FIN 305 Study Guide - Final Guide: Sunk Costs, Cash Flow, Capital Budgeting
Get access
Related Documents
Related Questions
Voice-Soft Inc. is trying to determine whether to open a new product line, Voice-Write, a speech-to-text product, which is expected to be competitive for four years. The cost of the new capital equipment including shipping and installation is $3100. The equipment will last for 4 years. They use simple straight line depreciation and the salvage value is $400. For 2016 to 2019, sales are expected to be $4000, 4000, 4200, and 4200; and operating expenses, $2800, $2800, $2700, $2700. The company is expecting to lose operating income of $200 per year due to Voice-Write cannibalizing its current product, Voice-Speak. Regardless of your answer to part I above (WACC calculation) assume Voice-Soft has a tax rate of 40% and a weighted average cost of capital (WACC) of 12
Complete the Project cash flow statement below and then answer questions.
2015 | 2016 | 2017 | 2018 | 2019 | |
Sales | |||||
Operating Expenses | |||||
Opportunity Costs | |||||
Depreciation | |||||
Operating Income (EBIT) | |||||
Taxes | |||||
Operating Income after taxes | |||||
Depreciation | |||||
Cash Flow | |||||
Salvage Value | |||||
Salvage Tax | |||||
Net Salvage Value | |||||
Initial capital Investment | |||||
Project Cash Flow |
Determine the Net Present Value, IRR and should Voice soft make an investment? why?
Tubby Toys estimates that its new line of rubber ducks will generate sales of $6.90 million, operating costs of $3.90 million, and a depreciation expense of $.90 million. Assume the tax rate is 30%.
a. | Calculate the operating cash flow for the year by using all three methods: (a) adjusted accounting profits; (b) cash inflow/cash outflow analysis; and (c) the depreciation tax shield approach. (Enter your answers in millions rounded to 2 decimal places.) |
Method | Cash Flow |
Adjusted accounting profits | $ million |
Cash inflow/cash outflow analysis | million |
Depreciation tax shield approach | million |
b. | Are the above answers equal? | |||
|
2)
Revenues generated by a new fad product are forecast as follows: |
Year | Revenues |
1 | $50,000 |
2 | 40,000 |
3 | 20,000 |
4 | 10,000 |
Thereafter | 0 |
Expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $40,000 in plant and equipment. |
a. | What is the initial investment in the product? Remember working capital. |
Initial investment | $ |
b. | If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firmâs tax rate is 30%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years. (Do not round intermediate calculations.) |
Year | Cash Flow |
1 | $ |
2 | |
3 | |
4 | |
c. | If the opportunity cost of capital is 12%, what is the project's NPV? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) |
NPV | $ |
d. | What is project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) |
IRR | % |
rev: 09_24_2015_QC_CS-26391, 02_03_2015