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Practice Set for Chapter 8                                                                   1) XYZ Corp

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Practice Set for Chapter 8                                                                  

1) XYZ Corp. expects the following revenues, cash expenses, and depreciation charges in the future:

Year       1              2              3             

Revenues            $149,000              $167,000              $180,000             

Cost of goods sold           $38,000 $ 49,000                $53,000               

Variable selling expense 20% of revenues             20%         20%        20%                   

Fixed selling expenses $11,000 $ 13,000                $14,000

Other cash operating expenses $10,000 $ 11,000                $12,000               

Depreciation     $  9,500 $ 13,500                $15,000               

This business is in the 27 percent tax bracket. Please compute the after-tax cash flows from operations for this investment for each of the years.

After tax operating cash flow for Year 1________ Year 2____________Year 3___________

2. Monty Corporation predicts the following revenues and cost of goods sold:

Year       1              2              3             

Revenues            $180,000              $210,000              $240,000             

Cost of goods sold           $ 68,000                $  79,000               $ 88,000              

 

Using these revenues and costs as drivers, Monty predicts the following relationships:

• 4 percent of revenues as a cash balance,
• 11 percent of the cost of goods sold as an inventory balance,
• 6 percent of the cost of goods sold as an accounts payable balance,
• 5 percent of revenues as accrued expenses balance.

All these balances would be needed at the beginning of each year and are estimated from the year-end annual estimates of revenues and cost of goods sold given above. The business will end at the end of year 3 and all working capital balances will be collected (or realized) at their face value. Please calculate the working capital balance needed and the incremental investment in working capital needed for years 0,1,2 and 3.

Working capital needed                                               Year 0___________Year 1___________ Year 2___________Year 3_________

Incremental investment in working capital Year 0___________Year 1___________ Year 2___________Year 3_________

 

1. You are thinking of opening an internet coffee shop and estimate the following cash flows. The cost of the establishment is $2,500,000 for the building and $700,000 for equipment (tax life of 7 years) and both are placed it into service on January 1, year 0. The business will earn $2,200,000 in revenue the first year and have cash expenses of 79% of revenues during its twenty years of operation. After the first year, sales are expected to grow at 6% per year, expenses will continue at 79% of sales. You will need to calculate depreciation on the building and the equipment using the methods discussed in the chapter. At the end of 20 years. the building and equipment will be sold for an after-tax cash disposition value of $600,000. No other cash flows will occur during the 20 years of operation. Using a 26 percent tax rate, and a 7.75 percent cost of money, calculate the following:

 

The first year’s total cash flow______________________

 

The second year’s total cash flow ___________________

 

The net present value of the project _____________________________________________

 

2. You place a commercial building into service on April 15, 2021 costing $40,000,000.  What is the depreciation expense allowed by the IRS for this building for tax years 2021? And 2022?

 

Depreciation expense for 2021__________________  ___________

 

Depreciation expense for 2022  ___________

3. Myles Corporation installed new charging stations for its employee vehicles with the following costs $110,000 for the equipment, delivery costs on the equipment of $6,200 and setup costs of $10,000. What is the initial depreciable cost (the amount that can be depreciated – not depreciation expense) of these charging stations?

 

Depreciable cost (not depreciation expense -- you may want to refer to the text) ______________________

 

 

4. Mason James Corporation installed a $48,000 machine in 2018 and another $115,000 machine in 2020. The first machine has a 5-year tax life, and the second machine has a 7-year tax life. What is the total expected depreciation expense for these two machines in 2021?

 

Total depreciation expense for both machines in 2021______________________

 

 

Problem 7

You are opening your own business and estimate the following expenses and revenues:

Revenues year 1                                              $266,000 growing at 5% thereafter

Cost of goods sold year 1                              $125,000 growing at 6% thereafter

Operating expense year 1                           $35,000 growing at 7% thereafter

Taxes all years                                                   26% per year

Depreciation                                      $32,000 in year 1, $44,000 in year 2, $35,000 in year 3, 28,000 in year 4

 

Cash flows from operations for Year 1________, Year 2________ Year 3___________ Year 4____________

 

 

Part 2:

 

 

 

1. You invest $4,000,000 in a commercial building that you place into service on 5/21/2020.  How much can you deduct in depreciation for 2020? And for 2021?

 

2. Your factory overhead will decrease from $140,000 to $100,000 if you take on a new project.  How much should be included in the operating cash flows for this new project --the $100,000, the $140,000 or $40,000?  And would this be modeled as an outflow or an inflow.

 

 

3. I bought my car for $16,000 five years ago, it is now worth $8,000 (net of selling expenses).  I now want to use my car in a new taxi business that I am starting.  What is the correct cost that should be modeled in calculating the NPV of my taxi service?

 

 

4. Per the book, you wish to maximize your depreciations for a piece of equipment placed into service on September 15th of 2021. This equipment has a seven-year tax life.  Using the MACRS tables given in the book, what depreciation rate would you use for 2021 and 2022 in depreciating this equipment?

 

 

5. Per IRS rules, over how many years are you allowed to depreciate commercial buildings? And how many for residential buildings? And how many for land (not land improvements)?

 

 

6. Your inventory balance was $80,000 on 12/31/2019 and was $60,000 on 12/31/2020.  Should this change in the inventory balance be modeled as a positive cash inflow to the corporations or a negative cash outflow? Pick one.

 

 

7. Your accounts payable balance was $100,000 on 12/31/2019 and was $160,000 on 12/31/2020.  Should this change in the accounts payable balance be modeled as a positive cash inflow to the corporations or a negative cash outflow? Pick one.

 

8. You have $80,000 in cash, $400,000 in accounts receivable, $500,000 in inventory, $450,000 in accounts payable, $250,000 in accrued expenses on 12/31/2020.  What was your net working capital balance on this date?

 

 

9. This year you expect sales of $200,000, cash cost of goods sold of $40,000, depreciation of $25,000 and other cash operating expenses of $60,000.  You are in the 25% marginal tax rate. These are your only expected expenses.  What is your expected net income after taxes?   What is your expected cash flow from operations?

 

10. In the typical project when are you more likely to experience positive cash flows? During the acquisition stage or the operating stage?