A new project will generate sales of $74 million, costs of $42 million, and depreciation expense of $10 million in the coming year. The firm%u2019s tax rate is 35%. Calculate cash flow for the year by using all three methods: (a) direct method (dollar in – dollar out); (b) indirect method (net income adjusted for non-cash items); and (c) the depreciation tax shield approach. You should get the same answer. $7.7 Millions
Question 2 2 pts
The only capital investment required for a small project is investment in inventory. Profits this year were $10,000, and inventory increased from $4,000 to $5,000. What was the cash flow from the project? $11,000
Question 3 2 pts
What is the cash flow from operations for the following firm: $750,000 sales, $20,000 cash dividends, $500,000 COGS, $40,000 administrative expense, $30,000 depreciation expense, $55,000 interest expense, no changes in working capital, and a tax rate of 35%? $180,000
Question 4 2 pts
What is the amount of the annual depreciation tax shield for a firm with $200,000 in net income, $75,000 in depreciation expense and a 35% marginal tax rate? $48,750
Question 5 1 pts
Cowabunga Aquatics is considering expanding their operations by building a new water park. It already spent $1 million to excavate the land some years ago. Cowabunga also estimates that cash flows from its other water parks will decrease by $2 million if the new water park is built. Which of the costs should Cowabunga consider when determining the value of this project? The $1 million land excavation cost
The $2 million decrease to its other water parks
None of these costs
Question 6 2 pts
In what manner does depreciation affect cash flows of an investment projects? It increases cash flows by the amount of the depreciation expense.
It reduces taxes paid by the amount of depreciation tax shield.
It reduces cash flows by the amount of the depreciation expense.
It increases taxable income by the amount of the depreciation expense.
Question 7 1 pts
Methods of accelerated depreciation: increase the depreciation tax shield.
decrease the depreciation tax shield.
allow more depreciation over the asset’s life.
allow assets to be depreciated more rapidly
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