Question 1 - Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year's capital budget. The projects are independent. The cash outlay for the truck is $17,100 and that for the pulley system is $22,430. The firm's cost of capital is 14%. After-tax cash flows, including depreciation, are as follows:
Year X Y
0 $ -1000 $ -1000
1 $100 $1,000
2 $300 $100
3 $400 $50
4 $700 $50
Question 2 - Davis Industries must choose between a gas powered and an electric-powered forklift truck for moving materials in its factory. Since both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $22,000, whereas the gas-powered truck will cost $17,500. The cost of capital that applies to both investments is 12%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,290 per year and those for the gas-powered truck will be $5,000 per year. Annual net cash flows include depreciation expenses. Calculate the NVP and IRR for each type of truck, and decide which to recommend.
Question 3 - Cairn Communications is trying to estimate the first-year operating cash flow (at t = 1) for a proposed project. The financial staff has collected the following information:
Projected sales $10 million
Operating cost (not including depreciation) $7 million
Depreciation $2 million
Interest expense $2 million
The company faces a 40% tax rate. What is the project's operating cash flow for the first year (t = 1)?