Tannen Industries is considering an expansion. The necessary equipment would be purchased for $18 million, and the expansion would require an additional$2 million investment in net operating working capital. The tax rate is 40%. a. What is the initial investment outlay? b. The company spent and expensed $20,000 on research related to the project last year. Would this change your answer? Explain. c. The company plans to use a building that it owns to house the project. The building could be sold for$1 million after taxes and real estate commissions. How would that fact affect your answer?

Colsen Communications is trying to estimate the first-year cash flow (at Year 1) for a proposed project. The financial staff has collected the following information on the project:

$$\begin{matrix} \text{Sales revenues} & \text{\$ 15 million}\\ \text{Operating costs (exluding depreciation)} & \text{10.5 million}\\ \text{Depreciation} & \text{3 million}\\ \text{Interest expense} & \text{3 million}\\ \end{matrix}$$

The company has a 40% tax rate, and its WACC is 11%. a. What is the project’s cash flow for the first year (t=1)? b. If this project would cannibalize other projects by $1.5 million of cash flow before taxes per year, how would this change your answer to part a? c. Ignore part b. If the tax rate dropped to 30%, how would that change your answer to part a?

Karsted Air Services is now in the final year of a project. The equipment originally cost $29 million, of which 75% has been depreciated. Karsted can sell the used equipment today for$8 million, and its tax rate is 35%. What is the equipment’s after-tax salvage value?

Most firms generate cash inflows every day, not just once at the end of the year. In capital budgeting, should we recognize this fact by estimating daily project cash flows and then using them in the analysis? If we do not, are our results biased? If so, would the NPV be biased up or down? Explain.

The Darlington Equipment Company purchased a machine 5 years ago at a cost of $85,000. The machine had an expected life of 10 years at the time of purchase, and it is being depreciated by the straight-line method by$8,500 per year. If the machine is not replaced, it can be sold for $15,000 at the end of its useful life. A new machine can be purchased for$170,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $40,000 per year. Sales are not expected to change. At the end of its useful life, the machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life; so the applicable depreciation rates are 33%, 45%, 15%, and 7%. The old machine can be sold today for$55,000. The firm’s tax rate is 40%. The appropriate WACC is 9%. a. If the new machine is purchased, what is the amount of the initial cash flow at Year 0? b. What are the incremental cash flows that will occur at the end of Years 1 through 5? c. What is the NPV of this project? Should Darlington replace the old machine? Explain.