Question 1

What is the advantage,if any,to using MACRS rather than straight line depreciation?

Accepted Answer

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Question 2

LaVigne Wineries is purchasing a new wine press.The equipment will cost $250,000.Transportation and installation will cost another $35,000.Because of increased production,inventories will increase by $15,000.The press will be depreciated using the straight line method to a book value of $0.00 over its useful life of 7 years.Compute depreciation for each year of the project.

Accepted Answer

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Question 3

Working capital for a project includes investment in fixed assets.

Accepted Answer

Working capital is the amount of money needed to cover the day-to-day operations of a project, such as paying bills and employees. Investment in fixed assets, such as buildings and equipment, is typically considered a separate category of financing for a project.

Question 4

Accounting profits represents free cash flows that are available for reinvestment.

Accepted Answer

Accounting profits do not necessarily represent free cash flows as they do not take into consideration non-cash expenses such as depreciation and changes in working capital. Free cash flows should be calculated separately to determine the actual amount available for reinvestment or distribution to shareholders.

Question 5

By examining cash flows,we are correctly able to analyze the timing of the benefits.

Accepted Answer

Cash flows provide information about when the benefits of an investment or project will be received. By analyzing the timing of cash inflows and outflows, we can determine if a project or investment is generating positive cash flows and when those cash flows are occurring. This information is important for making investment decisions and evaluating the financial health of a company.

Question 6

Expenses incurred to install an asset are part of the asset's initial cash outflow.

Accepted Answer

Expenses incurred to install an asset, such as delivery charges and installation fees, are considered part of the asset's cost and are included in the initial cash outflow.

Question 7

Sales captured from the firm's competitors can be relevant to the capital-budgeting decision.

Accepted Answer

If a capital-budgeting project has the potential to capture sales from competitors, this can increase the projected cash flows and make the project more attractive from a financial standpoint. It is important to consider these potential gains when making capital-budgeting decisions.

Question 8

Marguerite's Florist is considering the purchase of a new delivery van.It will cost $25,000 plus another $3,000 to have it painted in the company's characteristic floral motif.The van will be depreciated over 5 years using MACRS percentages and a half year convention.Compute depreciation for the second year in the life of the van.

Accepted Answer

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Question 9

It is not necessary to consider depreciation in estimating cash flows for a new capital project.

Accepted Answer

Depreciation is an important factor in estimating cash flows for a new capital project because it represents a reduction in the value of an asset over time and therefore affects the amount of cash generated by the project. Depreciation expenses are deducted from revenue to determine taxable income, which affects the amount of cash the business has available for investment or distribution to shareholders. Therefore, depreciation must be taken into account when estimating cash flows for a new capital project.

Question 10

Additional cash needed to fill increased working capital requirements should be included in the initial cost of a product when analyzing an investment.

Accepted Answer

Increased working capital requirements, such as higher levels of inventory and accounts receivable, will require additional cash to be tied up in the business. This should be factored into the initial cost of a product when analyzing an investment to ensure that the impact on cash flow is properly accounted for.

Question 11

Cape Cod Cranberry Products is evaluating the introduction of a new line of juice drinks consisting of cranberry juice blended with sweeter juices such as apple or grape.In the first year the product line is introduced,sales are forecasted at $2,000,000,Cost of Goods Sold at $1,200,000,other cash expenses at $300,000,depreciation expense at $800,000.The company has many other profitable product lines.It's marginal tax rate is 35%.Compute operating cash flow for the first year.

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Question 12

In 2010,Sunny Electronics expects to sell 100,000 3-D television sets for an average price of $1,000.Expected production costs are $600 per unit.In 2011,volume is expected to increase by 10%,while inflation will increase both the sales price and the cost per unit by 3%.In nominal dollars,expected gross profit for 2011 is:
A)$40 million.
B)$45.32 million.
C)$48.20 million.
D)$50 million.

Accepted Answer

In 2010, gross profit is $100,000 * ($1,000 - $600) = $40 million. In 2011, volume increases by 10%, so sales are 110,000 units. Sales price and cost per unit both increase by 3%, so the new sales price is $1,000 * 1.03 = $1,030 and the new cost per unit is $600 * 1.03 = $618. Therefore, gross profit in 2011 is 110,000 * ($1,030 - $618) = $45.32 million.

Question 13

In 2010,Sunny Electronics expects to sell 100,000 3-D television sets for an average price of $1,000.Expected production costs are $600 per unit.In 2011,volume is expected to increase by 10%,Inflation will increase the cost per unit by 3%,but to attract more buyers,Sunny will reduce the price by 5%.In real dollars,expected gross profit for 2011 is:
A)$45.32 million.
B)$40 million.
C)$38 million.
D)$36.52 million.

Accepted Answer

In 2010, expected gross profit is $100,000 * ($1,000 - $600) = $40 million. In 2011, volume increases by 10%, so units sold = 110,000. Cost per unit increases by 3%, so cost per unit = $600 * 1.03 = $618. Price per unit decreases by 5%, so price per unit = $1,000 * 0.95 = $950. Therefore, expected gross profit in 2011 is 110,000 * ($950 - $618) = $45.32 million.

Question 14

In 2010,Sunny Electronics expects to sell 100,000 3-D television sets for an average price of $1,000.Expected production costs are $600 per unit.In 2011,volume is expected to increase by 10%,while inflation will increase both the sales price and the cost per unit by 3%.In real dollars,expected gross profit for 2011 is:
A)$40 million.
B)$45.32 million.
C)$48.2 0 million.
D)$50 million.

Accepted Answer

In 2011, the sales volume increases by 10% to 110,000 units. The sales price and cost per unit increase by 3% due to inflation, making the new price $1,030 and the new cost $618. The nominal gross profit is (110,000 * $1,030) - (110,000 * $618) = $45.32 million. To find the real gross profit, we adjust for inflation by dividing by 1.03, resulting in approximately $44 million, closest to $40 million.

Question 15

The hardest step in capital budgeting analysis is calculating the cash flows of a project.

Accepted Answer

Calculating the cash flows of a project is the most difficult and crucial step in the capital budgeting process as it involves estimating future cash inflows and outflows accurately. The accuracy of cash flow estimation directly affects the decisions related to the project's viability and profitability. Therefore, it requires a careful analysis of various factors, including market conditions, economic trends, competition, technology, and production efficiency.

Question 16

Greenspan Inc.discounts cash flows at a nominal rate of 10%.Inflation over the next few years is expected to average 3%.Which of the following would be a correct adjustment for inflation when computing net present value?
A)Discount cash flows at 10%;increase revenues and expenses by 3% each year.
B)Discount cash flows at 13%;increase revenues and expenses by 3% each year.
C)Discount cash flows at 7%;ignore inflation when forecasting revenues and expenses.
D)Either A or C would be acceptable.

Accepted Answer

The correct adjustments for inflation when computing net present value can be either to discount cash flows at the nominal rate (which includes inflation) and adjust revenues and expenses for inflation (Option A), or to discount cash flows at the real rate (nominal rate minus inflation rate) and not adjust revenues and expenses for inflation (Option C). Both methods should theoretically yield the same result.

Question 17

A marketing survey completed last year to determine a project's feasibility would be included as part of the project's initial cash outflow.

Accepted Answer

The marketing survey completed last year would not be included as part of the project's initial cash outflow since it was completed before the project began. Only expenses directly related to starting the project would be included in the initial cash outflow.

Question 18

Cash flows associated with a project's termination generally include the salvage value of the project plus or minus any taxable gains or losses associated with its sale.

Accepted Answer

When a project is terminated, its salvage value can be realized through its sale, which would result in cash inflows. However, the sale of the project may also result in taxable gains or losses, which would affect the net cash flows associated with the termination of the project. Therefore, both the salvage value and the taxable gains or losses need to be considered when calculating the cash flows associated with a project's termination.

Question 19

Working capital requirements are considered a cash flow even though they do not leave the company.

Accepted Answer

Working capital requirements refer to the amount of cash and other current assets needed to fund a company's ongoing operations. While this cash may not physically leave the company, it still represents a cash flow as it is used to pay for expenses such as inventory, payroll, and other day-to-day costs. Therefore, working capital requirements are considered a cash flow for the company.

Question 20

The initial outlay of an asset does not include installation costs.

Accepted Answer

The initial outlay of an asset includes all costs associated with purchasing and installing the asset.

Quiz 12: Analyzing Project Cash Flows