Cash Flow Estimation Problem Set

Boise State EMBA

Byers

Remember – this is an individual assignment. You should start with a blank spreadsheet.
Deliverable: submit your spreadsheet with the problem numbers clearly identified.

1. Ernie's Electrical is evaluating a project which will increase sales by $60,000 and
costs by $20,000. The project will cost $125,000 and be depreciated straight-line
to a zero book value over the 10 year life of the project. The applicable tax rate is
40%. What is the operating cash flow for this project?

A. $29,000
B. $5,000
C. $9,350
D. $30,650
E. $38,300

2. A project will increase sales by $140,000 and cash expenses by $95,000.

The project will cost $200,000 and be depreciated using the straight-line
method to a zero book value over the 5-year life of the project. The
company has a marginal tax rate of 35%. What is the yearly value of the
depreciation tax shield?

A. $8,500
B. $13,600
C. $14,000
D. $25,000
E. $37,750
3. RP&A, Inc. purchased some fixed assets three years ago at a cost of
$19,800. It no longer needs these assets, so it is going to sell them today
at a price of $3,500. The assets are classified as 5-year property for
MACRS. What is the current book value of these assets?

A. $1,140.48
B. $3,421.44
C. $3,500.00
D. $4,016.67
E. $5,702.40

4. Ronnie's Custom Cars purchased some fixed assets two years ago for
$39,000. The assets are classified as 5-year property for MACRS. Ronnie
is considering selling these assets now so he can buy some newer fixed
assets which utilize the latest in technology. Ronnie has been offered
$18,000 for his old assets. What is the net cash flow from the salvage
value if the tax rate is 34%?

A. $16,358.88
B. $18,244.80
C. $18,720.00
D. $18,904.80
E. $19,000.00
5. A project is expected to create operating cash flows of $24,500 a year for
three years. The initial cost of the fixed assets is $55,000. These assets
will be worthless at the end of the project. An additional $4,000 of net
working capital will be required throughout the life of the project. What is
the project's net present value if the required rate of return is 9%?

A. $4,933.13
B. $6,105.45
C. $9,306.09
D. $11,208.11
E. $12,933.13

6. A project will produce operating cash flows of $45,000 a year for four
years. During the life of the project, inventory will be lowered by $30,000
and accounts receivable will increase by $15,000. Accounts payable will
decrease by $10,000. The project requires the purchase of equipment at
an initial cost of $120,000. The equipment will be depreciated straight-line
to a zero book value over the life of the project. The equipment will be
salvaged at the end of the project creating a $25,000 after-tax cash flow.
At the end of the project, net working capital will return to its normal level.
What is the net present value of this project given a required return of
13%?

A. $3,483.48
B. $31,117.58
C. $27,958.66
D. $32,037.86
E. $49,876.02
7. Thornley Machines is considering a 3-year project with an initial cost of
$618,000. The project will not directly produce any sales but will reduce
operating costs by $265,000 a year. The equipment is depreciated
straight-line to a zero book value over the life of the project. At the end of
the project the equipment will be sold for an estimated $60,000. The tax
rate is 34%. The project will require $23,000 in extra inventory for spare
parts and accessories. Should this project be implemented if Thornley's
requires a 8% rate of return?

A. no; The NPV is -$2,646.00.

B. yes; The NPV is $27,354.00.
C. yes; The NPV is $39,928.03.
D. yes; The NPV is $43,106.54.
E. yes; The NPV is $196,884.40.

8. Your company needs to produce a certain product for 6 years. You are
considering purchasing Machine A or Machine B. What is the NPV of the
best option after putting the machines on a common 6-year footing (in
other words, using Replacement Chain analysis)? The required return is
8.4%.

A) $1,735
B) $2,926
C) $3,098
D) $3,184
E) $4,306
9. Sub-Prime Loan Company is thinking of opening a new office, and the key
data are shown below. The company owns the building that would be
used, and it could sell it for $100,000 after taxes if it decides not to open
the new office. The equipment for the project would be depreciated by the
straight-line method over the project's 3-year life, after which it would be
worth nothing and thus it would have a zero salvage value. No new
working capital would be required, and revenues and other operating costs
would be constant over the project's 3-year life. What is the project's
NPV?

WACC (cost of capital) = 10.0%

Opportunity cost = $100,000
Net equipment cost (depreciable basis) = $65,000
Straight-line depreciation rate for equipment = 33.333%
Sales revenues, each year = $123,000
Operating costs (excluding depreciation), each year = $25,000
Tax rate = 36%

A. $10,373
B. $11,075
C. $11,658
D. $12,271
E. $12,885

10. Your company is considering a machine that will cost $1,000 at Time 0 and
which can be sold after 3 years for $105. To operate the machine, $200
must be invested at Time 0 in inventories; these funds will be recovered
when the machine is retired at the end of Year 3. The machine will produce
sales revenues of $900/year for 3 years; variable operating costs
(excluding depreciation) will be 50 percent of sales. Operating cash inflows
will begin 1 year from today (at Time 1). The machine will have
depreciation expenses of $500, $300, and $200 in Years 1, 2, and 3,
respectively. The company has a 40 percent tax rate, enough taxable
income from other assets to enable it to get a tax refund from this project if
the project's income is negative, and a 10 percent required rate of return.
Inflation is zero. What is the project's NPV?
A. $6.24
B. $7.89
C. $8.87
D. $9.15
E. $10.14
11. Peterson Inc. is evaluating a project that costs $840,000, has a six-year
life, and has no salvage value. Assume that depreciation is straight-line to
zero over the life of the project. Sales are projected at 220,000 units per
year. Price per unit is $55, variable cost per unit is $30, and fixed costs are
$910,000 per year. The tax rate is 34 percent, and they require a 10
percent return on this project. Calculate the base-case NPV.

12. Refer to the previous problem. What is the sensitivity of NPV to changes in
the unit sales figure (∆NPV / ∆Sales)?