ADMS 3530 Chapter Notes - Chapter 9: Discounted Cash Flow, Operating Cash Flow, Nominal Interest Rate

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carmineraccoon724

27 Apr 2019

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York University

Department

Administrative Studies

Course

ADMS 3530

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Document Summary

Chapter 9: using dcf analysis to make investment decisions. 9 basic rules for identifying relevant cash flows: discount cash flows, not accounting profits, recognize expenses and revenues as they occur. Ar, inventories) short-term liabilities (ap, nots payable, accruals such as wages or taxes) Investments in net working capital are just like investments in plant and equipment, results in cash outflows: remember shutdown cash flows: additional cash flow needed for after the project is done. Total cash flow = cash flow from investment in plant and equipment + cash flow from investment in working capital + cash flow from operations. Method 1 (dollar in, minus dollars out): revenues cash expenses taxes. Method 2 (adjusted accounting profits): after-tax profit + depreciation. Method 3 (tax shields): (revenue cash expenses) x (1 tax rate) + (cca x tax rate) Capital cost allowance (cca): the amount of write-off on depreciable assets allowed by the.

Related Questions

Problem 12-9
New project analysis

You must evaluate a proposal to buy a new milling machine. The base price is $164,000, and shipping and installation costs would add another $7,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $82,000. 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 $41,000 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?

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.

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.

-Select-IIIIIIIVVItem 1

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?
-Select-yesno

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?

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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ADMS 3530 Chapter Notes - Chapter 9: Discounted Cash Flow, Operating Cash Flow, Nominal Interest Rate

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