Finance Class

Practice Set for Chapter 8 Name_______________________

Please type in a numerical answer below each question – thanks. Please do your own work and do not share your work with others. Thanks.

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

Year 1 2 3 4

Revenues $194,000 $216,000 $380,000 $250,000

Cost of goods sold $58,000 $ 69,000 $103,000 $67,000

Variable selling exp as a % of revenue 20% 22% 21% 20%

Fixed selling expenses $21,000 $ 23,000 $24,000 $22,000

Other cash operating expenses $10,000 $ 11,000 $12,000 $14,000

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

This business is in the 26 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___________ Year 4 ____________

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

Year 1 2 3

Revenues $1,080,000 $2,180,000 $2,450,000

Cost of goods sold $ 680,000 $ 790,000 $ 880,000

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

• 4.25 percent of revenues as a cash balance,

• 9.4 percent of the cost of goods sold as an inventory balance,

• 6.25 percent of the cost of goods sold as an accounts payable balance,

• 5.75 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 you forecast the following cash flows. The cost of the establishment is $2,800,000 for the building and $900,000 for equipment (tax life of 7 years) and both are placed it into service on January 1, year 0. The business will earn $2,950,000 in revenue the first year and have cash expenses of 84% of revenues during its twenty years of operation. After the first year, sales are expected to grow at 6.5% per year. 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 jointly for an after-tax cash disposition value of $800,000. No other cash flows will occur during the 20 years of operation. Using a 26 percent tax rate, and an 8.25 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 _____________________________________________

1. You place a commercial building into service on October 31, 2023, costing $34,000,000. What is the depreciation expense allowed by the IRS for this building for tax years 2023? And 2024?

Depreciation expense for 2023__________________ Depreciation expense for 2024___________

1. Myles Corporation installed new charging stations for its employee vehicles with the following relevant and possibly irrelevant costs:

• $215,000 for the equipment,

• Delivery costs on the equipment of $6,200

• Cost of operating the charging stations the first year of operation

• Setup or installation costs $21,000.

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) ______________________

1. Mason James Corporation installed a $148,000 machine in 2020 and another $185,000 machine in 2022. The first machine has a 7-year tax life, and the second machine has a 5-year tax life. What is the total expected depreciation expense for these two machines in 2023?

Total depreciation expense for both machines in 2023______________________

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

Revenues year 1 $562,000 growing at 14% thereafter.

Cost of goods sold year 1 $305,000 growing at 12% thereafter.

Operating expense year 1 $135,000 growing at 10% thereafter.

Taxes for all the years 27% 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____________