Practice Problems - Net Cash Flow, Depreciation, Project Evaluation and More

Problem 3
A drill press costs $30,000 and is expected to have a 10 year life. The drill press will be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. This machine is expected to reduce the firm's cash operating costs by $4,500 per year. If the firm is in the 40 percent marginal tax bracket, determine the annual net cash flows generated by the drill press.

Problem 4
A company is evaluating a proposed 4-year project. The depreciable cost will include the following: $300,000 for the equipment, $20,000 for shipping, and $30,000 for installation. The depreciation life is under the MACRS 3-year class (see pp 483 in text for 3yr class rates), with a salvage value of $45,000. The inventories will rise by $18,000 and accounts payable will rise by $3,000. In addition, the new sales are estimated to be 150,000 units per year at $2.25 per unit. There is a variable operating cost that is 60% of sales and the company's marginal tax rate is 35%. Determine the net operating cash flow for Years 1, 2, and 3.

Year Rate Basis Depreciation
1 0.33 240 79
2 0.45 240 108
3 0.15 240 36
4 0.07 240 17
1 240

(Note: a good example (cell rows 95-111) is provided on pp 445 of the text. However, with the following caveats: 1) operating costs in the problem (60% of sales) would comprise both variable and fixed costs - which would equal both lines 98 and 99 in the example; 2) cells 105-110 should be excluded - as they are not relevant to solving the given problem )

Problem 5
The net cash flows for any year during the life of capital expenditure project are equal to the change in ____ plus the change in ____.
a. earnings before interest and taxes; depreciation
b. earnings before taxes; depreciation
c. earnings after taxes; depreciation
d. revenues; costs

Problem 6
Depreciation is based on the asset cost plus all of the following except:
a. shipping costs
b. increase in inventory
c. installation
d. cost of attached equipment acquired at the same time