CHAPTER 9
ACTIVITY
QUESTION NO. 1
A polisher costs 30,000 and will
cost 35,000 a year to operate
and maintain. If the discount rate
is 12% and the polisher will last
for 4 years, what is the
equivalent annual cost of the
tool?
44,877
QUESTION NO. 2
Jaimee, Inc. is considering an investment of 2
million in a new product line. Depreciation of
200,000 is to be deducted in each of the next
ten years. A selling price of 40 per unit is
decided upon; unit variable cost is 18, and fixed
operating costs, excluding depreciation are
estimated at 400,000 per year. The sales
division believes that a sales estimate of
50,000 units per year is realistic. Income tax is
30%. Determine the annual cash inflows and net
returns for the proposed investment project.
CASH FLOW – 550,000
NET RETURNS – 350,000
QUESTION NO. 3
A new machine will cost 100,000
and generate after-tax cash
inflows of 35,000 for 4 years.
What is the minimum rate of
return the project must earn to
be acceptable? Prove that your
rate is correct. (Between 12%20%)
14.96% OR 15%
QUESTION NO. 4
You can continue to use your less
efficient machine at a cost of 8,000
annually for the next 5 years.
Alternatively, you can purchase a
more efficient machine for 12,000
plus 5,000 annual maintenance. At a
cost of capital of 15%, you should:
continue its use or purchase a new
one? How much did you save?
CONTINUE TO USE
THE OLD MACHINE
AND SAVE 580
QUESTION NO. 5
What is the amount of the
operating cash flow for a
firm with 500,000 profit
before tax, 100,000
depreciation expense, and a
35% marginal tax rate?
425,000
QUESTION NO. 6
A project is expected to increase
inventory by 17,000, increase
accounts payable by 10,000, and
decrease accounts receivable by
1,000. What is the project's cash
flow from net working capital at
time zero? Indicate whether
inflow or outflow cash flow.
6000
CASH OUTFLOW
QUESTION NO. 7
Because of its age, your car costs 4,000
annually in maintenance expense. You
could replace it with a newer vehicle
costing 8,000. Both vehicles would be
expected to last 4 more years. If your
opportunity cost is 8%, by how much
must maintenance expense decrease on
the newer vehicle to justify its
purchase?
1,585
QUESTION NO. 8
Net working capital is expected
to increase by 25,000 over the
5-year life of a project. What is
the effect of net working capital
on the project's net present
value if the cost of capital is
15%?
NPV WILL DECREASE
BY 12,570.58
QUESTION NO. 9
 ACR Company, which operates a school canteen,
is planning to buy a doughnut-making machine
for 300,000. The machine is expected to produce
36,000 units of doughnuts per year which can be
sold for 10 each. Variable cost is 4 per unit.
Incremental fixed costs, exclusive of
depreciation, is estimated at 56,000 per year.
The machine will be depreciated on a straight line basis for 5 years and no salvage value. The
income tax is 32%. Determine the annual cash
inflows and the net income.
CASH FLOW – 128,000
NET INCOME – 68,000
QUESTION NO. 10
A new machine costing 50,000 with three
years useful life, no salvage value at the end
of the three years, is expected to bring in the
following cash inflows after tax:
First year
40,000
Second year
25,000
Third year
10,000
If the company’s cost of capital is 20%, what is
the discounted payback period?
1.96 YEARS