FIN 300 Chapter : FIN30 ch 10

47 views5 pages

aquamarinecat629

15 Feb 2012

School

Department

Course

Professor

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

It s like the project is its own mini-firm with its own revenues, costs, assets and liabilities: project is analyzed on its own merits. Asking the right question ask yourself will this cash flow occur (or not occur) only if we accept the project? . If the answer is yes , it should be included in the analysis because it is incremental. If the answer is no , it should not be included in the analysis because it will occur anyway. If the answer is part of it , then we should include the part that occurs (or does not occur) because of the project. Culinary student at george brown started selling fresh chips and salsa from a table at st lawrence market under the brand name mad mexican. Opened a restaurant called frida, used that kitchen for the mad mexican production work. In 2010, he opened a new production kitchen for mad mexican.

Related Questions

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

ivoryporcupine298

12-2: Analysis of an Expansion Project Problem 12-9 New project analysis You must evaluate a proposal to buy a new milling machine. The base price is $106,000, and shipping and installation costs would add another $16,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $47,700. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $6,500 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 $50,000 per year. The marginal tax rate is 35%, and the WACC is 10%. 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?

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?

New project analysis PLEASE ROUND CORRECTLY AND FOLLOW WHAT THE PROBLEMS SAYS THANKS

You must evaluate a proposal to buy a new milling machine. The base price is $135,000, and shipping and installation costs would add another $11,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $60,750. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $7,000 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 $38,000 per year. The marginal tax rate is 35%, and the WACC is 12%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

1.How should the $5,000 spent last year be handled? PLEASE SELECT ONE BELOW

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.

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.

2. 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.
$

3. 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 $

4.Should the machine be purchased? yes or no?

FIN 300 Chapter : FIN30 ch 10

Document Summary

Get access

Related Documents

FIN 300 Chapter Notes - Chapter 10: Operating Cash Flow, Cash Flow, Capital Cost Allowance

FIN 300 Chapter Notes - Chapter 10: Operating Cash Flow, Tax Shield, Cash Flow

FIN 300 Chapter Notes - Chapter 10: Net Present Value, The Terminal, Net Income

Related Questions