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48. You are evaluating a project for your company. You estimate the sales price to be $25 per
unit and sales volume to be 4,000 units in year 1; 7,000 units in year 2; and 1,000 units in year 3.
The project has a three-year life. Variable costs amount to $10 per unit and fixed costs are
$50,000 per year. The project requires an initial investment of $10,000 in assets that will be
depreciated straight-line to zero over the three-year project life. The actual market value of these
assets at the end of year 3 is expected to be $1,000. NWC requirements at the beginning of each
year will be approximately 10 percent of the projected sales during the coming year. The tax rate
is 34 percent and the required return on the project is 10 percent. What is the operating cash
flow for the project in year 2?
49. You are evaluating a product for your company. You estimate the sales price of product to
be $300 per unit and sales volume to be 8,000 units in year 1; 10,000 units in year 2; and 2,000
units in year 3. The project has a three-year life. Variable costs amount to $125 per unit and fixed
costs are $150,000 per year. The project requires an initial investment of $225,000 in assets that
will be depreciated straight-line to zero over the three-year project life. The actual market value
of these assets at the end of year 3 is expected to be $25,000. NWC requirements at the
beginning of each year will be approximately 20 percent of the projected sales during the coming
year. The tax rate is 34 percent and the required return on the project is 14 percent. What will the
year 2 free cash flow for this project be?
50. You are evaluating a product for your company. You estimate the sales price of product to
be $375 per unit and sales volume to be 500 units in year 1; 1,000 units in year 2; and 200 units in
year 3. The project has a three-year life. Variable costs amount to $200 per unit and fixed costs
are $100,000 per year. The project requires an initial investment of $175,000 in assets that will be
depreciated straight-line to zero over the three-year project life. The actual market value of these
assets at the end of year 3 is expected to be $20,000. NWC requirements at the beginning of
each year will be approximately 25 percent of the projected sales during the coming year. The tax
rate is 34 percent and the required return on the project is 10 percent. What will the year 2 free
cash flow for this project be?
51. You are evaluating a product for your company. You estimate the sales price of product to
be $200 per unit and sales volume to be 2,000 units in year 1; 5,000 units in year 2; and 1,000
units in year 3. The project has a three-year life. Variable costs amount to $75 per unit and fixed
costs are $200,000 per year. The project requires an initial investment of $360,000 in assets that
will be depreciated straight-line to zero over the three-year project life. The actual market value
of these assets at the end of year 3 is expected to be $40,000. NWC requirements at the
beginning of each year will be approximately 20 percent of the projected sales during the coming
year. The tax rate is 34 percent and the required return on the project is 13 percent. What will the
year 2 free cash flow for this project be?
52. You are evaluating a product for your company. You estimate the sales price of product to
be $50 per unit and sales volume to be 50,000 units in year 1; 75,000 units in year 2; and 10,000
units in year 3. The project has a three-year life. Variable costs amount to $15 per unit and fixed
costs are $100,000 per year. The project requires an initial investment of $275,000 in assets that
will be depreciated straight-line to zero over the three-year project life. The actual market value
of these assets at the end of year 3 is expected to be $25,000. NWC requirements at the
beginning of each year will be approximately 10 percent of the projected sales during the coming
year. The tax rate is 34 percent and the required return on the project is 9 percent. What will the
year 2 free cash flow for this project be?
53. Your company is considering the purchase of a new machine. The original cost of the old
machine was $100,000; it is now five years old, and it has a current market value of $40,000. The
old machine is being depreciated over a 10-year life toward a zero estimated salvage value on a
straight-line basis, resulting in a current book value of $50,000 and an annual depreciation
expense of $10,000. The old machine can be used for six more years but has no market value
after its depreciable life is over. Management is contemplating the purchase of a new machine
whose cost is $80,000 and whose estimated salvage value is zero. Expected before-tax cash
savings from the new machine are $13,000 a year over its full MACRS depreciable life.
Depreciation is computed using MACRS over a five-year life, and the cost of capital is 10 percent.
Assume a 40 percent tax rate. What will the year 1 operating cash flow for this project be?
54. Your company is considering the purchase of a new machine. The original cost of the old
machine was $75,000; it is now five years old, and it has a current market value of $35,000. The
old machine is being depreciated over a 10-year life toward a zero estimated salvage value on a
straight-line basis, resulting in a current book value of $37,500 and an annual depreciation
expense of $7,500. The old machine can be used for six more years but has no market value after
its depreciable life is over. Management is contemplating the purchase of a new machine whose
cost is $80,000 and whose estimated salvage value is zero. Expected before-tax cash savings
from the new machine are $15,000 a year over its full MACRS depreciable life. Depreciation is
computed using MACRS over a five-year life, and the cost of capital is 15 percent. Assume a 40
percent tax rate. What will the year 1 operating cash flow for this project be?
55. Your company is considering the purchase of a new machine. The original cost of the old
machine was $25,000; it is now five years old, and it has a current market value of $10,000. The
old machine is being depreciated over a 10-year life toward a zero estimated salvage value on a
straight-line basis, resulting in a current book value of $12,500 and an annual depreciation
expense of $2,500. The old machine can be used for six more years but has no market value after
its depreciable life is over. Management is contemplating the purchase of a new machine whose
cost is $20,000 and whose estimated salvage value is zero. Expected before-tax cash savings
from the new machine are $3,500 a year over its full MACRS depreciable life. Depreciation is
computed using MACRS over a five-year life, and the cost of capital is 13 percent. Assume a 40
percent tax rate. What will the year 1 operating cash flow for this project be?
56. Your company is considering the purchase of a new machine. The original cost of the old
machine was $75,000; it is now five years old, and it has a current market value of $20,000. The
old machine is being depreciated over a 10-year life toward a zero estimated salvage value on a
straight-line basis, resulting in a current book value of $37,500 and an annual depreciation
expense of $7,500. The old machine can be used for six more years but has no market value after
its depreciable life is over. Management is contemplating the purchase of a new machine whose
cost is $60,000 and whose estimated salvage value is zero. Expected before-tax cash savings
from the new machine are $10,000 a year over its full MACRS depreciable life. Depreciation is
computed using MACRS over a five-year life, and the cost of capital is 9 percent. Assume a 40
percent tax rate. What will the year 1 operating cash flow for this project be?
57. Suppose you sell a fixed asset for $99,000 when its book value is $129,000. If your
company's marginal tax rate is 39 percent, what will be the effect on cash flows of this sale (i.e.,
what will be the after-tax cash flow of this sale)?
58. Suppose you sell a fixed asset for $112,000 when its book value is $112,000. If your
company's marginal tax rate is 39 percent, what will be the effect on cash flows of this sale (i.e.,
what will be the after-tax cash flow of this sale)?
59. Your company is considering a new project that will require $100,000 of new equipment
at the start of the project. The equipment will have a depreciable life of 10 years and will be
depreciated to a book value of $25,000 using straight-line depreciation. The cost of capital is 11
percent, and the firm's tax rate is 34 percent. Estimate the present value of the tax benefits from
depreciation.
60. Your company is considering a new project that will require $250,000 of new equipment
at the start of the project. The equipment will have a depreciable life of eight years and will be
depreciated to a book value of $10,000 using straight-line depreciation. The cost of capital is 12
percent, and the firm's tax rate is 34 percent. Estimate the present value of the tax benefits from
depreciation.
61. Your company is considering a new project that will require $100,000 of new equipment
at the start of the project. The equipment will have a depreciable life of 10 years and will be
depreciated to a book value of $5,000 using straight-line depreciation. The cost of capital is 14
percent, and the firm's tax rate is 30 percent. Estimate the present value of the tax benefits from
depreciation.
62. You are trying to pick the least expensive car for your new delivery service. You have two
choices: the Scion xA, which will cost $15,000 to purchase and which will have OCF of -$1,600
annually throughout the vehicle's expected life of four years as a delivery vehicle; and the Toyota
Prius, which will cost $27,000 to purchase and which will have OCF of -$750 annually throughout
that vehicle's expected six-year life. Both cars will be worthless at the end of their life. If you
intend to replace whichever type of car you choose with the same thing when its life runs out,
again and again out into the foreseeable future, and if your business has a cost of capital of 10
percent, what is the EAC of the most expensive car?
63. You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $25,000,
has a six-year life, and has an annual OCF (after tax) of -$5,000 per year. The Keebler
CookieMunster costs $40,000, has a seven-year life, and has an annual OCF (after tax) of -$500
per year. If your discount rate is 10 percent, what is each machine's EAC?
64. KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is
planning to spend $250,000 on a machine to produce the new game. Shipping and installation
costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an
expected life of three years, a $75,000 estimated resale value, and falls under the MACRS seven-
year class life. Revenue from the new game is expected to be $600,000 per year, with costs of
$250,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 15
percent, and it expects net working capital to increase by $100,000 at the beginning of the
project. What will the year 0 free cash flow for this project be?
65. KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is
planning to spend $150,000 on a machine to produce the new game. Shipping and installation
costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an
expected life of three years, a $75,000 estimated resale value, and falls under the MACRS seven-
year class life. Revenue from the new game is expected to be $600,000 per year, with costs of
$250,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 15
percent, and it expects net working capital to increase by $100,000 at the beginning of the
project. What will the year 0 free cash flow for this project be?
66. KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is
planning to spend $250,000 on a machine to produce the new game. Shipping and installation
costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an
expected life of three years, a $75,000 estimated resale value, and falls under the MACRS seven-
year class life. Revenue from the new game is expected to be $500,000 per year, with costs of
$200,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 15
percent, and it expects net working capital to increase by $100,000 at the beginning of the
project. What will the year 1 free cash flow for this project be?
67. KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is
planning to spend $50,000 on a machine to produce the new game. Shipping and installation
costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an
expected life of three years, a $75,000 estimated resale value, and falls under the MACRS five-
year class life. Revenue from the new game is expected to be $500,000 per year, with costs of
$200,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 15
percent, and it expects net working capital to increase by $100,000 at the beginning of the
project. What will the year 2 free cash flow for this project be?
