Finance: Capital budgeting.
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1)Your company, RMU Inc., is considering a new project whose data are shown below. What is the project's Year 1 cash flow?
Sales revenues $22,250
Depreciation $ 8,000
Other operating costs $12,000
Tax rate 35.0%
a. $10,039
b. $9,463
c. $9,179
d. $9,746
e. $8,903
2)TexMex Food Company is considering a new salsa whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and no new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other TexMex products and would reduce their pre-tax annual cash flows. What is the project's NPV? (Hint: Cash flows are constant in Years 13.)
WACC 10.0%
Pre-tax cash flow reduction for other products (cannibalization) $ 5,000
Investment cost (depreciable basis) $80,000
Straight-line deprec. rate 33.333%
Sales revenues, each year for 3 years $67,500
Annual operating costs (excl. deprec.) $25,000
Tax rate 35.0%
a. $3,828
b. $4,019
c. $4,220
d. $3,636
e. $4,431
3)Temple Corp. is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage value. No new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV?
Risk-adjusted WACC 10.0%
Net investment cost (depreciable basis) $65,000
Straight-line deprec. rate 33.3333%
Sales revenues, each year $65,500
Operating costs (excl. deprec.), each year $25,000
Tax rate 35.0%
a. $16,569
b. $19,325
c. $15,740
d. $17,441
e. $18,359
4)Clemson Software is considering a new project whose data are shown below. The required equipment has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight-line method over 3 years. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's Year 1 cash flow?
Equipment cost (depreciable basis) $65,000
Straight-line depreciation rate 33.333%
Sales revenues, each year $60,000
Operating costs (excl. deprec.) $25,000
Tax rate 35.0%
a. $28,836
b. $31,092
c. $28,115
d. $30,333
e. $29,575
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Solution Summary
The problem set are multiple choice questions that include topics in capital budgeting.
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