1) The owner of a bicycle repair shop forecast revenues of $200,000 a year. Variable costs will be $60,000 and rental costs for the shop are $35,000 a year. Depreciation on the repair tools will be $15,000. The tax rate is 34%. Calculate the operating cash flow for the repair shop in the previous problem using all three methods we learned in the lecture. Confirm that all three approaches result in the same value for cash flow.

2) Your firm purchased machinery with a 7-year MACRS life for $15 million. The project, however, will end after 4 years. If the equipment can be sold for $5.5 million at the completion of the project, and your firms tax rate is 34%, what is the after-tax cash flow from the sale of the machinery? Refer to the lecture slides for the 7-year MACRS schedule.

3) Revenues generated by a new product are forecast as follows:

Year	Revenues
1	$40,000
2	30,000
3	20,000
4	10,000
Thereafter	0

Expenses are expected to be 30% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an investment of $35,000 in plant and equipment.

a. What is the total initial investment in the product at year zero? Don't forget initial working capital.

b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firms tax rate is 40%, what are the project cash flows each year?

c. If the opportunity cost of capital is 14%, what is the project NPV?

4) Blooper Industries must replace its magnesium purification system. Quick & Dirty Systems sells a relatively cheap purification system for $10 million. The system will last 5 years. Do-It-Right sells a sturdier but more expensive system for $12 million; it will last for 8 years. Both systems entail $1 million in operating costs; both will be depreciated straight-line to a final value of zero over their useful lives; neither will have any salvage value at the end of its life. The firms tax rate is 40%, and the discount rate is 13%. Which system should Blooper Industries install?