CASH FLOW PRINCIPLES

1) Copy-4-U Inc. purchased a new copy machine 3 years ago for $160,000 and paid an
additional $20,000 for installation. If the copy machine is expected to have 5 year
expected life, what is its book value?






















2) Benson Industries purchased new equipment 2 years ago for $130,000 for installation and
suffered a $20,000 increase in NWC. The equipment is expected to have 5 years expected
life. Benson recently sold the equipment for $86,400. What was the book value of the
equipment, and how much, if any, did Benson pay in taxes on the sale of the new
equipment? Assume a 40% tax bracket.






















3) Lennox Inc. is contemplating the purchase of a new asset $250,000. The asset will
require an additional $70,000 for shipping, handling, and installation. Lennox will also
sell an existing asset for its book value of $70,000 and increase their NWC by $40,000. If
Lennox is in a 40% tax bracket, estimate the initial investment for this asset.






















4) Fargo Fabricating is considering the purchase of a $300,000 piece of equipment as a
replacement for existing equipment. The new equipment would require $50,000 in
installation charges and a change in NWC of $10,000, but the firm would sell an existing
asset for $120,000- a full $20,000 above book value. If FF is in a 40% tax bracket, what
is the initial investment for this new equipment?






















5) Calculate Cheyenne Systems incremental operating cash flows for their irrigation project
for one year if revenues were $75,000, depreciation $30,000, expenses $35,000, and a tax
rate of 40%.























6) Calculate the incremental operating cash flows for Construct-by-U Inc (CBU). CBU is
replacing an existing asset which would have received $40,000 in depreciation this year,
with an asset whose depreciation will be $60,000. Incremental cash flows include
$100,000 in expenses, $170,000 in revenues and a 40% tax bracket.






















7) Triple Play Souvenirs can sell a fully-depreciated asset for $80,000, recover $20,000 in
NWC and are in a 40% tax bracket. Estimate the terminal cash flows for the firm.























8) Pearson Supply Inc. can sell an existing asset for $100,000. If the asset has been fully
depreciated and its sale will allow the firm to recover $20,000 in NWC, what will be cash
flow if the firm is in a 40% tax bracket?























9) Given the following information for Orchard Hill Products Inc, calculate the initial
investment and the first year incremental operating cash flow. The purchase price of the
asset in question is $100,000 plus $20,000 shipping handling and installation. Revenues
generated as a result of the new asset is expected to be $40,000 for the first year and
expenses are expected to be $10,000. The firm is in a 40% tax bracket, the asset will be
depreciated using 5 years expected life, and there will be a $10,000 increase in NWC at
the time of purchase.




















10) Calculate the book value of the following asset. It was purchased three years ago for
$100,000 and is being depreciated using the 5-year expected life.























11) Calculate the initial investment for the replacement asset being purchased by the
Incoming Tide Corporation. The existing asset was purchased three years ago for
$100,000 and the new asset has a price of $250,000. The company assumes an increase in
NWC of $20,000 and paid installation charges of $35,000 for the new asset. The existing
asset can be sold for $39,000 has been depreciated using the 5 years expected life and the
firm is in a 40% tax bracket.





















12) Calculate the incremental operating cash flow for the Justin Corporation given that
revenues are projected at $50,000, expenses at $30,000 the tax rate is 40% and
depreciation in the first year is $20,000.























13) Calculate the incremental operating cash flow for the Stensen Corporation in year three
given that year one revenues and expenses are expected to be $40,000 and $20,000
respectively and are each expected to grow at a rate of 5% per year. The asset generating
the cash flows initially had a depreciable value of $100,000 and is being depreciated
using the 5 year expected life. Assume a 40% marginal tax bracket.






















14) Calculate the first year incremental operating cash flows for a replacement project for
Allied Corporation. The first year anticipated revenues and expenses for the new project
are $70,000 and $30,000 respectively. For the existing asset the comparable figures are
$40,000 and $20,000. The existing asset would realize $18,000 in depreciation in the first
year, and the new asset is scheduled for $50,000 in depreciation. Allied is in a 40% tax
bracket.





















15) Calculate the terminal value cash flows for a project of the Granite Springs Company if
an asset with a book value of $0 is sold for $40,000, they recover $20,000 in NWC and
the marginal tax bracket is 40%.























16) E-con is considering an expansion plan. The purchase of e new machine is $300,000 and
would require $50,000 in installation charges and a change in NWC of $10,000. The
machine is expected to have 5 years expected life with salvage value $0. It will be
depreciated using straight line depreciation method. Revenues generated as a result of the
new asset is expected to be $400,000 for the first year and are expected to increase 10%
per year and the operating expenses are expected $300,000 per year. After 5 year, the
machine expected to be sold at $30,000. Given the firm is in a 40% tax bracket, calculate
the initial investment, annual operating cash flows and terminal value cash flows for the
machine.