Welcome to your ML301 Capital Budgeting 1. You are given the following information. What is the initial cash outflow? Purchase and installation of new equipment - $12,000 Sale price of replaced equipment - $ 4,000 Book value of replaced equipment - $ 3,000 When the new equipment is installed: Inventory increase - $ 2,000 Accounts payable increase - $ 1,000 Tax rate - 40%a. $9,400b. $9,000c. $13,000d. $10,600 2. A machine costs $3 million and has zero salvage value. Assume a discount rate of 10% and a 40% tax rate. The machine is depreciated straight-line over 3 years for tax purpose. What is the present value of depreciation tax savings associated with this machine?a. $1,200,000b. $994,741c. $1,090,900d. $400,000 3. Alpha Car Rental purchased 5 cars for a total of $100,000 three years ago. Now it is replacing the cars with newer vehicles. The company has depreciated 92.59% of the old cars, and sold these cars for a total of $ 25,000. Assume a tax rate of 40%. What is the cash inflow from the sale of these vehicles?a. $25,000b. $15,000c. $17,964d. $16,500 4. Net working capital decreases whena. Inventory falls, accounts receivable falls, or accounts payable increasesb. Inventory increases, accounts receivable increases, or accounts payable fallsc. Cost of goods sold falls, or interest rate fallsd. Operating expenses fall, or current assets increase 5. The cash flows associated with an investment project are as follows: Cash Flows Initial Outflow -$7,000,000 Year 1 $ 100,000 Year 2 $ 200,000 Year 3 $ 540,000 In year 4 and beyond, cash flows would continue to grow at 4 percent per year. Assume a discount rate of 10%. What is the NPV of this investment?a. $385,220b. $423,742c. $631,104d. $694,215 6. A certain investment will require an immediate cash outflow of $3 million. At the end of each of the next three years, the investment will generate cash inflows of $1.3 million. If the discount rate is 10%, what is the project’s NPV?a. $211,734b. -$303,886c. $232,908d. -$276,260 Exhibit 9-1 A project requires an initial investment in equipment and machinery of $10 million. The equipment is expected to have a 5-year lifetime with no salvage value and will be depreciated on a straight-line basis. The project is expected to generate revenues of $5.1 million each year for the 5 years and have operating expenses (not including depreciation) amounting to 1/3 of revenues. 7. Refer to Exhibit 9-1. The tax rate is 40%. What is the net cash flow in year 1?a. 2.84mb. 3.40mc. 0.84md. 2.04m 8. Refer to Exhibit 9-1. Assume the tax rate is 40%, and the cost of capital is 10%. What is the present value of cash inflows from year 1 to year 5? What percentage of this present value is attributed to the tax benefits accruing from depreciation?a. $12.89m; 24%b. $10.77m; 28%c. 3.18m; 95%d. 7.73m; 39%e. $10.77m; 24% 9. Refer to Exhibit 9-1. Assume the tax rate is 40%, and the cost of capital is 10%. What is the net present value of the project?a. $2.89mb. $0.77mc. -$6.82md. -$2.27m 10. Johnson Chemicals is considering an investment project. The project requires an initial $3 million outlay for equipment and machinery. Sales are projected to be $1.5 million per year for the next four years. The equipment will be fully depreciated straight-line by the end of year 4. Cost of goods sold and operating expense (not including depreciation) are predicted to be 30% of sales. The equipment can be sold for $400,000 at the end of year 4. Johnson Chemicals also needs to add net working capital of $100,000 immediately. The net working capital will be recovered in full at the end of the fourth year. Assume the tax rate is 40% and the cost of capital is 10%.What is the NPV of this investment?a. $89,290b. $80,199c. $189,482d. $72,909 Time is Up!Time's up