Select the incremental cash flows from the options.
1. Which of the following cash flows are relevant incremental cash flows for a project that you are currently considering investing in?
a. The tax savings brought about by the projects depreciation expense.
b. The cost of a marketing survey you conducted to determine demand for the proposed project.
c. Interest payments on debt used to finance the project.
d. Research and Development expenditures you have made.
2. Your firm is considering building a new office complex. Your firm already owns land suitable for the new complex. The current book value of the land is $100,000, however a commercial real estate again has informed you that an outside buyer is interested in purchasing this land and would be willing to pay $650,000 for it. When calculating the NPV of your new office complex, ignoring taxes, the appropriate incremental cash flow for the use of this land is:
a. $650,000
b. $0
c. $100,000
d. $750,000
3. You are considering adding a micro brewery on to one of your firm's existing restaurants. This will entail an increase in inventory of $8,000, an increase in accounts payables of $2,500, and an increase in property, plant, and equipment of $40,000. All other accounts will remain unchanged. The change in net working capital resulting from the addition of the micro brewery is:
a. $45,500
b. $10,500
c. $6,500
d. $5,500
4. You are considering adding a micro brewery on to one of your firm's existing restaurants. This will entail an investment of $40,000 in new equipment. This equipment will be depreciated straight line over five years. If your firm's marginal corporate tax rate is 35%, then what is the value of the micro brewery's depreciation tax shield in the first year of operation?
a. $2,800
b. $14,000
c. $5,200
d. $26,000