1. Why are interest charges not deducted when a project’s cash flows are calculated for use in a capital budgeting analysis?
  • Taylor Inc., the company you work for, is considering a new project whose data are shown below. What is the project’s Year 1 Net Operating Cash Flow?
Sales revenues, each year$62,500
Depreciation$8,000
Other operating costs$25,000
Interest expense$8,000
Tax rate35.0%
Net Operating CF =EBIT * (1-Tax) +Dep
EBIT = Sales – Costs – Dep
  • Your new employer, Freeman Software, is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, and the allowed depreciation rates for such property are 33.33%, 44.45%, 14.81%, and 7.41% for Years 1 through 4. Revenues and other operating costs are expected to be constant over the project’s 10-year expected life. What is the project’s Year 1 Net Operating Cash Flow?
Equipment cost (depreciable basis)$65,000
Sales revenues, each year$60,000
Operating costs (excl. deprec.)$25,000
Tax rate35.0%
Net Operating CF =EBIT * (1-Tax) +Dep
EBIT = Sales – Costs – Dep

4) Kasper Film Co. is selling off some old equipment it no longer needs because its associated project has come to an end. The equipment originally cost $22,500, of which 75% has been depreciated. The firm can sell the used equipment today for $6,000, and its tax rate is 40%. What is the equipment’s after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment’s final market value is less than its book value, the firm will receive a tax credit as a result of the sale.

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