FNCE 623 HOMEWORK #3, DUE WEDNESDAY, JUNE16, 5:00 PM.

There are 5
questions; elements of plagiarism or cooperative (copied work) will result in zero mark for
all papers. Do your work on this paper and submit via TURNITIN, in WORD format and
not in PDF. (17 points total)

Q1. Tallgate In. is embarking on a new project whose data are shown below. What is the
project's Year 1 Operating cash flow (OCF)? (3 points)

Sales revenues $22,250

Depreciation $8,000
Other operating costs $12,000
Tax rate 30.0%

Ans 1
Sales 22,250
Less: Operating cost (12,000)
Less: Depreciation (8,000)
Earnings before interest & tax (EBIT) 2,250
Less: Taxes (EBIT*30%) (675)
Net Income 1,575
Operating Cash Flow (for Year1)

EBIT + Depreciation - Taxes 9,575

Q2. Mechanicsville is planning to invest on a new project whose data are shown below. The
equipment has a 3-year tax life; depreciation method to be used is the straight-line method over
the 3 years. Revenues and other operating costs are expected to be constant over the project's 3-
year life. What is the project's Year 1 Operating cash flow? (3 points)

Equipment cost (depreciable basis) $65,000

Straight-line depreciation rate 33.333%
Sales revenues, each year $60,000
Operating costs (excl. deprec.) $25,000
Tax rate 30.0%
Salvage Value $0

Answer 2

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 Sales 60,000
Less: Operating cost (25,000)
Less: Depreciation (Equipment cost x 33.333%) (21,666)
Earnings before interest & tax (EBIT) 13,334
Less: Taxes (30%) (4,000)
Net Income 9,333
Operating Cash Flow (for Year1)

EBIT + Depreciation - Taxes 31,000

Q3. You just graduated and you are hired to help your company estimate the Year 1 cash flow
for a proposed project with the following data. What is the Year 1 Operating cash flow? (3
points)

Sales revenues, each year $42,500

Depreciation $10,000
Other operating costs $17,000
Interest expense $4,000
Tax rate 30.0%

Ans 3
Sales 42,500
Less: Operating cost (17,000)
Less: Depreciation (10,000)
Earnings before interest & tax (EBIT) 15,500
Less: Taxes (30%) (4,650)
Less: Interest (4,000)
Net Income 6,850
Operating Cash Flow (for Year1)

EBIT + Depreciation - Taxes 20,850

Q4. Allexis firm is considering some new equipment whose data are shown below. The

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equipment has a 3-year tax life depreciated by the straight-line method over 3 the years; it has a
positive pre-tax salvage value at the end of Year 3, when the project would be closed down. A
new working capital would be required, but it would be recovered at the end of the project's life.
Revenues and other operating costs are expected to be constant over the project's 3-year life. (5
points) What is the project's NPV?

WACC (interest rate) 10.0%

Net investment in fixed assets (depreciable basis) $70,000
Required new working capital $10,000
Straight-line deprec. rate 33.333%
Sales revenues, each year $75,000
Operating costs (excl. deprec.), each year $30,000
Expected pretax salvage value $5,000
Tax rate 30.0%

Step 1: Calculate the Cash Flows

Description Year 0 Year 1 Year 2 Year 3
Net Investment in Fixed Assets (70,000)
Required new working capital (10,000)
Sales revenue 75,000 75,000 75,000
Less: Operating cost (30,000) (30,000) (30,000)
Less: Depreciation (Fixed Asset * 33.333%) (23,333) (23,333) (23,333)
Income before Interest & Taxes (EBIT) 21,667 21,667 21,667
Less: Taxes (6,500) (6,500) (6,500)
Net Income/Profit 15,167 15,167 15,167
Add: Depreciation 23,333 23,333 23,333
Operating Cash Flows 38,500 38,500 38,500
*After-tax salvage value 3,500
Net Working Capital 10,000
Net Cash Flow (80,000) 38,500 38,500 52,000

*After-tax salvage value = Salvage value - [(Salvage value - Book value) x Tax
rate]

Step 2: Calculate the NPV

Using Excel Formula 23,53
3

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Using BA2 Plus calculator
CF0 = -80,000
C01 = 38,500
F01 = 2
C02 = 52,000
F02 = 1
ENTER; CPT NPV; I/Y = 10; Press down and CPT 25,886.5
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Q5. Singer Company is considering a new project whose data are shown below. What is the
project's Year 1 Operating cash flow? (3 points)

Sales revenues, each year $62,500

Depreciation $8,000
Other operating costs $25,000
Interest expense $8,000
Tax rate 30.0%

Sales 62,500
Less: Operating cost (25,000)
Less: Depreciation (8,000)
Earnings before interest & tax (EBIT) 29,500
Less: Taxes (30%) (8,850)
Less: Interest (8,000)
Net Income 12,650
Operating Cash Flow (for Year1)

EBIT + Depreciation - Taxes 28,650