1. Relevant Cash Flows [LO1] Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $5 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent these facilities from a competitor instead. If the land were sold today, the company would net $5.3 mil- lion. The company wants to build its new manufacturing plant on this land; the plant will cost $12.5 million to build, and the site requires $770,000 worth of grad- ing before it is suitable for construction. What is the proper cash flow amount to use as the initial investment in fixed assets when evaluating this project? Why?

2. Relevant Cash Flows [LO1] Winnebagel Corp. currently sells 30,000 motor homes per year at $68,000 each and 12,000 luxury motor coaches per year at $105,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 25,000 of these campers per year at $14,000 each. An independent consultant has determined that if Winnebagel introduces the new campers, it should boost the sales of its existing motor homes by 2,400 units per year and reduce the sales of its motor coaches by 1,100 units per year. What is the amount to use as the annual sales figure when evaluating this project? Why?

3. Calculating Projected Net Income [LO1] A proposed new investment has pro- jected sales of $750,000. Variable costs are 55 percent of sales, and fixed costs are $164,000; depreciation is $65,000. Prepare a pro forma income statement assuming a tax rate of 35 percent. What is the projected net income?

4. Calculating OCF [LO1] Consider the following income statement:

   Fill in the missing numbers and then calculate the OCF. What is the depreciation tax shield?

Sales Costs Depreciation EBIT Taxes (34%) Net income

$682,900 437,800 110,400 ? ? ?

0. Fill in the missing numbers and then calculate the OCF. What is the depreciation tax shield ?

1. OCF from Several Approaches [LO1] A proposed new project has projected sales of $125,000, costs of $59,000, and depreciation of $12,800. The tax rate is 35 percent. Calculate operating cash flow using the four different approaches described in the chapter and verify that the answer is the same in each case.

2. Calculating Depreciation [LO1] A piece of newly purchased industrial equipment costs $975,000 and is classified as seven-year property under MACRS. Calculate the annual depreciation allowances and end-of-the-year book values for this equipment.

3. Calculating Salvage Value [LO1] Consider an asset that costs $640,000 and is depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $175,000. If the relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset?

4. Calculating Project OCF [LO1] Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.7 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,080,000 in annual sales, with costs of $775,000. If the tax rate is 35 percent, what is the OCF for this project?

5. Calculating Project NPV [LO1] In the previous problem, suppose the required return on the project is 12 percent. What is the projects NPV?