Cash Flow Analysis. The Gulf States Press, Inc., is analyzing the potential profitability of three printing jobs put up for bid by the State Department of Transportation:
Assume that: (1) The company's marginal state plus federal tax rate is 40%, (2) each job is expected to have a ten-year life, (3) the firm uses straight-line depreciation, (4) the average cost of capital is 10%, (5) the jobs have the same risks as the firm's other business, and (6) the company has already spent $100,000 on developing the preceding data. This $100,000 has been capitalized and will be amortized over the life of the job chosen, if any.
A. What is the expected net cash flow each year? (Hint: Cash flow equals net profit after taxes plus depreciation and amortization charges.)
B. What is the net present value of each job? On which job, if any, should Gulf States bid?
C. Suppose that Gulf States' primary business is quite cyclical, improving and declining with the economy, which Job B is expected to be counter cyclical. Might this have any bearing on your decision?

Question

Cash Flow Analysis. The Gulf States Press, Inc., is analyzing the potential profitability of three printing jobs put up for bid by the State Department of Transportation:
  Assume that: (1) The company's marginal state plus federal tax rate is 40%, (2) each job is expected to have a ten-year life, (3) the firm uses straight-line depreciation, (4) the average cost of capital is 10%, (5) the jobs have the same risks as the firm's other business, and (6) the company has already spent $100,000 on developing the preceding data. This $100,000 has been capitalized and will be amortized over the life of the job chosen, if any.
A. What is the expected net cash flow each year? (Hint: Cash flow equals net profit after taxes plus depreciation and amortization charges.)
B. What is the net present value of each job? On which job, if any, should Gulf States bid?
C. Suppose that Gulf States' primary business is quite cyclical, improving and declining with the economy, which Job B is expected to be counter cyclical. Might this have any bearing on your decision?

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The Answer of Cash Flow Analysis. The Gulf States Press, Inc., is analyzing the potential profitability of three printing jobs put up for bid by the State Department of Transportation:
  Assume that: (1) The company's marginal state plus federal tax rate is 40%, (2) each job is expected to have a ten-year life, (3) the firm uses straight-line depreciation, (4) the average cost of capital is 10%, (5) the jobs have the same risks as the firm's other business, and (6) the company has already spent $100,000 on developing the preceding data. This $100,000 has been capitalized and will be amortized over the life of the job chosen, if any.
A. What is the expected net cash flow each year? (Hint: Cash flow equals net profit after taxes plus depreciation and amortization charges.)
B. What is the net present value of each job? On which job, if any, should Gulf States bid?
C. Suppose that Gulf States' primary business is quite cyclical, improving and declining with the economy, which Job B is expected to be counter cyclical. Might this have any bearing on your decision?