FNCE 370 - Lesson 8: Operating Cash Flows and Capital Investment

Lesson 8: Operating Cash Flows and Capital Investment

Question 3

Iota Inc. is considering taking on a project. At the initiation of this project, the company will experience an increase in accounts receivable of $50,000, a decrease in inventory of $10,000, and an increase in accounts payable of $15,000. What is the effect of these changes in net working capital on the project's cash flows?

Select one:

a. There is no effect as these are not incremental cash flows of the project.

b. Initial cash outflow to the project will decrease by $25,000.

c. Initial cash outflow to the project will increase by $25,000.

d. Initial cash inflow to the project will increase by $25,000.

e. Annual cash flow will decrease by $25,000.

Question 4

A project's after-tax operating cash flow is $200,000 per year, with operating costs of $100,000 and depreciation of $20,000 per year. The firm's marginal tax rate is 30%. What are the annual sales revenues from this project? Round your answer to the nearest dollar.

Select one:

a. $184,800

b. $194,286

c. $200,000

d. $377,143

e. $394,286

Question 5

Jabba-Dabba-Doo Inc. renovated its warehouses exactly two years ago at a cost of $3 million. The renovations were considered leasehold improvement, and the cost was therefore subject to straight-line depreciation for tax purposes. The firm will not need to renovate the warehouses for another three years (from today). Given that the firm's marginal tax rate is 35% and required return is 11%, what is the present value of the remaining depreciation tax shields on the leasehold improvement? Ignore the half-year rule, and round your answer to the nearest dollar.

Select one:

a. $776,138

b. $359,630

c. $513,180

d. $630,000

e. $210,000

Question 6

A project requires an initial investment of $5 million and will yield operating cash flows of $1.5 million per year for the next 10 years. At the end of 10 years, the project's assets can be divested for $250,000. The marginal tax rate is 40%, and the CCA rate is 30%. If the required rate of return is 12%, what is the present value of the CCA tax shields?

Select one:

a. $1,352,040.82

b. $1,342,381.62

c. $1,329,042.73

d. $1,210,537.92

e. $1,049,551.30

Question 7

Kerfuffle Corporation is considering the purchase of a new computer system. The cost for the new system, net of set-up and delivery costs, will be $1.6 million. The new system will provide annual before-tax cost savings of $500,000 for the next five years. The increased efficiency of the new system will lower net working capital by $200,000 today. The CCA rate on the new system will be 30%. At the end of five years, the system can be salvaged for $100,000. The firm's required rate of return is 15%, and its marginal tax rate is 35%. What is the NPV of this cost-cutting project?

Select one:

a. -$224,011.86

b. -$22,882.55

c. $15,174.10

d. $76,552.80

e. $563,744.59

Question 8

Lemington Enterprises is considering a project to replace its fleet of 10 vehicles. The company makes its fleet replacement decision every five years. Its current fleet of 10 vehicles was purchased five years ago at $50,000 each, and can be sold for $8,000 each today. The new vehicles will cost $60,000 each and will bring cost savings of $100,000 per year. In five years, the new vehicles can be sold for $9,000 each. If the fleet is not replaced today, the current fleet will have no salvage value in five years' time. The CCA rate on these vehicles is 30%, and the company's marginal tax rate is 35%. What is the PV(CCATS) for this replacement project, assuming a required rate of return of 10%? Round your answer to the nearest dollar.

Select one:

a. $115,626

b. $135,672

c. $130,295

d. $13,567

e. $148,711

Question 9

Monsoon Inc. is considering bidding on a government project. To do the project, the company must make an initial investment of $8 million to purchase the necessary equipment. The project will last for five years, at the end of which the equipment can be salvaged for $500,000. The equipment has a CCA rate of 30%. The bidding process for the project requires the firm to submit a bid for a constant amount of $X before-tax, to be remitted by the government to the winning bidder each year. The firm's marginal tax rate is 40%, and the required rate of return on similar projects is 18%. What is the minimum bid that the firm should submit for this project? Round your answer to the nearest dollar.

Select one:

a. $8,000,000

b. $3,191,717

c. $1,915,030

d. $3,308,198

e. $5,988,626

Question 10

Given the following information for projects X and Y, which one should be chosen and why?

Project X

Project Y

Net present value

$1,500,000

$2,000,000

Project life

5 years

8 years

Required return

10%

10%

Select one:

a. Choose Project X as it has a lower equivalent annual cost than Project Y.

b. Choose Project Y as it has a lower equivalent annual cost than Project X.

c. Choose Project Y as it has a higher equivalent annual benefit than Project X.

d. Choose Project X as it has a higher equivalent annual benefit than Project Y.

e. Choose Project Y as it has a higher net present value than Project X.