FIN 300 Chapter Notes - Chapter 10: Tax Rate, Net Present Value, Capital Cost Allowance

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14 Jan 2016

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The effect of undertaking a project is to change the firm"s overall cash flows today and in the future. To evaluate a proposed investment, we must consider these changes in the firm"s cash flows and then decide whether they add value to the firm. Incremental cash flows: the difference between a firm"s future cash flows with a project and without the project. Stand-alone principle: evaluation of a project based on the project"s incremental cash flows. Sunk cost: a cost that has already been incurred and cannot be removed and therefore should not be considered in an investment decision: the firm has to pay this cost no matter what. Opportunity cost: the most valuable alternative that is given up if a particular investment is undertaken. Capital budgeting and business taxes in canada promote certain types of capital investment: various levels of government common offer incentives to, includes: grants, investment tax credits, favourable rates, capital cost allowance (cca): depreciation method under.

Related Questions

Which of the following should be included in the capital budgeting decision

Select one:

A. Sunk costs

B. Opportunity costs

C. Relevant externalities

D. #2 and #3 should be included

E. All of the above should be included

Which of the following is NOT correct

Select one:

A. If an investment project would make use of land which the firm already owns, the opportunity cost of the land is a relevant cash flow and should be included with other project cash flows

B. Analysis of capital projects focuses on cash flows rather than accounting income

C. Changes in working capital do not need to be considered in capital project analysis

D. All of the above are correct

Stock dividends

Select one:

B. must be accompanied by cash dividends

C. are viewed unfavorably by investors and thus should not be used

D. have the same effect on financial statements as cash dividends

A project has initial costs of $5,000 and subsequent cash inflows of $1800, 1275, 1875, and 1525. The company's cost of capital is 10%. Calculate the Payback Period for the project

Aerospace Dynamics will invest $135,000 in a project that will produce the following cash flows. The cost of capital is 11 percent. (Note that the fourth yearâs cash flow is negative.) Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Year	Cash Flow
1		$	46,000
2			54,000
3			68,000
4			(53,000	)
5			120,000

a.	What is the net present value of the project? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

Net present value

Should the project be undertaken?

	Yes
	No

champagnebear597

Gammy is considering building a facility to manufacture cupcakes to distribute nationally. Your assignment involves both the calculation of cash flows associated with the new investment under consideration and the evaluation of several mutually exclusive projects. Grammy wants you to meet with everyone involved and write a meeting report for the board of directors that includes your recommendation. In addition to the recommendation, you have been asked to respond to a number of questions aimed at understanding the capital-budgeting process. Grammy wants to be sure that she and the board of directors understand cash flow and capital budgeting.

We are considering constructing a building to manufacture cupcakes. Currently we are in the 34 percent marginal tax bracket with a 15 percent required rate of return or cost of capital. This project is expected to last 5 years and then, because this is somewhat of a fad product, be terminated. The following information describes the project:

Cost of new plant and equipment	$7,900,000
Shipping and installation costs	$ 100,000
Unit Sales	Year Units Sold 1 70,000 2 120,000 3 140,000 4 80,000 5 60,000
Sales price per unit	$300/unit in years 1 through 4, $260/unit in year 5
Variable cost per unit	$180/unit
Annual fixed costs	$200,000 per year in years 1 â 5
Working-capital requirements	There will be an initial working-capital requirement of $100,000 just to get production started. For each year, the total investment in net working capital will be equal to 10 percent of the dollar value of sales for that year. Thus, the investment in working capital will increase during years 1 through 3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5.
The depreciation method	Use the simplified straight-line method over 5 years. Assume the plant and equipment will have no salvage value after 5 years.

5. Answer the following questions:

a. Should you focus on cash flows or accounting profits in making the capital-budgeting decision? Should you be interested in incremental cash flows, incremental profits, total free cash flow, or total profits?

b. How does depreciation affect free cash flow?

c. How do sunk costs affect the determination of cash flows?

d. What is the projectâs initial outlay?

e. What are the differential cash flows over the projectâs life?

f. What is the terminal cash flow?

g. Draw a cash-flow diagram for this project.

h. What is its net present value?

i. What is its internal rate of return?

j. Should the project be accepted? Why or why not?

k. How does Genesis 47: 18 â 19 relate to this project and cash flow management?

FIN 300 Chapter Notes - Chapter 10: Tax Rate, Net Present Value, Capital Cost Allowance

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