1. List the three steps that make up the general approach to capital budgeting.
2. Define an "Incremental cash flow" as the term is used in capital budgeting
3. Your firm is considering buying a new machine that costs $200,000, is expected to generate $110,000 in new revenue each year and will cost $45,000 a year to operate. If your firm's marginal income tax rate is 35% what is the Net Cash Flow your firm will realize from the new machine during the first year? Assume the MACRS depreciation rate for the machine for year 1 is 20%. Note - do not include the cost of the machine in your answer.
4. Define the payback period method in capital budgeting and state the payback period decision rule.
5. What is the payback period of the following project?
Initial Investment: $50,000
Projected life: 8 years
Net cash flows each year: $10,000
6. Consider the following income statement and answer the questions that follow:
Sales (100 units) $200
Variable costs ($.80 ea) 80
Fixed Costs 20
EBIT 100
Interest Expense 30
EBT 70
Income tax 24
Net Income 46
a. What is the firm's Breakeven Point in units?
b. Draw a breakeven chart for this firm.
7. Define the Net present Value (NPV) method in capital budgeting and state the NPV decision rule. In economic terms, what does the NPV amount represent?
8. Your firm is looking at a new investment opportunity, Project Alpha, with net cash flows as follows:
---- Net Cash Flows ----
Project Alpha
Initial Cost at T-0 (Now) ($10,000)
cash inflow at the end of year 1 6,000
cash inflow at the end of year 2 4,000
cash inflow at the end of year 3 2,000
Calculate project Alpha's Net Present Value (NPV), assuming your firm's required rate of return is 10%.
9. Define the Internal Rate of Return (IRR) method in capital budgeting and state the IRR Decision rule.
10. Calculate the IRR of the following project:
Year Cash Flow
0 -$30,000
1 $40,000