ACCT 250 Lecture Notes - Lecture 3: Product Liability, Risk Premium, Standard Deviation

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16 Oct 2018

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Operating cash flow, capital spending, additions to net working capital. The phrase "winner"s curse" refers to the phenomenon that in a competitive bidding process, the winning bidder is the one who makes the biggest mistake. Which of the following is not a definition of operating cash flow ocf = sales - costs - taxes + depreciation. The idea that we only need to look at a project"s incremental cash effects on a company when evaluating that project for capital investment is commonly referred to as stand-alone principle. ,000 for the next 7 years, but it will require an initial net working capital investment of ,000. The equipment can be depreciated at a cca rate of 30%, and at the end of the seventh year, it can be sold for. If other projects with similar risk require a rate of return of 15%, and the firm"s marginal tax rate is.

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You must evaluate a proposal to buy a new milling machine. The base price is $105,000, and shipping and installation costs would add another $10,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $42,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $7,500 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $43,000 per year. The marginal tax rate is 35%, and the WACC is 11%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

How should the $5,000 spent last year be handled? (pick one)

-Last year's expenditure is considered a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.

-The cost of research is an incremental cash flow and should be included in the analysis.

-Only the tax effect of the research expenses should be included in the analysis.

-Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay.

-Last year's expenditure is considered an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.

What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.

$____

What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent.

Year 1 $____

Year 2 $____

Year 3 $____

Should the machine be purchased? (yes or no)

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ACCT 250 Lecture Notes - Lecture 3: Product Liability, Risk Premium, Standard Deviation

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