Author: angela bedfrd

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Quick Computing currently sells 18 million computer chips each year at a price of $23 per chip. It is about to introduce a new chip, and it forecasts annual sales of 16 million of these improved chips at a price of $29 each. However, demand for the old chip will decrease, and sales of the old chip are expected to fall to 8 million per year. The old chip costs $8 each to manufacture, and the new ones will cost $11 each. What is the proper cash flow to use to evaluate the present value of the introduction of the new chip? 
Tubby Toys estimates that its new line of rubber ducks will generate sales of $7.70 million, operating costs of $4.70 million, and a depreciation expense of $1.70 million. Assume the tax rate is 40%.
The owner of a bicycle repair shop forecasts revenues of $228,000 a year. Variable costs will be $67,000, and rental costs for the shop are $47,000 a year. Depreciation on the repair tools will be $27,000. Prepare an income statement for the shop based on these estimates. The tax rate is 30%
Laurel’s Lawn Care, Ltd., has a new mower line that can generate revenues of $147,000 per year. Direct production costs are $49,000, and the fixed costs of maintaining the lawn mower factory are $19,500 a year. The factory originally cost $0.98 million and is being depreciated for tax purposes over 20 years using straight-line depreciation. Calculate the operating cash flows of the project if the firm’s tax bracket is 35%
Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $60,000 and sell its old low-pressure glueball, which is fully depreciated, for $10,000. The new equipment has a 10-year useful life and will save $14,000 a year in expenses. The opportunity cost of capital is 11%, and the firm’s tax rate is 40%. What is the equivalent annual savings from the purchase if Gluon uses straight-line depreciation? Assume the new machine will have no salvage value
Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $34,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $8,500. The grill will have no effect on revenues but will save Johnny’s $17,000 in energy expenses per year. The tax rate is 40%. Use the MACRS depreciation schedule.

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