A new project will generate sales of $74.4 million, costs of $42.4 million, and depreciation expense of $10.4 million in the coming year. The firmâs tax rate is 40%.
a. Calculate cash flow for the year by using all three methods: (a) adjusted accounting profits; (b) cash inflow/cash outflow analysis; and (c) the depreciation tax shield approach. (Enter your answers in millions rounded to 2 decimal places.)
Method Cash Flow Adjusted accounting profits $ million Cash inflow/cash outflow analysis million Depreciation tax shield approach million
b. Are the above answers equal? Yes No
| A new project will generate sales of $74.4 million, costs of $42.4 million, and depreciation expense of $10.4 million in the coming year. The firmâs tax rate is 40%. |
| a. | Calculate cash flow for the year by using all three methods: (a) adjusted accounting profits; (b) cash inflow/cash outflow analysis; and (c) the depreciation tax shield approach. (Enter your answers in millions rounded to 2 decimal places.) |
| Method | Cash Flow |
| Adjusted accounting profits | $ million |
| Cash inflow/cash outflow analysis | million |
| Depreciation tax shield approach | million |
| b. | Are the above answers equal? | ||||
|
Related questions
Tubby Toys estimates that its new line of rubber ducks will generate sales of $6.90 million, operating costs of $3.90 million, and a depreciation expense of $.90 million. Assume the tax rate is 30%.
| a. | Calculate the operating cash flow for the year by using all three methods: (a) adjusted accounting profits; (b) cash inflow/cash outflow analysis; and (c) the depreciation tax shield approach. (Enter your answers in millions rounded to 2 decimal places.) |
| Method | Cash Flow |
| Adjusted accounting profits | $ million |
| Cash inflow/cash outflow analysis | million |
| Depreciation tax shield approach | million |
| b. | Are the above answers equal? | |||
|
2)
| Revenues generated by a new fad product are forecast as follows: |
| Year | Revenues |
| 1 | $50,000 |
| 2 | 40,000 |
| 3 | 20,000 |
| 4 | 10,000 |
| Thereafter | 0 |
| Expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $40,000 in plant and equipment. |
| a. | What is the initial investment in the product? Remember working capital. |
| Initial investment | $ |
| b. | If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firmâs tax rate is 30%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years. (Do not round intermediate calculations.) |
| Year | Cash Flow |
| 1 | $ |
| 2 | |
| 3 | |
| 4 | |
| c. | If the opportunity cost of capital is 12%, what is the project's NPV? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| NPV | $ |
| d. | What is project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) |
| IRR | % |
rev: 09_24_2015_QC_CS-26391, 02_03_2015
