chapter 12
A capital budgeting project's cash flows that will occur only if the project is pursued are known as what?
A capital budgeting project's cash flows that will occur only if the project is pursued are known as incremental cash flows.
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 represent a reduction in the company's other cash flows are known as what?
A capital budgeting project's costs that represent a reduction in the company's other cash flows are known as cannibalization 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.
Next year, a project is expected to generate sales of $2,123,564. Its cost of goods sold is expected to be 60% of sales and it is expected to have depreciation expenses of $98,783. If the company's tax rate is 40%, what is the project's expected net operating profit after taxes?
EBIT = 2,123,564(1 - 0.6) - 98,783 = 750,643 NOPAT = EBIT(1- tax rate) = 750,643(1 - 0.40) = 450,386
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
Based on the three cases shown below, what is the expected net present value? Scenario Probability Projected NPV Best case 30% $14,000 Base case 55% $11,000 Worst case 15% -$8,000
Expected NPV = (.30)(14,000) + (.55)(11,000) + (.15)(-8,000) = 9,050
Based on the product demand scenarios shown below, what is the expected net present value? Scenario Probability Projected NPV High 35% $350,000 Normal 45% $150,000 Low 20% -$100,000
Expected NPV = (.35)(350,000) + (.45)(150,000) + (.20)(-100,000) = 170,000
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
A project generated operating cash flow of $603,358 last year. Capital expenditures were $184,535 and net working capital decreased by $24,865. What was the project's free cash flow?
Free cash flow = Operating cash flow - capital expenditures - increase in net working capital Free cash flow = 603,358 - 184,535 + 24,865 = 443,688
In its second year, a project is expected to generate net operating profit after tax of $689,226. Depreciation expenses are expected to be $127,963, capital expenditures are expected to be $105,657, and net working capital is expected to increase by $41,722. 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 = 689,226 + 127,963 - 105,657 - 41,722 = 669,810
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?
Hide Feedback 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
A company is considering expanding its product line. A new machine would be required that costs $170,000. The new product would cause a $10,000 increase in accounts receivable, a $15,000 increase in inventory, and a $12,000 increase in accounts payable. If the company's tax rate is 33%, what would be the initial cash outlay for this expansion project?
Increase in working capital = 10,000 + 15,000 - 12,000 = 13,000 Initial cash outlay = 170,000 + 13,000 = 183,000
In its first year, a project is expected to generate earnings before interest and taxes of $237,884 and its depreciation expense is expected to be $87,882. If the company's tax rate is 35%, what is the project's expected net operating profit after taxes for the year?
NOPAT = EBIT(1- tax rate) = 237,884(1 - 0.35) = 154,625
A project requires an investment of $1,200 today and it is expected to generate free cash flows of $400 at the end of year 1, $500 at the end of year 2 and, $700 at the end of year 3. The company's weighted average cost of capital is 10.4% per year. What is the project's equivalent annual annuity?
NPV = -1,200 + 400/1.104 + 500/1.104^2 + 700/1.104^3 = 92.8 PV = 92.8, N = 3, I = 10.4, FV = 0, CPT PMT = 37.6
A project requires an investment of $300,000 today and it is expected to generate free cash flows of $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?
NPV = -300,000 + 105,000/1.107 + 130,000/1.1072 + 170,000/1.1073 + 110,000/1.1074 = 99,499 PV = 99,499, N = 4, I = 10.7, FV = 0, CPT PMT = 31,866
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 + 11,600/1.1193 = 2,966 PV = 2,966, N = 3, I = 11.9, FV = 0, CPT PMT = 1,233
Next year, a project is expected to produce earnings before interest, taxes, depreciation, and amortization of $518,164 and its depreciation expense is expected to be $53,732. What is the project's expected operating cash flow, if the company's tax rate is 35%?
Operating cash flow = NOPAT + depreciation and amortization = (518,164 - 53,732)(1 - 0.35) + 53,732 = 355,613
In its second year, a project is expected to generate earnings before interest and taxes of $435,725 and depreciation expense of $95,313. If the company's tax rate is 35%, what is the project's expected operating cash flow?
Operating cash flow = NOPAT + depreciation and amortization = 435,725(1 - 0.35) + 95,313 = 378,534
In its third year, a project is expected to produce earnings before interest and taxes of $671,551 and depreciation expense of $125,193. If the company's tax rate is 34%, what is the project's expected operating cash flow?
Operating cash flow = NOPAT + depreciation and amortization = 671,551(1 - 0.34) + 125,193 = 568,417
What is the equivalent annual annuity of a project that requires an investment of $4,000 today and is expected to generate free cash flows of $1,000 per year for the next six years? The company's weighted average cost of capital is 12.6% per year.
PMT = 1,000, N = 6, I = 12.6, FV = 0, CPT PV = 4,042.5 NPV = 4,042.5 - 4,000 = 42.5 PV = 42.5, N = 6, I = 12.6, FV = 0, CPT PMT = 10
A company's weighted average cost of capital is 11.8% per year. A project requires an investment of $4,800 today and it is expected to generate free cash flows of $1,400 per year for the next five years. What is the project's equivalent annual annuity?
PMT = 1,400, N = 5, I = 11.8, FV = 0, CPT PV = 5,071.8 NPV = 5,071.8 - 4,800 = 271.8 PV = 271.8, N = 5, I = 11.8, FV = 0, CPT PMT = 75.0
A company's weighted average cost of capital is 11.8% per year. A project requires a capital investment of $40,000 today and the associated operating costs will be $10,000 per year for five years. What is the equivalent annual annuity of the project's costs?
PMT = 10,000, N = 5, I = 11.8, FV = 0, CPT PV = 36,227 PV = 36,227 + 40,000 = 76,227 PV = 76,227, N = 5, I = 11.8, FV = 0, CPT PMT = 21,041
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 a capital investment of $66,000 today and its operating costs will be $21,000 per year for four years. What is the equivalent annual annuity of the project's costs, if the company's weighted average cost of capital is 9.4% per year?
PMT = 21,000, N = 4, I = 9.4, FV = 0, CPT PV = 67,441 PV = 67,441 + 66,000 = 133,441 PV = 133,441, N = 4, I = 9.4, FV = 0, CPT PMT = 41,551
A project requires a capital investment of $231,000 today and its operating costs will be $78,000 per year for five years. What is the equivalent annual annuity of the project's costs, if the company's weighted average cost of capital is 13.4% per year?
PMT = 78,000, N = 5, I = 13.4, FV = 0, CPT PV = 271,686 PV = 271,686 + 231,000 = 502,686 PV = 502,686, N = 5, I = 13.4, FV = 0, CPT PMT = 144,319
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 $125,000 and the asset's tax basis is $176,000. If the company's tax rate is 36%, what taxes are due on the asset sale?
Taxes due = 0.36(125,000 - 176,000) = -18,360
A company is considering replacing an old machine, which has a market value of $120,000 and a tax basis of $50,000. The new machine would cost $240,000 and would require an additional $10,000 in working capital for spare parts. If the company's tax rate is 33%, what would be the initial cash outlay for this replacement project?Taxes due on sale of old machine
Taxes due on sale of old machine= 0.33(120,000 - 50,000) = 23,100 Cash flow from sale of old machine = 120,000 - 23,100 = 96,900 Initial cash outlay = 240,000 - 96,900 + 10,000 = 153,100
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
A company purchased equipment five years ago for $55,000. 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% + 45% + 15% + 7% or 100% Tax basis = 55,000(1 - 1) = 0
A company purchased equipment three years ago for $35,000. 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 accumulated depreciation in the equipment?
Total depreciation percentage equals 33% + 45% + 15% or 93% Accumulated depreciation = 35,000(0.93) = 32,550
A company purchased equipment two years ago for $155,000. 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 accumulated depreciation in the equipment?
Total depreciation percentage equals 33% + 45% or 78% Accumulated depreciation = 155,000(0.78) = 120,900
A capital budgeting project's costs that are associated with assets that the company already owns are known as what?
opportunity costs
