# ch12pp - CHAPTER 12 CASH FLOW ESTIMATION Annual operating...

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Annual operating cash flows, depr'n given 1. You work for Alpha Inc., and you must estimate the Year 1 operating net cash flow for a proposed project with the following data. What is the Year 1 operating cash flow? Sales \$11,000 Depreciation \$4,000 Other operating costs \$6,000 Tax rate 35% OCF = \$650 Ann. op. cash flows, depr'n given, interest given 2. As a member of Gamma Corporation's financial staff, you must estimate the Year 1 operating net cash flow for a proposed project with the following data. What is the Year 1 operating cash flow? Sales \$33,000 Depreciation \$10,000 Other operating costs \$17,000 Interest expense \$4,000 Tax rate 35% OCF = \$3,900 Salvage value calculations 3. Big Air Services is now in the final year of a project. The equipment originally cost \$20 million, of which 75% has been depreciated. Big Air can sell the used equipment today for \$6 million, and its tax rate is 40%. What is the equipment’s after-tax net salvage value? Net Salvage value = \$600,000 Relevant cash flows 4. Which of the following is NOT a cash flow that should be included in the analysis of a project? a. Changes in net operating working capital. b. Shipping and installation costs. c. Cannibalization effects. d. Opportunity costs. e. Sunk costs that have been expensed for tax purposes. CHAPTER 12 CASH FLOW ESTIMATION

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Page 2 Chapter 12: Cash Flow Estimation and Risk Analysis Sunk costs 5. Which of the following statements is CORRECT? a. A sunk cost is any cost that must be expended in order to complete a project and bring it into operation. b. A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project. c. A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project. d. Sunk costs were formerly hard to deal with, but once the NPV method came into wide use, it became possible to simply include sunk costs in the cash flows and then calculate the PV. e. A good example of a sunk cost is a situation where a retailer opens a
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## ch12pp - CHAPTER 12 CASH FLOW ESTIMATION Annual operating...

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