Cash Flow Practice Problems
Prepared by Pamela Peterson Drake
- Identify each of the following items as either a positive cash
flow, negative cash flow, or no effect, and identify the dollar amount
(if a cash flow). Assume a marginal tax rate of 40%:
- Increase in Accounts Receivable by $5,000
- Increase in Inventory by $10,000
- Increase cash revenues by $100,000
- Increase cash expenses by $60,000
- Increase Accounts Paybable by $10,000
- Increase depreciation expense for tax purposes by $30,000
- Suppose Congress changed the rates of depreciation for plant and
equipment assets such that a more accelerated system of rates is adopted.
How would you expect this change to affect the cash flows of a proposed
project that involves plant and equipment assets?
- Suppose that you are evaluating an asset that costs $400,000 and that is
depreciated for tax purposes using MACRS rates for a 5-year asset.
Assume a marginal tax rate of 30%.
- What is the depreciation expense in the second year?
- What is the depreciation tax-shield in the second year?
- If you plan to dispose of the asset at the end of the third year,
what is the asset's book value for tax purposes at the time of sale?
- If you can sell the asset for $50,000 at the end of the fifth year,
do you have a gain or a loss? What are the tax consequences of this
sale? What are the cash flow consequences?