1. Why shouldnt sunk costs and opportunity costs be included in capital budgeting cash flow analysis?

2. Describe incremental cash flows and provide an example for each phase of life of a project (provide at least 3)

3. Harmons Helpers expects to generate $87,000 in sales in the long term. Harmonss operating costs, excluding depreciation, are 80% of sales. The company has only one asset, a moving truck, that was just purchased for $90,000. The machine will be depreciated according to the MACRS 5-year class of assets. Harmons marginal tax rate is 35 percent, and it has no debt. Compute the companys (a) net income and (b) after-tax operating cash flow for the next four years.

4. Arnies Market is evaluating whether to replace an aging machine. The existing machine is being depreciated at $40,000 per year, whereas the depreciation for a new machine is expected to be $35,000 per year. Arnies operating income, excluding depreciation, is expected to be $90,000 no matter which machine is used. The companys marginal tax rate is 40 percent. If the new machine is purchased, what effect will the change in depreciation have on the companys

(a)net income and

(b)supplemental operating cash flows.

Arnies Market has no debt.

5. Quiet Quilts is considering adding another division that requires a cash outlay of $29,500, and is expected to generate $6,250 in after-tax operating cash flows each year for seven years. The CFO has determined the new divisions beta coefficient is 0.8. The market return is expected to be 11 percent and the risk-free rate of return is 4 percent. Should Quiet add the new division?