Introduction to Finance

7. 
AA Auto Parts Company has a corporate tax rate of 34 percent and 
depreciation of $19,180. Compute its depreciation tax shield.
8. 
A project is estimated to generate sales revenue of $10 million with 
expenses of $9 million. No change in net working capital is expected. 
Marginal profi ts will be taxed at a 35 percent rate. If the project’s 
operating cash fl ow is $1 million, what is the project’s depreciation 
expense? Its net income?
9. 
Compute operating cash fl ows for the following:
a. 
A project that is expected to have sales of $10,000, expenses of 
$5,000, depreciation of $200, an investment of $50 in net working 
capital, and a 20 percent tax rate.
b. 
A project has the simplifi ed project income statement below. In 
addition, assume the project will require a $75 investment in net 
working capital.
 15. 
(LO 17.8)
Why might managers want to use other techniques 
besides NPV to make capital budgeting decisions?
 16. 
(LO 17.9)
How is the stand-alone principle applied when evalu-
ating whether to invest in projects?
 17. 
(LO 17.9)
What are the three types of relevant cash fl ows to be 
considered in analyzing a project?
 18. 
(LO 17.9)
Label each of the following as a cannibalization eff ect, 
enhancement eff ect, or neither. Explain your answers.
a. 
A computer manufacturer seeks to produce a high-quality engi-
neering work station, thinking that consumers will believe the fi rm’s 
standard PC products will also be of higher quality.
b. 
An airline off ers taxicab service to and from the airport.
c. 
A gas station adds service bays and a small convenience store.
d. 
A mainframe computer manufacturer sells personal computers.