Quick Computing Sells 16 Million Computer Chips Each

Quick Computing Currently Sells 16 Million Computer Chips Each Year

Quick Computing currently sells 16 million computer chips each year at a price of $30 per chip. It is about to introduce a new chip, and it forecasts annual sales of 18 million of these improved chips at a price of $38 each. However, demand for the old chip will decrease, and sales of the old chip are expected to fall to 2 million per year. The old chip costs $15 each to manufacture, and the new ones will cost $18 each. What is the proper cash flow to use to evaluate the present value of the introduction of the new chip? (Enter your answer in millions.) Cash flow $ million

Tubby Toys estimates that its new line of rubber ducks will generate sales of $7.80 million, operating costs of $4.80 million, and a depreciation expense of $1.80 million. Assume the tax rate is 30%. a. Calculate the operating cash flow for the year by using all three methods: (a) adjusted accounting profits; (b) cash inflow/cash outflow analysis; and (c) the depreciation tax shield approach. (Enter your answers in millions rounded to 2 decimal places.) Method Cash Flow Adjusted accounting profits $ million Cash inflow/cash outflow analysis million Depreciation tax shield approach million b. Are the above answers equal? Yes No

The owner of a bicycle repair shop forecasts revenues of $164,000 a year. Variable costs will be $51,000, and rental costs for the shop are $31,000 a year. Depreciation on the repair tools will be $11,000. Prepare an income statement for the shop based on these estimates. The tax rate is 40%. (Input all amounts as positive values.) INCOME STATEMENT $ Rental costs $

Laurel’s Lawn Care, Ltd., has a new mower line that can generate revenues of $168,000 per year. Direct production costs are $56,000, and the fixed costs of maintaining the lawn mower factory are $23,000 a year. The factory originally cost $1.4 million and is being depreciated for tax purposes over 25 years using straight-line depreciation. Calculate the operating cash flows of the project if the firm’s tax bracket is 40%. (Enter your answer in dollars not in millions.) Operating cash flows $

Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $180,000 and sell its old low-pressure glueball, which is fully depreciated, for $32,000. The new equipment has a 10-year useful life and will save $40,000 a year in expenses. The opportunity cost of capital is 8%, and the firm’s tax rate is 40%. What is the equivalent annual savings from the purchase if Gluon uses straight-line depreciation? Assume the new machine will have no salvage value. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Equivalent annual savings $

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $45,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $11,250. The grill will have no effect on revenues but will save Johnny’s $22,500 in energy expenses per year. The tax rate is 30%. Use the MACRS depreciation schedule . a. What are the operating cash flows in each year? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Year Operating Cash Flows 1 $

b. What are the total cash flows in each year? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) Time Total Cash Flows 0 $

c. If the discount rate is 10%, should the grill be purchased? Yes No

Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $44,000 Thereafter 0 Expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $48,000 in plant and equipment. a. What is the initial investment in the product? Remember working capital. Initial investment $

b. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm’s tax rate is 40%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years. (Do not round intermediate calculations.) Year Cash Flow $

c. If the opportunity cost of capital is 15%, what is the project's NPV? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV $

d. What is project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) IRR %

Kinky Copies may buy a high-volume copier. The machine costs $60,000 and will be depreciated straight-line over 5 years to a salvage value of $10,000. Kinky anticipates that the machine actually can be sold in 5 years for $22,000. The machine will save $10,000 a year in labor costs but will require an increase in working capital, mainly paper supplies, of $5,000. The firm’s marginal tax rate is 35%, and the discount rate is 11%. (Assume the net working capital will be recovered at the end of Year 5.) Calculate the NPV. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV $ Should Kinky buy the machine? Yes No

Quick Computing installed its previous generation of computer chip manufacturing equipment 3 years ago. Some of that older equipment will become unnecessary when the company goes into production of its new product. The obsolete equipment, which originally cost $38 million, has been depreciated straight-line over an assumed tax life of 5 years, but it can be sold now for $17.6 million. The firm’s tax rate is 30%. What is the after-tax cash flow from the sale of the equipment? (Enter your answer in millions rounded to 2 decimal places.) After-tax cash flow $ million

Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $4,800 and sell its old washer for $1,200. The new washer will last for 6 years and save $1,400 a year in expenses. The opportunity cost of capital is 18%, and the firm’s tax rate is 40%. a. If the firm uses straight-line depreciation to an assumed salvage value of zero over a 6-year life, what is the annual operating cash flow of the project in years 1 to 6? The new washer will in fact have zero salvage value after 6 years, and the old washer is fully depreciated. Annual operating cash flow $

b. What is project NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV $

c. What is NPV if the firm uses MACRS depreciation with a 5-year tax life? Use the MACRS depreciation schedule . (Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV $

Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $44,000 Thereafter 0 Expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $48,000 in plant and equipment. a. What is the initial investment in the product? Remember working capital.

Paper For Above instruction

In evaluating potential investments and projects, financial decision-making hinges upon the accurate calculation of cash flows, which serve as the foundation for determining present value and overall profitability. Proper cash flow analysis involves understanding operational cash flows, investment outlays, taxes, and depreciation, among other factors. This report examines various scenarios and examples to shed light on the proper cash flows used in different contexts, including new product launches, capital projects, leasing decisions, and equipment sales. Through detailed analysis, methods, and calculations, this paper aims to clarify the best practices for evaluating investments based on cash flow metrics.

Introduction

The cornerstone of capital budgeting and investment appraisal is the use of cash flows, as they provide a more accurate measure of a project's economic effect than accounting profits. Cash flows reflect the actual movement of cash—cash receipts and payments—excluding non-cash items like depreciation. Proper assessment of cash flows ensures that decisions made on investments are aligned with the company's value maximization objectives. This report reviews various scenarios to identify the appropriate cash flow concepts and calculations appropriate for project valuation.

Evaluating the Cash Flow of New Product Introduction

The introduction of a new product involves estimating incremental cash flows arising from production, sales, and associated costs. In the case of Quick Computing, the appropriate cash flow encompasses only those cash flows that are directly attributable to the new product. This includes the changes in sales revenue, manufacturing costs, and the effect on existing product sales. Importantly, sunk costs and fixed overheads unrelated to the project are excluded. The net cash flow, therefore, reflects the incremental benefit or cost to the firm, adjusted for taxes and depreciation effects.

Methodologies for Operating Cash Flow Calculation

Multiple methodologies can be used to determine operating cash flows: (a) adjusted accounting profits, (b) cash inflow/outflow analysis, and (c) depreciation tax shield approach. Each method provides a different perspective but should converge to similar results under correct application. For example, the depreciation tax shield approach considers tax savings from depreciation, whereas the cash inflow/outflow method directly analyzes cash receipts and payments. The adjusted accounting profit method aligns profits after tax and then adjusts for non-cash items like depreciation. Ensuring consistency across methods is critical for accurate valuation.

Application of Tax Effects and Depreciation

Tax considerations profoundly influence cash flow calculations. Depreciation reduces taxable income, creating a tax shield that enhances cash flows. For instance, in the case of Laurel’s Lawn Care, depreciation reduces taxable income, thus increasing after-tax cash flows on top of operating cash flow derived from revenues and costs. Similarly, in equipment sales, after-tax cash flows from sale proceeds account for taxes paid on any gains, reflecting the true cash effect of disposing of assets. Properly accounting for these factors ensures realistic valuation.

Capital Budgeting and Discounted Cash Flows

Once the appropriate cash flows are established, they are discounted at the project's cost of capital to determine net present value (NPV). A positive NPV indicates a value-adding project, whereas a negative NPV suggests disposable costs outweigh benefits. Variations in depreciation schedules, tax rates, and salvage values significantly impact present value calculations. Techniques like IRR (internal rate of return) and payback period supplement NPV analysis to assess project feasibility comprehensively.

Conclusion

The proper cash flow used to evaluate the present value of a new product, project, or investment should reflect incremental cash flows attributable to that initiative. It excludes sunk costs and fixed costs unrelated to the project, incorporates taxes and depreciation effects accurately, and considers salvage or disposal gains/losses. By applying consistent and correct methodology—whether through adjusted accounting profits, cash flow analysis, or the depreciation tax shield approach—managers can make informed decisions that maximize shareholder value. Ultimately, careful evaluation of the correct cash flows fosters better investment and operational decisions for sustained growth.

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