1. You are evaluating a project for The Farstroke golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Farstroke to be $440 per unit and sales volume to be 1,000 units in year 1; 1,500 units in year 2; and 1,325 units in year 3. The project has a 3-year life. Variable costs amount to $245 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $177,000 in assets, which can be depreciated using bonus depreciation. The actual market value of these assets at the end of year 3 is expected to be $39,000. 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 21 percent and the required return on the project is 11 percent. What change in NWC occurs at the end of year 1?

2. You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $70,000. The truck falls into the MACRS 3-year class, is not eligible for either bonus depreciation or Section 179 expensing, and it will be sold after three years for $19,000. Use of the truck will require an increase in NWC (spare parts inventory) of $1,000. The truck will have no effect on revenues, but it is expected to save the firm $24,000 per year in before-tax operating costs, mainly labor. The firms marginal tax rate is 21 percent.

What will the cash flows for this project be?

3. Your company is considering a new project that will require $1,099,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $159,000 using straight-line depreciation. Neither bonus depreciation nor Section 179 expensing will be used. The cost of capital is 13 percent, and the firms tax rate is 21 percent. Estimate the present value of the tax benefits from depreciation.