Finance Exam 3 Math

A capital budgeting project is expected to generate earnings before taxes (EBT) of $60,000 per year. Annual depreciation from the project is $30,000 and the firm's tax rate is 40 percent. Determine the project's annual net cash flows.

$66,000 CF = $60,000(1 - .40) + $30,000 = $66,000

The future cash flows of a stand-alone capital project follow: Year 0 1 2 3 Cash flow ($5,000) $2,500 $2,500 $2,500 If the company's cost of capital is 14%, what is the approximate NPV of the project?

$804 Calculator steps: CFo = -5000, C01 = 2500, F01 = 3; NPV: I=14 NPV = $804

A project has the following cash flows: 0 1 2 3 ($500) $100 $200 $250 What is the project's NPV if the interest rate is $6%?

-500+100(.9434)+200(.8900)+250(.8396) = -$17.76

Atlantis Inc. is considering two mutually exclusive projects with the following cash flows: Year 0 1 2 3 4 Project A ($120,000) $60,000 $40,000 $60,000 $80,000 Project B ($100,000) $60,000 $50,000 $0 $0 If Atlantis accepts projects that pay back in two years or less, which should be undertaken?

A: 60+40=100<120 payback longer that two years B: 60+50=110>100 payback less than two years

What is the after-tax cash flow that results from the sale for $150,000 of a capital asset that has a book value of $200,000, given a 40% tax rate?

Capital gains tax credit: (150 - 200).4 = -20 Cash flow:150 + 20 = 170

Capital Foods purchased an oven 5 years ago for $45,000. The oven is being depreciated over its estimated 10-year life using the straight line method to a salvage value of $5,000. Capital is planning to replace the oven with a more automated one that will cost $150,000 installed. If the old oven can be sold for $30,000, what is the tax liability? Assume a marginal tax rate of 40 percent.

Book Value = $45,000 - 5($45,000 - $5,000)/10 = $25,000 Tax liability = ($30,000 - $25,000) × (.4) = $2,000

Jim Bo's currently has annual cash revenues of $240,000 and annual operating expenses of $185,000 including $35,000 in depreciation. The firm's marginal tax rate is 40 percent. A new cutting machine can be purchased for $120,000 that will increase revenues by $50,000 per year while operating expenses would increase to $205,000, including $42,000 in depreciation. Compute Jim Bo's annual incremental after-tax net cash flows.

CF = ($50,000 - $20,000) × (1 - .4) + $7,000 = $25,000

Allen Company is considering a capital budgeting project that is expected to generate $100,000 in annual earnings before taxes. Annual depreciation will be $50,000. Allen's marginal tax rate is 40%. Determine the project's annual net cash flows.

CF = Δ EBT (1 - T) + ΔDep = $100,000 (1 - .40) + $50,000 = $110,000

Calculate the NPV of a project requiring a $3,000 investment followed by an outflow of $500 in Year 1, and inflows of $1,000 in Year 2 and $4,000 in Year 3. The cost of capital is 12%. (Round to nearest $)

Calculator Steps: -3,000 CFo; - 500 C01; 1,000 C02; 4,000 C03; 12 I/Y; NPV = $198

An investment project requires an outlay of $100,000, and is expected to generate annual cash inflows of $28,000 for the next 5 years. The cost of capital is 12 percent. Determine a net present value for the project.

NPV = 28,000(PVFA12,5) - 100,000 = $28,000(3.605) - 100,000 = $940 Calculator: $934

LISP Inc. is planning to purchase a new mixer/dubber for $50,000. The new equipment will replace an older mixer that has been fully depreciated but has a salvage value of $5,000. Compute the net investment required for this project. Assume a marginal tax rate of 40 percent.

Net Investment = $50,000 - $5,000 + $5,000(.4) = $47,000

In Step Video is considering expanding its video rental library to 8,000 tapes. The purchase price of the additional videos will be $80,000 and the shipping cost is another $4,000. To house the tapes, the owner will have to spend another $10,000 for display shelves, increase net working capital by $5,000, and interest expenses will add another $8,000 to the operating cost. What is the net investment to In Step Video for this project?

Net Investment = $80,000 + $4,000 + $10,000 + $5,000 = $99,000

Ten years ago J-Bar Company purchased a lathe for $250,000. It was being depreciated on a straight-line basis to an estimated $25,000 salvage value over a 15-year period. The firm is considering selling the old lathe and purchasing a new one. The new lathe would cost $500,000. The firm's marginal tax rate 40 percent. Determine the net investment required to purchase the new lathe, if the old lathe is sold for $100,000.

New lathe cost $500,000 Less: Salvage value (old lathe) -100,000* Net investment $400,000 *Book value (old lathe) = $250,000 - 10[($250,000 - $25,000)/15] = $100,000. Because book value equals salvage value, no gain or loss is incurred on sale of old lathe.

A project has the following cash flows: Year 0 1 2 3 4 Cash flow: ($240,000) $60,000 $100,000 $60,000 $80,000 The project's payback period is:

three and one-quarter years. 60+100+60+20=240