Questions 26 through 36 are related

The engineers at Cyberdyne Corporation have developed a new robotic manufacturing machine, the Model T1000. The marketing departments forecast for sales of the new machine are shown below. The equipment needed to manufacture the machine is expected to have a useful life of 9 years. The equipment will be installed and the end of 2016 and the project will commence operations in 2017.

Revenue Forecast for the Model T1000

($ In Thousands)

Year:	2017	2018	2019	2020	2021	2022	2023	2024	2025
Revenue:	$1900	$2100	$2500	$2700	$2900	$3000	$2800	$2500	$2100

The following information has also been provided:

Management estimates the equipment and other assets needed to manufacture and distribute the T1000 will cost $2,500,000. The assets have an MACRS class life of 7 years and will have a salvage value of $300,000 at the end of the project. The equipment would be installed at the end of 2016 and production would begin in 2017.

MACRS Depreciation Rates for 7 Year Class Life

Year:	1	2	3	4	5	6	7	8
Revenue:	14%	25%	17%	13%	9%	9%	9%	4%

2. Based on the forecast volume of production, management forecasts the raw materials cost schedule shown below.

Forecast of Cost of Raw Materials and Parts

($ In Thousands)

Year:	2017	2018	2019	2020	2021	2022	2023	2024	2025
Materials Cost:	$900	$1000	$1100	$1300	$1350	$1400	$1350	$1250	$1200

3. Miscellaneous expenses and other costs are shown below:

Forecast of Miscellaneous Expenses and Other Costs

($ In Thousands)

Year:	2017	2018	2019	2020	2021	2022	2023	2024	2025
Other Costs:	$300	$350	$400	$425	$500	$550	$600	$650	$700

4. Cyberdynes income tax rate is 35%.

5. The company generally requires net working capital to be 25% of sales.

6. Because Cyberdyne has signed long-term agreements for raw materials, the investment is considered to be less risky than the average investment. One way of taking risk into account is to have a higher or lower discount rate, or required rate of return. Consequently, Cyberdyne requires a minimum rate of return of 6.75% on this project.

Questions:

26. The Initial Investment of the Project, or the Cash Outflow at time zero at the end of 2016, is:

a. $1075

b. $1575.

c. $2025

d. $2500.

e. $2975.

27. The projects free cash flows for the first three years, or years 2017, 2018, and 2019 are:

2017 2018 2019

a. $350 $125 $575

b. $228 $81 $374

c. $528 $606 $749

d. $578 $706 $799

e. $805 $1,113 $1,075

28. The projects free cash flows for the second three years, or years 2020, 2021, and 2022 are:

2020 2021 2022

a. $423 $536 $536

b. $748 $761 $761

c. $650 $825 $825

d. $698 $736 $811

e. $959 $908 $908

29. The projects free cash flows for the final three years, or years 2023, 2024, and 2025 are:

2023 2024 2025

a. $406 $325 $130

b. $631 $425 $130

c. $778 $490 $130

d. $625 $500 $500

e. $706 $525 $850

30. The projects cash flow from salvage is:

a. $300

b. $295

c. $195

d. $105

e. $720

31. The projects Net Present Value is:

a. $4,489

b. $2,188

c. $1,514

d. ($678)

e. ($787)

32. After completing the analysis, you are informed by suppliers of the special metals and electrical components needed for production of the new machine will qualify Cyberdyne for quantity discounts. The forecast is that the discounts will reduce the cost of raw materials and supplies used in all of Cyberdynes products by $300,000 annually during the life of the project. The cost reduction is an example of:

a. an opportunity cost.

b. a sunk cost.

c. a negative externality.

d. a synergy or positive externality.

e. a real option.

33. Taking the $300,000 annual quantity discounts into account, the projects free cash flows for the first three years, or years 2017, 2018 and 2019, are:

2017 2018 2019

a. $650 $425 $875

b. $528 $381 $674

c. $723 $801 $944

d. $773 $901 $994

e. $1,000 $1,308 $1,270

34. The projects free cash flows for the second three years, or years 2020, 2021 and 2022, are:

2020 2021 2022

a. $723 $836 $836

b. $1,048 $1,061 $1,061

c. $845 $1,020 $1,020

d. $893 $931 $1,006

e. $1,154 $1,103 $1,103

35. The projects free cash flows for the final three years, or years 2023, 2024 and 2025, are:

2023 2024 2025

a. $601 $520 $325

b. $826 $620 $325

c. $973 $685 $325

d. $820 $695 $695

e. $901 $720 $1,045

36. The projects Net Present Value would now be:

a. $5,773

b. $4,164

c. $2,798

d. $1,189

e. $606