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MGFB10H3 Chapter 14: Chapter 14 Notes

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lavenderdonkey6
1 Jun 2011
School
UTSC
Department
Finance
Course
MGFB10H3
Professor
Derek Chau

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Document Summary

14. 1 general guidelines for capital expenditure analysis: marginal or incremental cash flows additional cash flows that result from budgeting decisions, generated by new projects. Two ways to determine cash flows after capital cost allowance. Cft = cfbtt (1 t) + ccat (t) Ccat = the cca expense for year t, t = the firm"s marginal (or effective) tax rate where cfbtt = cash flow before taxes (i. e. , incremental pre-tax operating income), 9: consider the effect of all project interdependencies on cash flow estimates, treat inflation consistently. This harks back to comparing like with like: discount nominal cash flows with nominal. Ignore intangible considerations. discount rates, and real cash flows with real discount rates: undertake all social investments required by law, estimate the future cash flows associated with potential investments. These cash flows include 3 categories: initial cash flow, the expected annual after-tax cash flows, and the ending cash flow. o o o.

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Related Questions

Which of the following should be included in the capital budgeting decision
Select one:
A. Sunk costs
B. Opportunity costs
C. Relevant externalities
D. #2 and #3 should be included
E. All of the above should be included

Which of the following is NOT correct
Select one:
A. If an investment project would make use of land which the firm already owns, the opportunity cost of the land is a relevant cash flow and should be included with other project cash flows
B. Analysis of capital projects focuses on cash flows rather than accounting income
C. Changes in working capital do not need to be considered in capital project analysis
D. All of the above are correct

Stock dividends
Select one:
A. are similar to stock splits in that they do not change the fundamental position of current shareholders
B. must be accompanied by cash dividends
C. are viewed unfavorably by investors and thus should not be used
D. have the same effect on financial statements as cash dividends


A project has initial costs of $5,000 and subsequent cash inflows of $1800, 1275, 1875, and 1525. The company's cost of capital is 10%. Calculate the Payback Period for the project
Select one:
A. 2.83 years
B. 3.03 years
C. 3.33 years
D. 4.00 years

New project analysis

You must evaluate a proposal to buy a new milling machine. The base price is $183,000, and shipping and installation costs would add another $17,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $128,100. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $9,500 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 $60,000 per year. The marginal tax rate is 35%, and the WACC is 14%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

A. How should the $5,000 spent last year be handled? Chose an option from 1-5.

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

2. 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.

3. 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.

4. 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.

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


B. 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.
$ _____

C. 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 $ _____

D. Should the machine be purchased?
Yes or No


Compare and contrast up to three concepts associated with making capital investment decisions such as cash flows, sunk costs, opportunity costs, or others. Discuss why your selected concepts are important for you as an investor to factor into the decision-making process.