Problem 1: Your company, RMU Inc., is considering a new project whose data are shown below. What is the project's Year 1 cash flow?
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Sales revenues
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$22,250
|
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Depreciation
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$ 8,000
|
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Other operating costs
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$12,000
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Tax rate
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35.0%
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a. $10,039
b. $9,463
c. $9,179
d. $9,746
e. $8,903
Problem 2) TexMex Food Company is considering a new salsa whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and no new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other TexMex products and would reduce their pre-tax annual cash flows. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.)
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WACC
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10.0%
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Pre-tax cash flow reduction for other products (cannibalization)
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$ 5,000
|
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Investment cost (depreciable basis)
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$80,000
|
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Straight-line deprec. rate
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33.333%
|
|
Sales revenues, each year for 3 years
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$67,500
|
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Annual operating costs (excl. deprec.)
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$25,000
|
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Tax rate
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35.0%
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a. $3,828
b. $4,019
c. $4,220
d. $3,636
e. $4,431
Problem 3) Temple Corp. is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage value. No new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV?
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Risk-adjusted WACC
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10.0%
|
|
Net investment cost (depreciable basis)
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$65,000
|
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Straight-line deprec. rate
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33.3333%
|
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Sales revenues, each year
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$65,500
|
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Operating costs (excl. deprec.), each year
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$25,000
|
|
Tax rate
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35.0%
|
a. $16,569
b. $19,325
c. $15,740
d. $17,441
e. $18,359
Problem 4) Clemson Software is considering a new project whose data are shown below. The required equipment has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight-line method over 3 years. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's Year 1 cash flow?
|
Equipment cost (depreciable basis)
|
$65,000
|
|
Straight-line depreciation rate
|
33.333%
|
|
Sales revenues, each year
|
$60,000
|
|
Operating costs (excl. deprec.)
|
$25,000
|
|
Tax rate
|
35.0%
|
a. $28,836
b. $31,092
c. $28,115
d. $30,333
e. $29,575