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Capital budgeting

1. Which of the following is NOT a relevant factor when determining incremental cash flows for a new product?

a. The use of high quality factory floor space that is currently unused and therefore could be used to produce the proposed new product.

b. Revenues from an existing product that would be lost as a result of customers switching to the new product.

c. Shipping and installation costs associated with preparing a machine which would be used to produce the new product.

d. The cost of a marketing study that was completed last year related to the new product. This research led to the tentative decision to go ahead with the new product, and the cost of the research was expensed for tax purposes last year.

e. The land which would be used for the new project could be sold to another firm.

2. You work for Athens Inc., and you must estimate the Year 1 operating cash flow for a project with the following data. What is the Year 1 operating cash flow?

Sales revenues: $15,000
Depreciation: $4,000
Other operating costs: $6,000
Tax rate: 35.0%

a. $5,000
b. $7,250
c. $7,617
d. $7,807
e. $8,003

Solution Preview

1. d. The cost of a marketing study that was completed last year related to the new product. This research led to the ...

Solution Summary

The solution explains two questions relating to relevant factors in cash flow analysis and project cash flow for Year 1

$2.19