Problem 11-02

Operating Cash Flow

The financial staff of Cairn Communications has identified the following information for the first year of the roll-out of its new proposed service:

Projected sales $25 million

Operating costs (not including depreciation) $9 million

Depreciation $6 million

Interest expense $4 million

The company faces a 30% tax rate. What is the project's operating cash flow for the first year (t = 1)? Write out your answer completely. For example, 2 million should be entered as 2,000,000.

Problem 11-03

Net Salvage Value

Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $13 million, of which 75% has been depreciated. The used equipment can be sold today for $4.55 million, and its tax rate is 30%. What is the equipment's after-tax net salvage value? Write out your answer completely. For example, 2 million should be entered as 2,000,000.

Problem 11-06

New-Project Analysis

The Campbell Company is considering adding a robotic paint sprayer to its production line. The sprayer's base price is $910,000, and it would cost another $20,500 to install it. The machine falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), and it would be sold after 3 years for $688,000. The machine would require an increase in net working capital (inventory) of $17,000. The sprayer would not change revenues, but it is expected to save the firm $361,000 per year in before-tax operating costs, mainly labor. Campbell's marginal tax rate is 30%.

1. What is the Year 0 net cash flow?
2. What are the net operating cash flows in Years 1, 2, and 3? Do not round intermediate calculations. Round your answers to the nearest dollar.

a. Year 1

b. Year 2

c. Year 3

3.What is the additional Year 3 cash flow (i.e, the after-tax salvage and the return of working capital)? Do not round intermediate calculations. Round your answer to the nearest dollar.

4.If the project's cost of capital is 12 %, what is the NPV of the project? Do not round intermediate calculations. Round your answer to the nearest dollar.