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72) Samoa's Tools has annual sales of $760,000 and a profit margin of 8 percent. The annual
depreciation expense is $50,000. What is the amount of the annual operating cash flow if the
company has no long-term debt?
A) $50,000
B) $60,800
C) $110,800
D) $810,000
E) $930,000
73) For this year, Jessica's has sales of $439,000, depreciation of $32,000, and net working
capital of $56,000. The firm has a tax rate of 23 percent and a profit margin of 6 percent. The
firm has no interest expense. What is the amount of the operating cash flow?
A) $49,384
B) $52,616
C) $54,980
D) $58,340
E) $114,340
74) For next year, By-Way has projected sales of $435,000, costs of $254,000, depreciation of
$35,000, interest expense of $22,000, and taxes of $28,500. What is the amount of the projected
operating cash flow?
A) $130,500
B) $157,900
C) $152,500
D) $161,500
E) $181,000
75) For this year, Wilbert's Cakes has costs of $187,400, depreciation of $32,700, interest
expense of $14,800, dividends paid of $5,600, taxes of $17,600, and an operating cash flow of
$101,900. What is the sales amount?
A) $264,200
B) $269,800
C) $306,900
D) $322,100
E) $324,200
76) Ben's Border Café is considering a project that will produce sales of $16,000, increase cash
expenses by $10,000, increase taxes by $950, and increase depreciation by $1,500 for each year
of the project's 9-year life. What is the amount of the annual operating cash flow using the top-
down approach?
A) $3,550
B) $5,050
C) $6,100
D) $7,550
E) $4,550
77) Camille's Café is considering a project that will not produce any sales but will decrease
annual cash expenses by $12,000. If the project is implemented, annual taxes will increase from
$23,000 to $25,205, and depreciation will increase from $4,000 to $5,500 per year. What is the
amount of the annual operating cash flow using the top-down approach?
A) $5,025
B) $9,795
C) $5,500
D) $12,000
E) $14,205
78) Ronnie's Coffee House is considering a project with a life of one year that will produce sales
of $6,000 and increase cash expenses by $2,500. If the project is implemented, taxes will
increase by $700. The additional depreciation expense will be $200 and interest expense will
increase by $100. An initial cash outlay of $200 is required for net working capital. What is the
amount of the operating cash flow using the top-down approach?
A) $2,200
B) $1,500
C) $2,800
D) $3,500
E) $4,200
79) A project will increase annual sales by $60,000 and annual cash expenses by $51,000. The
project will cost $40,000 and will be depreciated using straight-line depreciation to a zero book
value over the 4-year life of the project. Ignore bonus depreciation. The company has a marginal
tax rate of 23 percent. What is the annual operating cash flow using the tax shield approach?
A) $5,850
B) $8,650
C) $9,230
D) $9,770
E) $10,350
80) A new project with a life of four years will increase sales by $140,000 and cash expenses by
$95,000 annually. The project will cost $100,000 and will be depreciated using the Year 2018
bonus depreciation method. The company has a marginal tax rate of 21 percent. What is the
value of the depreciation tax shield in Year 2?
A) $0
B) $5,250
C) $2,625
D) $3,375
E) $6,500
81) Matty's Place is considering the installation of a new computer system that will cut annual
operating costs by $12,000. The system will cost $42,000 to purchase and install. This system is
expected to have a life of 5 years and will be depreciated to zero using straight-line depreciation.
Ignore bonus depreciation. What is the amount of the earnings before interest and taxes for each
year of this project if the tax rate is 21 percent?
A) −$20,400
B) $5,400
C) $3,600
D) $12,000
E) $8,400
82) The Wolf's Den is considering replacing the equipment it uses to produce tents. The
equipment would cost $1.4 million and lower manufacturing costs by an estimated $215,000 a
year. The equipment will be depreciated over 8 years using straight-line depreciation to a book
value of zero. Ignore bonus depreciation. The required rate of return is 13 percent and the tax
rate is 21 percent. The equipment will be worthless after 8 years. What is the annual operating
cash flow from this proposed project?
A) $141,900
B) $206,600
C) $232,400
D) $160,000
E) $40,000
83) The initial cost of one customized machine is $675,000 with an annual operating cost of
$14,800, and a life of 4 years. The machine will be worthless and replaced at the end of its life.
What is the equivalent annual cost of this machine if the required rate of return is 14.5 percent
and we ignore taxes?
A) $249,797.41
B) $240,008.02
C) $248,841.99
D) $247,647.78
E) $251,610.29
84) Jackson & Sons uses packing machines to prepare its products for shipping. One machine
costs $397,500 and lasts 5 years before it needs replaced. The machine will be worthless after the
5 years. The annual aftertax operating cost per machine is $38,400. What is the equivalent annual
cost of one machine if the required rate of return is 16 percent?
A) $148,556.67
B) $159,800.23
C) $156,004.12
D) $143,006.15
E) $154,224.08
85) Bruno's is analyzing two machines to determine which one it should purchase. The company
requires a rate of return of 14.6 percent and uses straight-line depreciation to a zero book value
over a machine's life. Ignore bonus depreciation and taxes. Machine A has a cost of $318,000,
annual operating costs of $8,700, and a life of 3 years. Machine B costs $247,000, has annual
operating costs of $9,300, and a life of 2 years. Whichever machine is purchased will be replaced
at the end of its useful life. Which machine should Bruno's purchase and why?
A) Machine A; because it will save the company about $13,406 a year
B) Machine A; because it will save the company about $18,100 a year
C) Machine B; because it will save the company about $16,510 a year
D) Machine B; because it will save the company about $11,609 a year
E) $154,224.08
86) Western Tech is considering a new project that will require $118,000 of fixed assets and net
working capital of $16,000. The fixed assets will be depreciated on a straight-line basis to a zero
salvage value over three years. Ignore bonus depreciation. This project is expected to produce an
operating cash flow of $45,000 the first year with that amount decreasing by 5 percent annually
for two years before the project is shut down. The fixed assets can be sold for $55,000 at the end
of the project and all net working capital will be recovered. What is the net present value of this
project at a discount rate of 11.5 percent and a tax rate of 23 percent?
A) $3,209.17
B) $15,311.09
C) $12,136.54
D) −$3,770.30
E) −$5,456.32
87) You are working on a bid for a contract. Thus far, you have determined that you will need
$156,000 for fixed assets and another $32,000 for net working capital at Time 0. You have also
determined that you can recover $68,400 aftertax for the combined fixed assets and net working
capital at the end of the 4-year project. What operating cash flow will be required each year for
the project to return 16 percent in nominal terms?
A) $46,666.67
B) $48,929.74
C) $55,200.16
D) $53,686.06
E) $50,725.50
88) You plan to bid on a project with a life of 5 years that will require $68,000 of fixed assets.
These assets will be depreciated straight-line to zero over the project's life. Ignore bonus
depreciation. The relevant discount rate is 12.5 percent, the tax rate is 21 percent, there is no
interest expense, net working capital is unaffected, and there is no salvage value. What is the
minimal required amount of annual sales revenue given annual cash costs of $47,900?
A) $74,515.75
B) $82,018.27
C) $57,202.19
D) $68,459.58
E) $52,311.89
89) Stu is working on a bid for a contract. Thus far, he has determined that he will need $218,000
for fixed assets and another $41,000 for net working capital at Time 0. He has also determined
that he can recover $79,900 aftertax for the combined fixed assets and net working capital at the
end of the 3-year project. What operating cash flow will be required each year for the project to
return 14 percent in nominal terms?
A) $116,079.42
B) $97,487.79
C) $110,220.48
D) $88,330.01
E) $113,360.69
90) In working on a bid project, you have determined that $318,000 of fixed assets are required.
These assets will be depreciated straight-line to zero over the 6-year life of the project. Ignore
bonus depreciation. The discount rate is 18 percent, the tax rate is 21 percent, and there is no
interest expense. In addition, the annual cash costs will be $198,200. After considering all the
project's other cash flows, you have determined that the required operating cash flow is $92,400.
What is the required amount of annual sales revenue?
A) $299,811.17
B) $302,006.64
C) $284,849.92
D) $301,073.42
E) $279,407.72
91) Lew's Market invested in a project that returned 14.83 percent during a period when inflation
averaged 2.69 percent. What real rate of return did the firm earn on its project?
A) 12.41 percent
B) 11.03 percent
C) 12.99 percent
D) 11.82 percent
E) 11.29 percent
92) MTM Ltd. earns 10.25 percent on its current investments after adjusting for inflation.
Inflation is expected to average 2.8 percent annually over the next 5 years. What discount rate
should the firm assign to a project assuming the project has a life of 5 years and the same level of
risk as the firm's current operations?
A) 12.96 percent
B) 13.05 percent
C) 13.14 percent
D) 13.34 percent
E) 12.87 percent
93) Lester's has a new project with projected real cash flows of $12,200, $14,600, and $16,300
for Years 1 to 3, respectively. The nominal discount rate is 15.96 percent and the inflation rate is
4 percent. What is the net present value of the project if the initial cost is $25,000?
A) $9,711.64
B) $8,946.48
C) $9,508.70
D) $9,444.15
E) $9,248.74
94) Should financing costs be included as an incremental cash flow in capital budgeting
analysis?
95) Explain the underlying assumptions that are being made when a project's total investment in
net working capital is recouped when the project ends.
96) This chapter introduced three new methods for calculating project operating cash flow
(OCF). Under what circumstances is each method appropriate?
97) When is it appropriate to use the equivalent annual cost (EAC) methodology, and how do
you make a decision using it?
98) Explain the use of real and nominal discount rates in discounting cash flows. Which is used
more often and why?
