1- Suppose you sell a fixed asset for $90,000 when its book value is $95,000. If your company's marginal tax rate is 40 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?

2- You are evaluating two different machines. Machine A costs $25,000, has a five-year life, and has an annual OCF (after tax) of $6,000 per year. Machine B costs $30,000, has a seven-year life, and has an annual OCF (after tax) of $5,500 per year. If your discount rate is 10 percent, using EAC which machine would you choose?

3- Compute the IRR statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

Time: 0 1 2 3 4 5

Cash flow: 75 75 0 100 75 50

4- You are evaluating two different cookie-baking ovens. The Pillsbury 707 costs $25,000, has a six-year life, and has an annual OCF (after tax) of $5,000 per year. The Keebler CookieMunster costs $40,000, has a seven-year life, and has an annual OCF (after tax) of $500 per year. If your discount rate is 10 percent, what is each machine's EAC?

5- How many possible IRRs could you find for the following set of cash flows?

Time: 0 1 2 3 4

Cash Flow -$201,000-$37,350$460,180$217,020-$5,000

6- Your company has spent $200,000 on research to develop a newgame. The firm is planning to spend $40,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $5,000. The machine has an expected life of five years, a $25,000 estimated resale value, and falls under the MACRS five-year class life. Revenue from the new game is expected to be $300,000 per year, with costs of $100,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 14 percent, and it expects net working capital to increase by $50,000 at the beginning of the project. What will be the operating cash flow for year one of this project? (Remember you can look up the depreciation rates for the MACRS five-year class.)

7- KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is planning to spend $250,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $50,000. The machine has an expected life of three years, a $75,000 estimated resale value, and falls under the MACRS seven-year class life. Revenue from the new game is expected to be $600,000 per year, with costs of $250,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 15 percent, and it expects net working capital to increase by $100,000 at the beginning of the project. What will the year 0 free cash flow for this project be?

8- Explain why we focus on cash flow when valuing assets, projects, and firms instead of net income.

9-Compute the NPV for Project X with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

Time: 0 1 2 3 4 5

Cash flow: 75 75 0 100 75 50

10-Briefly explain the basic principles of forecasting cash flows for capital budgeting purposes.

11- You are evaluating a project for your company. You estimate the sales price to be $10 per unit and sales volume to be 3,000 units in year 1; 10,000 units in year 2; and 1,000 units in year 3. The project has a three-year life. Variable costs amount to $3 per unit and fixed costs are $25,000 per year. The project requires an initial investment of $50,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $10,000. NWC requirements at the beginning of each year will be approximately 25 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 15 percent. What change in NWC occurs at the end of year 1?

12- Compare and contrast a cash flow forecast (for capital budgeting) to an income statement forecast. How are they similar? How are they different?