMT = 5,000, N = 4, I = 10.1, FV = 0, CPT PV = 15,815.1 NPV = 15,815.1 - 15,000 = 815.1 PV = 815.1, N = 4, I = 10.1, FV = 0, CPT PMT = 257.7
A company sold an asset for $300,000 and the asset's tax basis is $100,000. If the company's tax rate is 33%, what taxes are due on the asset sale?
Taxes due = 0.33(300,000 - 100,000) = 66,000
A company sold an asset for $300,000 and the asset's tax basis is $100,000. If the company's tax rate is 33%, how much cash flow did the asset sale generate?
Taxes due = 0.33(300,000 - 100,000) = 66,000 Cash flow = 300,000 - 66,000 = 234,000
A company sold an asset for $47,000 and the asset's tax basis is $31,000. If the company's tax rate is 37%, how much cash flow did the asset sale generate?
Taxes due = 0.37(47,000 - 31,000) = 5,920 Cash flow = 47,000 - 5,920 = 41,080
A company is considering replacing an old machine, which has a market value of $75,000 and a tax basis of $50,000. The new machine would cost $145,000 and would require an additional $12,000 in working capital for spare parts. If the company's tax rate is 34%, what would be the initial cash outlay for this replacement project?
Taxes due on sale of old machine= 0.34(75,000 - 50,000) = 8,500 Cash flow from sale of old machine = 75,000 - 8,500 = 66,500 Initial cash outlay = 145,000 - 66,500 + 12,000 = 90,500
A company is considering replacing an old machine, which has a market value of $85,000 and a tax basis of $115,000. The new machine would cost $300,000 and would require an additional $8,000 in working capital for spare parts. If the company's tax rate is 35%, what would be the initial cash outlay for this replacement project?
Taxes due on sale of old machine= 0.35(85,000 - 115,000) = -10,500 Cash flow from sale of old machine = 85,000 - (-10,500) = 95,500 Initial cash outlay = 300,000 - 95,500 + 8,000 = 212,500
A company is considering replacing an old machine, which has a market value of $200,000 and a tax basis of $133,000. The new machine would cost $330,000 and would cause a $15,000 reduction in working capital because of the need for fewer spare parts. If the company's tax rate is 36%, what would be the initial cash outlay for this replacement project?
Taxes due on sale of old machine= 0.36(200,000 - 133,000) = 24,120 Cash flow from sale of old machine = 200,000 - 24,120 = 175,880 Initial cash outlay = 330,000 - 175,880 - 15,000 = 139,120
A company purchased equipment three years ago for $75,000. The equipment is being depreciated according to the MACRS five-year class, whose depreciation rates are 20%, 32%, 19%, 12%, 11% and 6%. What is the company's current tax basis in the equipment?
Total depreciation percentage equals 20% + 32% + 19% or 71% Tax basis = 75,000(1 - 0.71) = 21,750
A company purchased equipment two years ago for $605,000. The equipment is being depreciated according to the MACRS five-year class, whose depreciation rates are 20%, 32%, 19%, 12%, 11% and 6%. What is the company's current tax basis in the equipment?
Total depreciation percentage equals 20% + 32% or 52% Tax basis = 605,000(1 - 0.52) = 290,400
A company purchased equipment one year ago for $97,500. The equipment is being depreciated according to the MACRS three-year class, whose depreciation rates are 33%, 45%, 15%, and 7%. What is the company's current tax basis in the equipment?
Total depreciation percentage equals 33% Tax basis = 97,500(1 - 0.33) = 65,325
When calculating a project's net present value, which type of cash flows should be considered?
When calculating a project's net present value, free cash flows should be considered.
