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68. 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 $10,000 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 $25,000 at the beginning of the project.
What will the year 3 free cash flow for this project be?
69. 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 $15,000 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
$300,000 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 $55,000 at the beginning of the project.
What will the year 3 free cash flow for this project be?
70. Your firm needs a computerized machine tool lathe that costs $50,000, requires $10,000
in installation, and another $12,000 in maintenance for each year of its three-year life. After three
years, this machine will be replaced. The machine falls into the MACRS three-year class life
category. Assume a tax rate of 30 percent and a discount rate of 12 percent. Calculate the
depreciation tax shield for this project in year 1.
71. Your firm needs a computerized machine tool lathe that costs $50,000, requires $10,000
in installation, $5,000 in freight charges, and another $12,000 in maintenance for each year of its
three-year life. After three years, this machine will be replaced. The machine falls into the
MACRS three-year class life category. Assume a tax rate of 30 percent and a discount rate of 12
percent. Calculate the depreciation tax shield for this project in year 1.
72. Your firm needs a computerized machine tool lathe that costs $50,000, requires $10,000
in installation, $5,000 in freight charges, and another $12,000 in maintenance for each year of its
three-year life. After three years, this machine will be replaced. The machine falls into the
MACRS three-year class life category. Assume a tax rate of 30 percent and a discount rate of 12
percent. If the lathe can be sold for $7,000 at the end of year 3, what is the after-tax salvage
value?
73. Your firm needs a computerized machine tool lathe that costs $50,000, requires $10,000
in installation, and another $12,000 in maintenance for each year of its three-year life. After three
years, this machine will be replaced. The machine falls into the MACRS three-year class life
category. Assume a tax rate of 30 percent and a discount rate of 12 percent. If the lathe can be
sold for $7,000 at the end of year 3, what is the after-tax salvage value?
74. Your firm needs a computerized machine tool lathe that costs $50,000 and another
$12,000 in maintenance for each year of its three-year life. After three years, this machine will be
replaced. The machine falls into the MACRS three-year class life category. Assume a tax rate of
30 percent and a discount rate of 12 percent. If the lathe can be sold for $6,000 at the end of year
3, what is the after-tax salvage value?
75. You have been asked by the president of your company to evaluate the proposed
acquisition of a new special-purpose truck for $50,000. The truck falls into the MACRS three-year
class, and it will be sold after three years for $20,000. Use of the truck will require an increase in
NWC (spare parts inventory) of $2,000. The truck will have no effect on revenues, but it is
expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm's
marginal tax rate is 40 percent. What will the free cash flows for this project be?
76. You are evaluating a project for The Tiff-any golf club, guaranteed to correct that nasty
slice. You estimate the sales price of The Tiff-any to be $375 per unit and sales volume to be
1,000 units in year 1; 1,400 units in year 2; and 1,325 units in year 3. The project has a three-year
life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project
requires an initial investment of $165,000 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 $35,000. 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 change in NWC occurs at the end of year 1?
77. You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to
correct that wimpy backhand. You estimate the sales price of The Ultimate to be $300 per unit
and sales volume to be 1,000 units in year 1; 1,250 units in year 2; and 1,325 units in year 3. The
project has a three-year life. Variable costs amount to $200 per unit and fixed costs are $50,000
per year. The project requires an initial investment of $150,000 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 30
percent and the required return on the project is 10 percent. What will the free cash flow for this
project be in year 2?
78. You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to
correct that wimpy backhand. You estimate the sales price of The Ultimate to be $300 per unit
and sales volume to be 1,000 units in year 1; 1,250 units in year 2; and 1,325 units in year 3. The
project has a three-year life. Variable costs amount to $200 per unit and fixed costs are $50,000
per year. The project requires an initial investment of $150,000 in assets which 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 30 percent and the required return on the project is 10 percent. What will the free cash
flow for this project be in year 3?
79. A new project would require an immediate increase in raw materials in the amount of
$12,000. The firm expects that accounts payable will automatically increase $8,500. How much
must the firm expect its investment in net working capital to change if they accept this project?
80. A new project would require an immediate increase in raw materials in the amount
$17,000. The firm expects that accounts payable will automatically increase $7,000. How much
must the firm expect its investment in net working capital to increase if they accept this project?
81. To correctly project cash flows, we need to consider all of the factors EXCEPT:
82. A financial analyst calculated that the after-tax salvage value for a machine was $10,200.
The current book value of the asset is $25,000 and the firm's tax rate is 20 percent. How much
could the machine be sold for today?
83. A financial analyst calculated that the after-tax salvage value for a machine was $10,200.
The current book value of the asset is $12,000 and the firm's tax rate is 30 percent. How much
could the machine be sold for today?
84. Which of the following statements is correct?
85. Which of the following statements is correct?
86. Your company is considering a project that will cost $100. The project will generate after-
tax cash flows of $37.50 per year for five years. The WACC is 10 percent and the firm's D/A ratio
is 0.70. The flotation cost for equity is 6 percent, the flotation cost for debt is 3 percent, and your
firm does not plan on issuing any preferred stock within its capital structure. If your firm follows
the practice of incorporating flotation costs into the project's initial investment, what is the firm's
flotation-adjusted cash flow in year 0?
87. Your company is considering a project that will cost $175. The project will generate after-
tax cash flows of $37.50 per year for five years. The WACC is 10 percent and the firm's D/A ratio
is 0.62. The flotation cost for equity is 5 percent, the flotation cost for debt is 3 percent, and your
firm does not plan on issuing any preferred stock within its capital structure. If your firm follows
the practice of incorporating flotation costs into the project's initial investment, what is the firm's
flotation-adjusted cash flow in year 0?
88. Your company is considering a project that will cost $100. The project will generate after-
tax cash flows of $37.50 per year for five years. The WACC is 10 percent and the firm's D/A ratio
is 0.70. The flotation cost for equity is 6 percent, the flotation cost for debt is 3 percent, and your
firm does not plan on issuing any preferred stock within its capital structure. If your firm follows
the practice of incorporating flotation costs into the project's initial investment, what is the
weighted-average flotation cost for the firm?
89. Your company is considering a project that will cost $100. The project will generate after-
tax cash flows of $37.50 per year for five years. The WACC is 10 percent and the firm's D/A ratio
is 0.35. The flotation cost for equity is 5 percent, the flotation cost for debt is 2 percent, and your
firm does not plan on issuing any preferred stock within its capital structure. If your firm follows
the practice of incorporating flotation costs into the project's initial investment, what is the
weighted-average flotation cost for the firm?
