10 May WHAT IS THE EFFECT OF THESE CHANGES IN NET WORKING CAPITAL ON THE PROJECT’S CASH FLOWS?
Lesson 8: Operating Cash Flows and Capital InvestmentQuestion 3Iota Inc. is considering taking on a project. At the initiation of this project the company will experience an increase in accounts receivable of $50 000 a decrease in inventory of $10 000 and an increase in accounts payable of $15 000. What is the effect of these changes in net working capital on the project’s cash flows?Select one:a. There is no effect as these are not incremental cash flows of the project.b. Initial cash outflow to the project will decrease by $25 000.c. Initial cash outflow to the project will increase by $25 000.d. Initial cash inflow to the project will increase by $25 000.e. Annual cash flow will decrease by $25 000.Question 4A project’s after-tax operating cash flow is $200 000 per year with operating costs of $100 000 and depreciation of $20 000 per year. The firm’s marginal tax rate is 30%. What are the annual sales revenues from this project? Round your answer to the nearest dollar.Select one:a. $184 800b. $194 286c. $200 000d. $377 143e. $394 286Question 5Jabba-Dabba-Doo Inc. renovated its warehouses exactly two years ago at a cost of $3 million. The renovations were considered leasehold improvement and the cost was therefore subject to straight-line depreciation for tax purposes. The firm will not need to renovate the warehouses for another three years (from today). Given that the firm’s marginal tax rate is 35% and required return is 11% what is the present value of the remaining depreciation tax shields on the leasehold improvement? Ignore the half-year rule and round your answer to the nearest dollar.Select one:a. $776 138b. $359 630c. $513 180d. $630 000e. $210 000Question 6A project requires an initial investment of $5 million and will yield operating cash flows of $1.5 million per year for the next 10 years. At the end of 10 years the project’s assets can be divested for $250 000. The marginal tax rate is 40% and the CCA rate is 30%. If the required rate of return is 12% what is the present value of the CCA tax shields?Select one:a. $1 352 040.82b. $1 342 381.62c. $1 329 042.73d. $1 210 537.92e. $1 049 551.30Question 7Kerfuffle Corporation is considering the purchase of a new computer system. The cost for the new system net of set-up and delivery costs will be $1.6 million. The new system will provide annual before-tax cost savings of $500 000 for the next five years. The increased efficiency of the new system will lower net working capital by $200 000 today. The CCA rate on the new system will be 30%. At the end of five years the system can be salvaged for $100 000. The firm’s required rate of return is 15% and its marginal tax rate is 35%. What is the NPV of this cost-cutting project?Select one:a. -$224 011.86b. -$22 882.55c. $15 174.10d. $76 552.80e. $563 744.59Question 8Lemington Enterprises is considering a project to replace its fleet of 10 vehicles. The company makes its fleet replacement decision every five years. Its current fleet of 10 vehicles was purchased five years ago at $50 000 each and can be sold for $8 000 each today. The new vehicles will cost $60 000 each and will bring cost savings of $100 000 per year. In five years the new vehicles can be sold for $9 000 each. If the fleet is not replaced today the current fleet will have no salvage value in five years’ time. The CCA rate on these vehicles is 30% and the company’s marginal tax rate is 35%. What is the PV(CCATS) for this replacement project assuming a required rate of return of 10%? Round your answer to the nearest dollar.Select one:a. $115 626b. $135 672c. $130 295d. $13 567e. $148 711Question 9Monsoon Inc. is considering bidding on a government project. To do the project the company must make an initial investment of $8 million to purchase the necessary equipment. The project will last for five years at the end of which the equipment can be salvaged for $500 000. The equipment has a CCA rate of 30%. The bidding process for the project requires the firm to submit a bid for a constant amount of $X before-tax to be remitted by the government to the winning bidder each year. The firm’s marginal tax rate is 40% and the required rate of return on similar projects is 18%. What is the minimum bid that the firm should submit for this project? Round your answer to the nearest dollar.Select one:a. $8 000 000b. $3 191 717c. $1 915 030d. $3 308 198e. $5 988 626Question 10Given the following information for projects X and Y which one should be chosen and why?Project XProject YNet present value$1 500 000$2 000 000Project life5 years8 yearsRequired return10 %Select one:a. Choose Project X as it has a lower equivalent annual cost than Project Y.b. Choose Project Y as it has a lower equivalent annual cost than Project X.c. Choose Project Y as it has a higher equivalent annual benefit than Project X.d. Choose Project X as it has a higher equivalent annual benefit than Project Y.e. Choose Project Y as it has a higher net present value than Project X.
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