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1. Quick Computing currently sells 16 million computer chips each year at a price of $24 per chip. It is about to introduce a new chip, and it forecasts annual sales of 17 million of these improved chips at a price of $30 each. However, demand for the old chip will decrease, and sales of the old chip are expected to fall to 5 million per year. The old chips cost $9 each to manufacture, and the new ones will cost $12 each. What is the proper cash flow to use to evaluate the present value of the introduction of the new chip? (Enter your answer in millions.) Cash flow million 2. Tubby Toys estimates that its new line of rubber ducks will generate sales of $7.80 million, operating costs of $4.80 million, and a depreciation expense of $1.80 million. If the tax rate is 30%, what is the firm's operating cash flow? (Enter your answer in millions rounded to 2 decimal places.) Firm's operating cash flow million 3. The owner of a bicycle repair shop forecasts revenues of $232,000 a year. Variable costs will be $68,000, and rental costs for the shop are $48,000 a year. Depreciation on the repair tools will be $28,000. Prepare an income statement for the shop based on these estimates. The tax rate is 35%. INCOME STATEMENT 0 $0 4. Laurel's Lawn Care, Ltd., has a new mower line that can generate revenues of $153,000 per year. Direct production costs are $51,000, and the fixed costs of maintaining the lawn mower factory are $20,500 a year. The factory originally cost $1.02 million and is being depreciated for tax purposes over 20 years using straightline depreciation. Calculate the operating cash flows of the project if the firm's tax bracket is 30%. (Enter your answer in dollars not in millions.) Operating cash flows 5. Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $150,000 and sell its old lowpressure glueball, which is fully depreciated, for $26,000. The new equipment has a 10year useful life and will save $34,000 a year in expenses. The opportunity cost of capital is 11%, and the firm's tax rate is 40%. What is the equivalent annual savings from the purchase if Gluon uses straightline depreciation? Assume the new machine will have no salvage value. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Equivalent annual savings 6. Johnny's Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $47,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $11,750. The grill will have no effect on revenues but will save Johnny's $23,500 in energy expenses per year. The tax rate is 40%. Use the MACRS depreciation schedule. a. What are the operating cash flows in each year? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Year Operating Cash Flows 1 2 3 b. What are the total cash flows in each year? (Do not round intermediate calculations. Round your answers to 2 decimal places. Time Total Cash Flows 0 1 2 3 c. If the discount rate is 11%, should the grill be purchased? Yes No 7. PC Shopping Network may upgrade its modem pool. It last upgraded 2 years ago, when it spent $75 million on equipment with an assumed life of 5 years and an assumed salvage value of $10 million for tax purposes. The firm uses straightline depreciation. The old equipment can be sold today for $80 million. A new modem pool can be installed today for $180 million. This will have a 3year life and will be depreciated to zero using straightline depreciation. The new equipment will enable the firm to increase sales by $36 million per year and decrease operating costs by $18 million per year. At the end of 3 years, the new equipment will be worthless. Assume the firm's tax rate is 35% and the discount rate for projects of this sort is 10%. a. What is the net cash flow at time 0 if the old equipment is replaced? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Net cash flow million b. What are the incremental cash flows in years 1, 2, and 3? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.) Incremental cash flow million per year c. What are the NPV and IRR of the replacement project? (Do not round intermediate calculations. Enter the NPV in millions rounded to 2 decimal places. Enter the IRR as a percent rounded to 2 decimal places.) NPV million IRR % 8. evenues generated by a new fad product are forecast as follows: Year 1 2 Revenue s $60,0 00 30,00 0 20,00 0 10,00 0 3 4 Thereaf ter 0 Expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 10% of revenues in the following year. The product requires an immediate investment of $54,000 in plant and equipment. a. What is the initial investment in the product? Remember working capital. Initial investment b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm's tax rate is 20%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years. (Do not round intermediate calculations.) Year Cash Flow 1 2 3 4 c. If the opportunity cost of capital is 10%, what is the project's NPV? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV d. What is project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) IRR 9 % 9. Quick Computing installed its previous generation of computer chip manufacturing equipment 3 years ago. Some of that older equipment will become unnecessary when the company goes into production of its new product. The obsolete equipment, which originally cost $43.5 million, has been depreciated straightline over an assumed tax life of 5 years, but it can be sold now for $18.7 million. The firm's tax rate is 40%. What is the aftertax cash flow from the sale of the equipment? (Enter your answer in millions rounded to 1 decimal place.) After-tax cash flow million 10. Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $7,500 and sell its old washer for $2,000. The new washer will last for 6 years and save $2,000 a year in expenses. The opportunity cost of capital is 16%, and the firm's tax rate is 40%. a. If the firm uses straightline depreciation to an assumed salvage value of zero over a 6year life, what is the annual operating cash flow of the project in years 1 to 6? The new washer will in fact have zero salvage value after 6 years, and the old washer is fully depreciated. Annual operating cash flow b. What is project NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV c. What is NPV if the firm uses MACRS depreciation with a 5year tax life? Use the MACRS depreciation schedule. (Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV 11. Canyon Tours showed the following components of working capital last year: Beginni End of ng Year Accounts 27,00 $ $ 24,500 receivable 0 13,50 Inventory 15,500 0 Accounts 16,00 19,500 payable 0 a. What was the change in net working capital during the year? (A negative amount should be indicated by a minus sign.) Change in net working capital b. If sales were $37,500 and costs were $25,500, what was cash flow for the year? Ignore taxes. Cash flow 12. A house painting business had revenues of $16,500 and expenses of $9,500 last summer. There were no depreciation expenses. However, the business reported the following changes in working capital: Accounts receivable Accounts payable 1,70 5,00 $ $ 0 0 800 350 Calculate net cash flow for the business for this period. Net cash flow 13. Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6.3 million. The equipment will be depreciated straight line over 6 years to a value of zero, but in fact it can be sold after 6 years for $536,000. The firm believes that working capital at each date must be maintained at a level of 10% of next year's forecast sales. The firm estimates production costs equal to $1.10 per trap and believes that the traps can be sold for $5 each. Sales forecasts are given in the following table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm's tax bracket is 35%, and the required rate of return on the project is 10%. Use the MACRS depreciation schedule. Year: 0 1 2 3 4 5 6 Thereaf ter Sales (millions of 00. 0. 0. 0. 0. 0. 0 traps) 5 7 8 8 6 5 a. What is project NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in millions rounded to 4 decimal places.) NPV million b. By how much would NPV increase if the firm depreciated its investment using the 5year MACRS schedule? (Do not round intermediate calculations. Enter your answer in whole dollars not in millions.) The NPV increases by 14. The efficiency gains resulting from a justintime inventory management system will allow a firm to reduce its level of inventories permanently by $493,000. What is the most the firm should be willing to pay for installing the system? Firm should willing to pay 15. Better Mousetraps has developed a new trap. It can go into production for an initial investment in equipment of $6.3 million. The equipment will be depreciated straight line over 6 years to a value of zero, but, in fact, it can be sold after 6 years for $519,000. The firm believes that working capital at each date must be maintained at a level of 10% of next year's forecast sales. The firm estimates production costs equal to $1.20 per trap and believes that the traps can be sold for $5 each. Sales forecasts are given in the following table. The project will come to an end in 6 years, when the trap becomes technologically obsolete. The firm's tax bracket is 35%, and the required rate of return on the project is 10%. Use the MACRS depreciation schedule. Year: 0 1 2 3 4 5 6 Thereaf ter Sales (millions of 0 0. 0. 0. 0. 0. 0. 0 traps) 5 6 7 7 5 2 Suppose the firm can cut its requirements for working capital in half by using better inventory control systems. By how much will this increase project NPV? (Enter your answer in millions rounded to 4 decimal places.) Change in NPV million