### Question details

1. Quick Computing currently sells 12 million computer chips each year at a price of \$21 per
\$ 30.00

1.

 Quick Computing currently sells 12 million computer chips each year at a price of \$21 per chip. It is about to introduce a new chip, and it forecasts annual sales of 14 million of these improved chips at a price of \$26 each. However, demand for the old chip will decrease, and sales of the old chip are expected to fall to 4 million per year. The old chip costs \$6 each to manufacture, and the new ones will cost \$9 each. What is the proper cash flow to use to evaluate the present value of the introduction of the new chip?

 2.) Tubby Toys estimates that its new line of rubber ducks will generate sales of \$6.60 million, operating costs of \$3.60 million, and a depreciation expense of \$.60 million. Assume the tax rate is 30%.

 a. Calculate the operating cash flow for the year by using all three methods:

 b. Are the above answers equal?

 3.) The owner of a bicycle repair shop forecasts revenues of \$196,000 a year. Variable costs will be \$59,000, and rental costs for the shop are \$39,000 a year. Depreciation on the repair tools will be \$19,000. Prepare an income statement for the shop based on these estimates. The tax rate is 35%.
 4.) Laurel’s Lawn Care, Ltd., has a new mower line that can generate revenues of \$126,000 per year. Direct production costs are \$42,000, and the fixed costs of maintaining the lawn mower factory are \$16,000 a year. The factory originally cost \$1.05 million and is being depreciated for tax purposes over 25 years using straight-line depreciation. Calculate the operating cash flows of the project if the firm’s tax bracket is 30%.

 5.) Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for \$110,000 and sell its old low-pressure glueball, which is fully depreciated, for \$20,000. The new equipment has a 10-year useful life and will save \$24,000 a year in expenses. The opportunity cost of capital is 10%, and the firm’s tax rate is 40%. What is the equivalent annual savings from the purchase if Gluon uses straight-line depreciation? Assume the new machine will have  no salvage value.

 6.) Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost \$50,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for \$12,500. The grill will have no effect on revenues but will save Johnny’s \$25,000 in energy expenses. The tax rate is 40%. Use the MACRS depreciation schedule.
 a. What are the operating cash flows in each year?
 b. What are the total cash flows in each year?
 c. If the discount rate is 11%, should the grill be purchased?

 7.) Revenues generated by a new fad product are forecast as follows:
 a. What is the initial invesment in the product? Remember working capital.
 b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm’s tax rate is 30%, what are the project cash flows in each year? Assume the plant  and equipment are worthless at the end of 4 years.
 c. If the opportunity cost of capital is 12%, what is the project's NPV?
 d. What is the project IRR?

8.

 Kinky Copies may buy a high-volume copier. The machine costs \$140,000 and will be depreciated straight-line over 5 years to a salvage value of \$24,000. Kinky anticipates that the machine actually can be sold in 5 years for \$33,000. The machine will save \$24,000 a year in labor costs but will require an increase in working capital, mainly paper supplies, of \$12,000. The firm’s marginal tax rate is 35%, and the discount rate is 7%. (Assume the net working capital will be recovered at the end of Year 5.)

 9.) Quick Computing installed its previous generation of computer chip manufacturing equipment 3 years ago. Some of that older equipment will become unnecessary when the company goes into production of its new product. The obsolete equipment, which originally cost \$42.5 million, has been depreciated straight-line over an assumed tax life of 5 years, but it can be sold now for \$18.5 million. The firm’s tax rate is 30%. What is the after-tax cash flow from the sale of the equipment?

 10.) Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for \$7,800 and sell its old washer for \$1,600. The new washer will last for 6 years and save \$2,300 a year in expenses. The opportunity cost of capital is 17%, and the firm’s tax rate is 40%.

 a. If the firm uses straight-line depreciation to an assumed salvage value of zero over a 6-year life, what is the annual operating cash flow of the project in years 1 to 6? The new washer will in fact have zero salvage value after 6 years, and the old washer is fully depreciated.
 c. What is NPV if the firm uses MACRS depreciation with a 5-year tax lifef?

 11.) Canyon Tours showed the following components of working capital last year:
 a. What was the change in net working capital during the year?

 b. If sales were \$37,500 and costs were \$25,500, what was cash flow for the year?  Ignore taxes.

 12.) A house painting business had revenues of \$16,300 and expenses of \$19,300 last summer.

13.

 Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of \$6.3 million. The equipment will be depreciated straight line over 6 years to a value of zero, but in fact it can be sold after 6 years for \$682,000. The firm believes that working capital at each date must be maintained at a level of 10% of next year’s forecast sales. The firm estimates production costs equal to \$1.30 per trap and believes that the traps can be sold for \$5 each. Sales forecasts are given in the following table. The project will come to an end in 6 years., when the trap becomes technologically obsolete. The firm’s tax bracket is 35%, and the required rate of return on the project is 8%. Use the MACRS depreciation schedule.

 14.) The efficiency gains resulting from a just-in-time inventory management system will allows a firm to reduce its level of inventories permanently by \$503,000. What is the most the firm should be willing to pay for installing the system?

 15.) Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of \$5.7 million. The equipment will be depreciated straight line over 6 years to a value of zero, but in fact it can be sold after 6 years for \$638,000. The firm believes that working capital at each date must be maintained at a level of 10% of next year’s forecast sales. The firm estimates production costs equal to \$1.70 per trap and believes that the traps can be sold for \$8 each. Sales forecasts are given in the following table. The project will come to an end in 6 years., when the trap becomes technologically obsolete. The firm’s tax bracket is 35%, and the required rate of return on the project is 10%. Use the MACRS depreciation schedule.

### Solutions

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• 1. Quick Computing currently sells 12 million computer chips each year at a price of \$21 per
\$30.00

1.) Quick C

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