A project is expected to create operating cash flows

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63. A project is expected to create operating cash flows of $22,500 a year for three years. The initial cost of the fixed assets is $50,000. These assets will be worthless at the end of the project. An additional $3,000 of net working capital will be required throughout the life of the project. What is the project's net present value if the required rate of return is 10%? A. $2,208.11 B. $2,954.17 C. $4,306.09 D. $5,208.11 E. $5,954.17 Difficulty level: Medium Topic: PROJECT NPV Type: PROBLEMS
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Chapter 06 - Making Capital Investment Decisions 6-32 64. A project will produce operating cash flows of $45,000 a year for four years. During the life of the project, inventory will be lowered by $30,000 and accounts receivable will increase by $15,000. Accounts payable will decrease by $10,000. The project requires the purchase of equipment at an initial cost of $120,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating a $25,000 after-tax cash flow. At the end of the project, net working capital will return to its normal level. What is the net present value of this project given a required return of 14%? CF 0 = $30,000 - $15,000 - $10,000 - $120,000 = -$115,000 C0 4 = $45,000 -$30,000 + $15,000 + $10,000 + $25,000 = $65,000 Difficulty level: Challenge Topic: PROJECT NPV Type: PROBLEMS
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Chapter 06 - Making Capital Investment Decisions 6-33 65. A project will produce an operating cash flow of $7,300 a year for three years. The initial cash investment in the project will be $11,600. The net after-tax salvage value is estimated at $3,500 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 11%? Difficulty level: Medium Topic: PROJECT NPV Type: PROBLEMS 66. Matty's Place is considering the installation of a new computer system that will cut annual operating costs by $11,000. The system will cost $48,000 to purchase and install. This system is expected to have a 5-year life and will be depreciated to zero using straight-line depreciation. What is the amount of the earnings before interest and taxes for this project? Earnings before interest and taxes = $11,000 - ($48,000 5) = $1,400 Difficulty level: Medium Topic: COST-CUTTING Type: PROBLEMS
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Chapter 06 - Making Capital Investment Decisions 6-34 67. The Wolf's Den Outdoor Gear 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 using straight-line depreciation to a book value of zero. The life of the equipment is 8 years. The required rate of return is 13% and the tax rate is 34%. What is the net income from this proposed project? A. $13,600 B. $26,400 C. $32,400 D. $40,000 E. $53,600 Annual depreciation = $1,400,000 8 = $175,000 Net income = ($215,000 - $175,000) (1 - .34) = $26,400 Difficulty level: Medium Topic: COST-CUTTING Type: PROBLEMS
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Chapter 06 - Making Capital Investment Decisions 6-35
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