1. Quick Computing currently sells 16 million computer chips each year at a price of $30 per chip. It is about to introduce a new chip, and it forecasts annual sales of 18 million of these improved chips at a price of $38 each. However, demand for the old chip will decrease, and sales of the old chip are expected to fall to 2 million per year. The old chip costs $15 each to manufacture, and the new ones will cost $18 each. What is the proper cash flow to use to evaluate the present value of the introduction of the new chip? (Enter your answer in millions.)   Cash flow $  million 2. Tubby Toys estimates that its new line of rubber ducks will generate sales of $7.80 million, operating costs of $4.80 million, and a depreciation expense of $1.80 million. Assume the tax rate is 30%. a. Calculate the operating cash flow for the year by using all three methods: (a) adjusted accounting profits; (b) cash inflow/cash outflow analysis; and (c) the depreciation tax shield approach. (Enter your answers in millions rounded to 2 decimal places.) Method Cash Flow   Adjusted accounting profits $ million     Cash inflow/cash outflow analysis million     Depreciation tax shield approach million   b. Are the above answers equal? Yes No 3. The owner of a bicycle repair shop forecasts revenues of $164,000 a year. Variable costs will be $51,000, and rental costs for the shop are $31,000 a year. Depreciation on the repair tools will be $11,000. Prepare an income statement for the shop based on these estimates. The tax rate is 40%. (Input all amounts as positive values.) INCOME STATEMENT $     Rental costs $   4. Laurel’s Lawn Care, Ltd., has a new mower line that can generate revenues of $168,000 per year. Direct production costs are $56,000, and the fixed costs of maintaining the lawn mower factory are $23,000 a year. The factory originally cost $1.4 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 40%. (Enter your answer in dollars not in millions.)   Operating cash flows $   5. Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $180,000 and sell its old low-pressure glueball, which is fully depreciated, for $32,000. The new equipment has a 10-year useful life and will save $40,000 a year in expenses. The opportunity cost of capital is 8%, 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. (Do not round intermediate calculations. Round your answer to 2 decimal places.)   Equivalent annual savings $   6. Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $45,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal aft ...

1. 1. Quick Computing currently sells 16 million computer chips
each year at a price of $30 per chip. It is about to introduce a
new chip, and it forecasts annual sales of 18 million of these
improved chips at a price of $38 each. However, demand for the
old chip will decrease, and sales of the old chip are expected to
fall to 2 million per year. The old chip costs $15 each to
manufacture, and the new ones will cost $18 each. What is the
proper cash flow to use to evaluate the present value of the
introduction of the new chip? (Enter your answer in millions.)
Cash flow
$
million
2.
Tubby Toys estimates that its new line of rubber ducks will
generate sales of $7.80 million, operating costs of $4.80
million, and a depreciation expense of $1.80 million. Assume
the tax rate is 30%.
a.
Calculate the operating cash flow for the year by using all three
methods: (a) adjusted accounting profits; (b) cash inflow/cash
outflow analysis; and (c) the depreciation tax shield approach.
(Enter your answers in millions rounded to 2 decimal places.)
Method
Cash Flow
Adjusted accounting profits

2. $ million
Cash inflow/cash outflow analysis
million
Depreciation tax shield approach
million
b.
Are the above answers equal?
Yes
No
3.
The owner of a bicycle repair shop forecasts revenues of
$164,000 a year. Variable costs will be $51,000, and rental
costs for the shop are $31,000 a year. Depreciation on the repair
tools will be $11,000. Prepare an income statement for the shop
based on these estimates. The tax rate is 40%. (Input all
amounts as positive values.)
INCOME STATEMENT
$
Rental costs

3. $
4.
Laurel’s Lawn Care, Ltd., has a new mower line that can
generate revenues of $168,000 per year. Direct production costs
are $56,000, and the fixed costs of maintaining the lawn mower
factory are $23,000 a year. The factory originally cost $1.4
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 40%. (Enter your
answer in dollars not in millions.)
Operating cash flows
$
5.

4. Gluon Inc. is considering the purchase of a new high pressure
glueball. It can purchase the glueball for $180,000 and sell its
old low-pressure glueball, which is fully depreciated, for
$32,000. The new equipment has a 10-year useful life and will
save $40,000 a year in expenses. The opportunity cost of capital
is 8%, 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. (Do not round intermediate calculations. Round your
answer to 2 decimal places.)
Equivalent annual savings
$
6.
Johnny’s Lunches is considering purchasing a new, energy-
efficient grill. The grill will cost $45,000 and will be
depreciated according to the 3-year MACRS schedule. It will be
sold for scrap metal after 3 years for $11,250. The grill will
have no effect on revenues but will save Johnny’s $22,500 in
energy expenses per year. The tax rate is 30%. Use the MACRS
depreciation schedule.
a.
What are the operating cash flows in each year? (Do not round
intermediate calculations. Round your answers to 2 decimal
places.)
Year
Operating Cash Flows
1

5. $
2
3
b.
What are the total cash flows in each year? (Negative amounts
should be indicated by a minus sign. Do not round intermediate
calculations. Round your answers to 2 decimal places.)
Time
Total Cash Flows
0
$
1
2
3
c.
If the discount rate is 10%, should the grill be purchased?
Yes
No
7.
Revenues generated by a new fad product are forecast as

6. follows:
Year
Revenues
1
$44,000
2
30,000
3
20,000
4
10,000
Thereafter
0
Expenses are expected to be 50% of revenues, and working
capital required in each year is expected to be 20% of revenues
in the following year. The product requires an immediate
investment of $48,000 in plant and equipment.
a.
What is the initial investment in the product? Remember
working capital.
Initial investment
$
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 40%, what are the project cash flows in each
year? Assume the plant and equipment are worthless at the end
of 4 years. (Do not round intermediate calculations.)
Year

7. Cash Flow
1
$
2
3
4
c.
If the opportunity cost of capital is 15%, what is the project's
NPV? (A negative value should be indicated by a minus sign.
Do not round intermediate calculations. Round your answer to 2
decimal places.)
NPV
$
d.
What is project IRR? (Do not round intermediate calculations.
Enter your answer as a percent rounded to 2 decimal places.)
IRR
%
8.
Kinky Copies may buy a high-volume copier. The machine costs
$60,000 and will be depreciated straight-line over 5 years to a
salvage value of $10,000. Kinky anticipates that the machine
actually can be sold in 5 years for $22,000. The machine will
save $10,000 a year in labor costs but will require an increase in
working capital, mainly paper supplies, of $5,000. The firm’s
marginal tax rate is 35%, and the discount rate is 11%. (Assume
the net working capital will be recovered at the end of Year 5.)

8. Calculate the NPV. (Negative amount should be indicated by a
minus sign. Do not round intermediate calculations. Round your
answer to 2 decimal places.)
NPV
$
Should Kinky buy the machine?
Yes
No
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 $38 million, has been depreciated straight-
line over an assumed tax life of 5 years, but it can be sold now
for $17.6 million. The firm’s tax rate is 30%. What is the after-
tax cash flow from the sale of the equipment? (Enter your
answer in millions rounded to 2 decimal places.)
After-tax cash flow
$ million
10.
Bottoms Up Diaper Service is considering the purchase of a new
industrial washer. It can purchase the washer for $4,800 and sell
its old washer for $1,200. The new washer will last for 6 years
and save $1,400 a year in expenses. The opportunity cost of
capital is 18%, and the firm’s tax rate is 40%.

9. 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.
Annual operating cash flow
$
b.
What is project NPV? (Negative amount should be indicated by
a minus sign. Do not round intermediate calculations. Round
your answer to 2 decimal places.)
NPV
$
c.
What is NPV if the firm uses MACRS depreciation with a 5-
year tax life? Use the MACRS depreciation schedule. (Do not
round intermediate calculations. Round your answer to 2
decimal places.)
NPV
$
11
Canyon Tours showed the following components of working
capital last year:

10. Beginning
End of Year
Accounts receivable
$24,800
$23,400
Inventory
12,400
13,300
Accounts payable
14,900
17,300
a.
What was the change in net working capital during the year? (A
negative amount should be indicated by a minus sign.)
Change in net working capital
$
b.
If sales were $36,400 and costs were $24,400, what was cash
flow for the year? Ignore taxes.
Cash flow
$
12.
A house painting business had revenues of $16,200 and
expenses of $9,200 last summer. There were no depreciation
expenses. However, the business reported the following changes
in working capital:
Beginning

11. End
Accounts receivable
$1,400
$4,700
Accounts payable
740
320
Calculate net cash flow for the business for this period.
Net cash flow
$
13
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 $518,000. 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
$1.50 per trap and believes that the traps can be sold for $6
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 9%. Use the MACRS
depreciation schedule.
Year:
0
1
2
3
4
5
6

12. Thereafter
Sales (millions of traps)
0
.4
.5
.6
.6
.4
.2
0
a.
What is project NPV? (Do not round intermediate calculations.
Enter your answer in millions rounded to 4 decimal places.)
NPV
$ million
b.
By how much would NPV increase if the firm depreciated its
investment using the 5-year MACRS schedule? (Do not round
intermediate calculations. Enter your answer in whole dollars
not in millions.)
The NPV increases by $ .
14.
The efficiency gains resulting from a just-in-time inventory
management system will allow a firm to reduce its level of
inventories permanently by $581,000. What is the most the firm
should be willing to pay for installing the system?
Firm should willing to pay
$

13. 15.
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 $538,000. The firm believes that working capital at each
date must be maintained at a level of 15% of next year’s
forecast sales. The firm estimates production costs equal to
$1.00 per trap and believes that the traps can be sold for $4
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 9%. Use the MACRS
depreciation schedule.
Year:
0
1
2
3
4
5
6
Thereafter
Sales (millions of traps)
0
.4
.5
.7
.7
.5
.4

14. 0
Suppose the firm can cut its requirements for working capital in
half by using better inventory control systems. By how much
will this increase project NPV? (Enter your answer in millions
rounded to 4 decimal places.)
NPV
$ million
(Click to select)
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