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Exam 9: Making Capital Investment Decisions

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Question 61

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Jamie is analyzing the estimated net present value of a project under various conditions by revising the sales quantity,sales price,and the cost estimates.The type of analysis that Jamie is doing is best described as:

A) sensitivity analysis.
B) erosion planning.
C) scenario analysis.
D) benefit planning.
E) opportunity evaluation.

F) A) and C)
G) A) and B)

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Question 62

Multiple Choice

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A project has sales of $511,800,costs of $322,400,depreciation of $22,620,interest expense of $3,062,and a tax rate of 34 percent.What is the value of the depreciation tax shield?

A) $7,690.80
B) $8,064.08
C) $6,652.40
D) $9,281.88
E) $10,805.39

F) D) and E)
G) A) and D)

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Question 63

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You are analyzing a project and have developed the following estimates.The depreciation is $1,020 a year and the tax rate is 35 percent.What is the worst-case operating cash flow? $\begin{array} { | l | r | r | r | } \hline & \text { Base-Case } & \text { Lower Bound } & \text { Upper Bound } \\\hline \text { Unit sales } & 1,300 & 1,150 & 1,450 \\\hline \text { Sales price per unit } & \$ 19 & \$ 16 & \$ 22 \\\hline \text { Variable cost per unit } & \$ 12 & \$ 10 & \$ 14 \\\hline \text { Fixed costs } & \$ 1,400 & \$ 1,350 & \$ 1,450 \\\hline\end{array}$

You are analyzing a project and have developed the following estimates.The depreciation is $47,900 a year and the tax rate is 35 percent.What is the worst-case operating cash flow? $\begin{array} { | l | r | r | r | } \hline & \text { Base-Case } & \text { Lower Bound } & \text { Upper Bound } \\\hline \text { Unit sales } & 11,300 & 9,800 & 12,800 \\\hline \text { Sales price per unit } & \$ 39 & \$ 34 & \$ 44 \\\hline \text { Variable cost per unit } & \$ 25 & \$ 24 & \$ 26 \\\hline \text { Fixed costs } & \$ 9,700 & \$ 9,200 & \$ 10,200 \\\hline\end{array}$

A new project is expected to generate an operating cash flow of $38,728 and will initially free up $11,610 in net working apital.Purchases of fixed assets costing $52,800 will be required to start up the project.What is the total cash flow for this project at Time zero?