Chapter 12
Quiz 2-Answer Key
1. Eisenhower Communications is trying to estimate the first-year operating cash flow for a proposed project. The financial staff has collected the following information:
Projected sales $10 million
Operating costs (w/o dep.) $7 million
Depreciation $2 million
Interest expense $2 million
The company faces a 40 percent tax rate. What is the project’s operating cash flow for the first year?
A. $2,250,000
B. $2,430,000
C. $2,600,000-ANSWER
D. $2,800,000
Use the following information for the next 4 problems:
You have been asked by the president of your company to evaluate the proposed acquisition of a spectrometer for the firm’s R&D department. The equipment’s base price is $140,000, and it would cost another $30,000 to modify it for special use by your firm. The spectrometer, which falls into the MACRS 3-year class, would be sold after 3 years for $60,000. The applicable depreciation rates are 33 percent, 45 percent, 15 percent, and 7 percent. Use of the equipment would require an increase in net operating working capital (spare parts inventory) of $8,000. The spectrometer would have no effect on revenues, but it is expected to save the firm $50,000 per year in before tax operating costs, mainly labor. The firm’s marginal federal-plus-state tax rate is 40 percent.
2. What is the net cost of the spectrometer? That is, what is the Year 0 net cash flow?
A. $158,000
B. $162,000
C. $178,000-ANSWER
D. $182,000
3. What are the net operating cash flows in Years 1, 2, and 3?
A. $51,350; $58,800; $42,000
B. $52,440; $60,600; $40,200-ANSWER
C. $52,440; $58,800; $42,000
D. $51,350; $60,600; $42,000
4. What is the terminal cash flow?
A. $48,760-ANSWER
B. $49,560
C. $51,340
D. $51,760
5. If the project’s cost of capital is 12 percent, should the spectrometer be purchased?
A. Yes
B. No-ANSWER