Introduction to Finance

e. 
A snack food manufacturer starts marketing a new line of fat-free 
snacks.
f. 
A fi rm seeks to export its products to foreign countries.
 19. 
(LO 17.9)
What types of cash fl ows are considered irrelevant 
when analyzing a project?
 20. 
(LO 17.9)
“Our fi rm owns property around Chicago that would 
be an ideal location for the new warehouse, and since we own the 
land, there isn’t any cash fl ow needed to purchase it.” Do you agree or 
disagree with this statement? Explain.
 21. 
(LO 17.9)
“Our bank will fi nance the product expansion project 
with at a loan interest rate of 10 percent. Make sure the project’s 
cash fl ow estimates include this interest expense.” Do you agree or 
disagree? Explain.
 22. 
(LO 17.9)
Classify each of the following as a sunk cost, an oppor-
tunity cost, or neither.
a. 
The fi rm has spent $1 million to develop the next-generation 
robotic arm; it is examining whether the project should continue.
b. 
A piece of ground owned by the fi rm can be used as the site for 
a new facility.
c. 
Another $200,000 of R&D spending will probably be needed to 
work out the bugs of a new software package.
 23. 
(LO 17.9)
How is a project’s cash fl ow statement similar to that 
of a fi rm? How is it diff erent?
 24. 
(LO 17.9)
Why is the change in net working capital included in 
operating cash fl ow estimates?
 25. 
(LO 17.9) 
Why is depreciation considered a tax shield?
 26. 
(LO 17.10)
What is a way to keep managers accountable for their 
capital budgeting forecasts and estimates?
 27. 
(LO 17.11) 
What is a risk-adjusted discount rate (RADR)? How 
are RADRs determined for individual projects?

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552
C H A PT E R 1 7 Capital Budgeting Analysis
Sales
$925.00
–Costs
–315.00
–Depreciation
–100.00
EBIT = EBT
510.00
–Taxes (at 34%)
–173.40
Net Income
336.60
c. 
For a capital budgeting proposal, assume this year’s cash sales 
are forecast to be $220, cash expenses $130, and depreciation $80. 
Assume the fi rm is in the 30 percent tax bracket. 
10. 
A machine can be purchased for $10,500, including transportation 
charges, but installation costs will require $1,500 more. The machine 
is expected to last four years and produce annual cash revenues of 
$6,000. Annual cash operating expenses are expected to be $2,000, 
with depreciation of $3,000 per year. The fi rm has a 30 percent tax 
rate. Determine the relevant after-tax cash fl ows and prepare a cash 
fl ow schedule.