Question

Slinger Supply is looking at developing a new line of industrial slings. The initial marketing study cost $50,000 and determined they should proceed with the next stage of analysis. The marketing department determined the expected unit sales for the next 5 years are 3000, 5000, 6000, 5000, 3000 respectively. Unit selling price $60 and is expected to increase by 3% after the first year. Unit cost $36 is expected to increase by 5% after the first year.

1. The equipment purchase price is $400,000 and will be put in a warehouse already owned by the company. The warehouse has a current market value of $20,000. Net working capital increase is $10,000. The machine can be salvaged at the end of the 5 year project for $60,000. The cost of capital is 8%. Tax rate 34%. Depreciation is MACRS 5 year.

What is the CF0?

		-400,000
		-420,000
		-430,000
		-480,000

2. The equipment purchase price is $400,000 and will be put in a warehouse already owned by the company. The warehouse has a current market value of $20,000. Net working capital increase is $10,000. The machine can be salvaged at the end of the 5 year project for $60,000. The cost of capital is 8%. Tax rate 34%. Depreciation is MACRS 5 year.

What is the depreciation expense for year 2?

		128,000
		134,400
		80,000
		137,600

3. The equipment purchase price is $400,000 and will be put in a warehouse already owned by the company. The warehouse has a current market value of $20,000. Net working capital increase is $10,000. The machine can be salvaged at the end of the 5 year project for $60,000. The cost of capital is 8%. Tax rate 34%. Depreciation is MACRS 5 year.

What is the OCF for year 3?

4. The equipment purchase price is $400,000 and will be put in a warehouse already owned by the company. The warehouse has a current market value of $20,000. Net working capital increase is $10,000. The machine can be salvaged at the end of the 5 year project for $60,000. The cost of capital is 8%. Tax rate 34%. Depreciation is MACRS 5 year.

The OCF for year 4 is between $94,000-96,000.

True

False

5. The equipment purchase price is $400,000 and will be put in a warehouse already owned by the company. The warehouse has a current market value of $20,000. Net working capital increase is $10,000. The machine can be salvaged at the end of the 5 year project for $60,000. The cost of capital is 8%. Tax rate 34%. Depreciation is MACRS 5 year.

What is the terminal (salvage) value for the equipment?

		60,000
		36,960
		47,434
		23,040

6. The equipment purchase price is $400,000 and will be put in a warehouse already owned by the company. The warehouse has a current market value of $20,000. Net working capital increase is $10,000. The machine can be salvaged at the end of the 5 year project for $60,000. The cost of capital is 8%. Tax rate 34%. Depreciation is MACRS 5 year.

What is CF5 (not just OCF) that is used in investment analysis?

		130,170
		140,170
		16,656
		202,592

7. The equipment purchase price is $400,000 and will be put in a warehouse already owned by the company. The warehouse has a current market value of $20,000. Net working capital increase is $10,000. The machine can be salvaged at the end of the 5 year project for $60,000. The cost of capital is 8%. Tax rate 34%. Depreciation is MACRS 5 year.

The NPV for this project is positive .

True

False

8. The equipment purchase price is $400,000 and will be put in a warehouse already owned by the company. The warehouse has a current market value of $20,000. Net working capital increase is $10,000. The machine can be salvaged at the end of the 5 year project for $60,000. The cost of capital is 8%. Tax rate 34%. Depreciation is MACRS 5 year.

What is the IRR for the project?

9. The equipment purchase price is $400,000 and will be put in a warehouse already owned by the company. The warehouse has a current market value of $20,000. Net working capital increase is $10,000. The machine can be salvaged at the end of the 5 year project for $60,000. The cost of capital is 8%. Tax rate 34%. Depreciation is MACRS 5 year.

If it is determined that additional project risk demands the cost of capital for this project to increase to 12%, the project has a positive NPV.

True

False

10. The discounted payback for Slinger Supply is slightly under 5 years.

True

False

11. The regular payback for Slinger Supply is over 5 years.

True

False

Answer 1

1	Cash Flow in Year 0(CF0)
	Purchase Price	($400,000)
	Opportunity cost of using warehouse	($20,000)
	Net working capital increase	($10,000)
	Cash Flow in Year 0(CF0)	($430,000)
2	Cost of depreciable asset	$400,000
		A	B=400000*A
	Year	5 yearMACRSDepreciation Rate	Annual Depreciation expense	Accumulated Depreciation
	1	20%	$80,000	$80,000
	2	32%	$128,000	$208,000
	3	19.20%	$76,800	$284,800
	4	11.52%	$46,080	$330,880
	5	11.52%	$46,080	$376,960
	Depreciation expense for year2	$128,000
4	OCF in Year 4	$94,501
	The OCF for year 4 is between $94,000-96,000.
	TRUE
5	Terminal Salvage Value before tax	$60,000
	Accumulated depreciation in year5	$376,960
	Book Value at end of year5=400000-376960	$23,040
	Gain on Salvage =60000-23040	$36,960
	Tax on gain =36960*34%	$12,566
	After tax Terminal Value (60000-12566)	$47,434
6	Cash Flow (CF) in Year 5
	Operating Cash Flow in year5	$72,736
	Terminal (Salvage) Cash Flow	$47,434
	Release of warehouse	$20,000
	Cash Flow (CF) in Year 5	$140,170
7
N	Year	0	1	2	3	4	5
CF	Cash Flow	($430,000)	$74,720	$122,720	$121,009	$94,501	$140,170	SUM
	Cumulative Cash Flow	($430,000)	($355,280)	($232,560)	($111,551)	($17,049)	$123,121
PV=CF/(1.08^N)	Present Value of Cash Flow	($430,000)	$69,185	$105,213	$96,061	$69,461	$95,397	$5,318
	Cumulative Present Value	($430,000)	($360,815)	($255,602)	($159,541)	($90,080)	$5,318
NPV=Sum of PV	Net Present Value	$5,318
	The NPV for this project is positive .
	TRUE
8	Iinternal Rate of Return (IRR) of the Project	8.44%	(Using IRR function of excel over the Cash Flow)
9	If it is determined that additional project risk demands the cost of capital for this project to increase to 12%, the project has a positive NPV.
	FALSE
	Because IRR is less than 12%
10	The discounted payback for Slinger Supply is slightly under 5 years.
	TRUE
	Because Cumulative Present Value is Zero at slightly less than 5 years
11	The regular payback for Slinger Supply is over 5 years.
	FALSE
	Because Cumulative Cash Flow is Zero at slightly less than 5 years