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18 Dec 2018

Class, what are the relevant cash flows of capital budgetingprojects? For example, what cash flows are relevant when decidingwhether to replace an existing machine with a new one?

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Casey Durgan
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18 Dec 2018

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Question 9

Tech Star Company must maintain a minimum cash balance of$25,000. At the beginning of June the company's cash balance was$17,000. Budgeted cash receipts for June are $150,000 and budgetedcash disbursements are $201,000. Budgeted net income for Julytotals $11,000. During July, how much will Tech Star Company needto borrow?

A.

$43,000
B.

$59,000
C.

$9,000
D.

$34,000

Question 11

Which of the following would most likely be the present value ofa 5 year annuity of $5,000 per year (assuming a positive discountrate)?

A.

$5,000
B.

$18,000
C.

$25,000
D.

$2,000

2 points

Question 12

A $600,000 investment is expected to generate cash flows of$120,000 per year for each of the next six years. What is theinvestment's payback period?

A.

2.50 years.
B.

6.00 years.
C.

4.00 years.
D.

5.00 years.

2 points

Question 13

Maude Company's required rate of return on capital budgetingprojects is 9%. The company is considering an investment whichwould yield a cash flow of $12,000 per year for five years.Ignoring taxes, what is the most that the company would be willingto invest in this project?

A.

$38,994
B.

$60,000
C.

$46,674
D.

$55,046

2 points

Question 14

Melton Company's required rate of return on capital budgetingprojects is 16%. The company is considering an investment whichwould yield an after-tax cash flow of $30,000 in four years. Whatis the most that the company would be willing to invest in thisproject?

A.

$10,721
B.

$54,318
C.

$83,946
D.

$16,569

2 points

Question 15

A proposed project will cost $600,000 and will provide operatingcash flows of $150,000 in Year 1, $300,000 in Year 2, $500,000 inYear 3The company's hurdle rate is 15%. How much is the net presentvalue of the project?

A.

$23,013
B.

$66,373
C.

$86,020
D.

$50,000

Pat, a Pizzeria manager, replaced the convection oven just sixmonths ago. Today, Turbo Ovens Manufacturing announced theavailability of a new convection oven that cooks more quickly withlower operating expenses. Pat is considering the purchase of thisfaster, lower-operating cost convection oven to replace theexisting one they recently purchased. Selected information aboutthe two ovens is given below:

Existing New Turbo Oven

Original cost $60,000 $50,000

Accumulated depreciation $ 5,000 —

Current salvage value $40,000 —

Remaining life 5 years 5 years

Annual operating expenses $10,000 $ 7,500

Disposal value in 5 years $ 0 $ 0

Required:

a. What costs are sunk?

b. What costs are relevant?

c. What are the net cash flows over the next 5 years assumingthe Pizzeria purchases the new convection oven?

d. What other items should Pat, as manager of the Pizzeria,consider when making this decision?

Assume you serve on the board of a localgolf and country club. In preparation for renegotiating theclub%u2019s bank loans, the president indicates that the club needsto increase its operating cash flows before the end of the currentyear. The club%u2019s treasurer reassures the president and otherboard members that he knows a couple of ways to boost theclub%u2019s operating cash flows. First, he says, the club can sellsome of its accounts receivable to a collections company that iswilling to pay the club $97,000 up front for the right to collect$1 00,000 of the overdue accounts. That will immediately boostoperating cash flows. Second, he indicates that the club paid about$200,000 last month to relocate the 18th fairway and green closerto the clubhouse. The treasurer indicates that although these costshave been reported as expenses in the club%u2019s own monthlyfinancial statements, he feels an argument can be made forreporting them as part of land and land improvements (a long-livedasset) in the year-end financial statements that would be providedto the bank. He explains that, by recording these payments as anaddition to a long-lived asset, they will not be shown as areduction in operating cash flows.

Required:

1. Does the sale of accounts receivable togenerate immediate cash harm or mislead anyone? Would you considerit an ethical business activity?

2. What category in the statement of cash flows is used whenreporting cash spent on long-lived assets, such as landimprovements? What category is used when cash is spent on expenses,such as costs for regular upkeep of the grounds?

3. What facts are relevant to decidingwhether the costs of the 18th hole relocation should be reported asan asset or as an expense? Is it appropriate to make this decisionbased on the impact it could have on operating cash flows?

4. As a member of the board, how would you ensure that anethical decision is made?

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