# 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
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
Chapter 06 - Making Capital Investment Decisions 6-35

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