FINANCE 3101 WORKSHEET: CHAPTER 10

TUID ________________ NAME ____________________

1. What are the two main reasons that in Finance we focus on cash flows instead of accounting profits?

2. What are the four main pieces needed to estimate a projects incremental cash flows?

3. After you receive your BA degree from Temple, your lifetime earnings are $3 million. A friend who is identical in every way but with no college degree has lifetime earnings over the same period of $2 million. What are your incremental lifetime earnings attributable to your Temple BA?

4. Make up an example of sunk, erosion and opportunity costs and an example of a synergy gain.

5. For an asset in the 5-year MACRS category with an acquisition cost of $2 million and installation costs of $500,000, what is the difference in the first years depreciation expense between straight line and MACRS? How about in the first two years combined?

6. Assuming no interest expense, if EBIT is $5 million, depreciation expense is $1.5 million and the tax rate is 35%, what is OCF?

7. Make up a numerical example to illustrate cash flow from salvage where the asset is sold at (a) a gain; and (b) a loss. How does the cash flow from salvage compare to the selling price of the asset in each of these cases?

8. Incremental cash flows are estimated to be in order -$2 million, $0.5 million, $4.0 million and $0.75 million. If the cost of capital is 8%, what is the NPV of this project?