Cash Flow Analysis. The Printing Press, Inc., (PPI) is analyzing the potential profitability of three printing jobs put up for bid by a national textbook publisher:
Assume that: (1) The company's marginal city-plus-state-plus-federal tax rate is 35%, (2) each job is expected to have a five-year life, (3) the firm uses straight-line depreciation, (4) the average cost of capital is 15%, (5) the jobs have the same risks as the firm's other business, and (6) the company has already spent $10,000 on developing the preceding data. This $10,000 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 PPI bid?
C. Suppose that PPI's 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 Printing Press, Inc., (PPI) is analyzing the potential profitability of three printing jobs put up for bid by a national textbook publisher:
  Assume that: (1) The company's marginal city-plus-state-plus-federal tax rate is 35%, (2) each job is expected to have a five-year life, (3) the firm uses straight-line depreciation, (4) the average cost of capital is 15%, (5) the jobs have the same risks as the firm's other business, and (6) the company has already spent $10,000 on developing the preceding data. This $10,000 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 PPI bid?
C. Suppose that PPI's 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?

Quizplus · Accepted Answer

The Answer of Cash Flow Analysis. The Printing Press, Inc., (PPI) is analyzing the potential profitability of three printing jobs put up for bid by a national textbook publisher:
  Assume that: (1) The company's marginal city-plus-state-plus-federal tax rate is 35%, (2) each job is expected to have a five-year life, (3) the firm uses straight-line depreciation, (4) the average cost of capital is 15%, (5) the jobs have the same risks as the firm's other business, and (6) the company has already spent $10,000 on developing the preceding data. This $10,000 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 PPI bid?
C. Suppose that PPI's 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?