Name: mik

Score: 2 / 20 (10%)
Cash Flow Estimation 3

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

Foxglove Corp. is faced with an investment project. The following information is

1. associated with this project:
Year

Net Income*

Allowable Depreciation
for 3-Yr. MACRS class

1
2
3
4

$50,000
60,000
70,000
60,000

0.33
0.45
0.15
0.07

*Assume no interest expenses and a zero tax rate.

The project involves an initial investment of $100,000 in equipment that falls in the 3year MACRS class and has an estimated salvage value of $15,000. In addition, the
company expects an initial increase in net operating working capital of $5,000 which
will be recovered in year 4. The cost of capital for the project is 12 percent. What is the
project's net present value? (Round your final answer to the nearest whole dollar.)
a. $153,840
b. $159,071
c. $162,409
d. $168,604
e. $182,344
D
ANSWER: Step 1 Calculate depreciation:
Dep 1 = 100,000(0.33) = 33,000.
Dep 2 = 100,000(0.45) = 45,000.
Dep 3 = 100,000(0.15) = 15,000.
Dep 4 = 100,000(0.07) = 7,000.
Step 2 Calculate cash flows:
CF 0 = -100,000 - 5,000 = -105,000.
CF 1 = 50,000 + 33,000 = 83,000.
CF 2 = 60,000 + 45,000 = 105,000.
CF 3 = 70,000 + 15,000 = 85,000.
CF 4 = 60,000 + 7,000 + 5,000 + 15,000 = 87,000.
Step 3 Calculate NPV:
Use CF key on calculator. Enter cash flows shown above.
Enter I/YR = 12%. Solve for NPV = $168,604.

Pierce Products is deciding whether it makes sense to purchase a new piece of

2. equipment. The equipment costs $100,000 (payable at t = 0). The equipment will
provide before-tax cash inflows of $45,000 a year at the end of each of the next four
years (t = 1, 2, 3, 4). The equipment can be depreciated according to the following
schedule:
t = 1: 0.33
t = 2: 0.45
t = 3: 0.15
t = 4: 0.07