Chapter 10 Exam 3 Material

The Cyclone Golf Resorts is redoing its golf course at a cost of $2,744,320. It expects to generate cash flows of $1,223,445, $2,007,812, and $3,147,890 over the next three years. If the appropriate discount rate for the firm is 13 percent, what is the NPV of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)

$2,092,432

An investment of $115 generates after-tax cash flows of $30 in Year 1, $80 in Year 2, and $140 in Year 3. The required rate of return is 20 percent. The net present value is closest to

$46.57.

A machine costs $1,000 and has a 3-year life. The estimated salvage value at the end of three years is $100. The project is expected to generate after tax-cash flows of $600 per year. If the required rate of return is 10%, what is the NPV of the project? (Do not round intermediate computations. Round final answer to the nearest whole number.)

$567

Gao Enterprises plans to build a new plant at a cost of $3,250,000. The plant is expected to generate annual cash flows of $1,225,000 for the next five years. If the firm's required rate of return is 18 percent, what is the NPV of this project?

$580,785

Cortez Art Gallery is adding to its existing buildings at a cost of $2 million. The gallery expects to bring in additional cash flows of $520,000, $700,000, and $1,000,000 over the next three years. Given a required rate of return of 10 percent, what is the NPV of this project?

-$197,446

Signet Pipeline Co. is looking to install new equipment that will cost $2,750,000. The cash flows expected from the project are $612,335, $891,005, $1,132,000, and $1,412,500 for the next four years. What is Signet's internal rate of return?

15%

Boomer Biscuit Inc. needs to automate its production line. The project costs $275,000 and is expected to provide after-tax cash flows of $73,306 for eight years. Management estimates its cost of capital as 12 percent. What is the project's MIRR?

16%

The Easton manufacturing Company is looking to replace its conveyor belt system. A new system will cost $345,000, and will result in cost savings of $220,000 in the first year, followed by savings of $100,000 per year over the following 3 years. The payback period for this project is closest to: Round your answer to two decimal places. 3 years. 2 years. 1.5 years. 2.25 years.

2.25 years.

Modern Federal Bank is setting up a brand-new branch. The cost of the project will be $1.2 million. The branch will create additional cash flows of $235,000, $412,300, $665,000 and $875,000 over the next four years. The firm's cost of capital is 12 percent. What is the internal rate of return on this branch expansion?

23%

Kathleen Dancewear Co. has bought some new machinery at a cost of $1,250,000. The impact of the new machinery will be felt in the additional annual cash flows of $375,000 over the next five years. What is the payback period for this project? If its acceptance period is three years, will this project be accepted?

3.33 years; no

Roswell Energy Company is installing new equipment at a cost of $10 million. Expected cash flows from this project over the next five years will be $1,045,000, $2,550,000, $4,125,000, $6,326,750, and $7,000,000. The company's discount rate for such projects is 14 percent. What is the project's discounted payback period?

4.2 years

Carmen Electronics bought new machinery for $5 million. This is expected to result in additional cash flows of $1.2 million over the next seven years. The firm's cost of capital is 12 percent. What is the discounted payback period for this project? If the firm's acceptance period is five years, will this project be accepted?

6.1 years; no

Jackson Inc. is considering two mutually exclusive, equally risky projects S and L. Their cash flows are shown below. The CEO believes the IRR is the best selection criterion, while the CFO advocates for the NPV method. What is the modified IRR (MIRR) for project S? WACC: 7.50% Year 0 1 2 3 4 CFS -$1,100 $550 $600 $100 $100 CFL -$2,700 $650 $725 $800 $1,400

9.55%

Which of the following is a disadvantage of the payback method? It ignores cash flows beyond the payback period. All of these. It ignores the time value of money. It is inconsistent with the goal of maximizing shareholder wealth.

All of these.

Which of the following is an advantage of the payback method? The technique is simple for managers to compute and interpret. None of the above It is a good measure of liquidity risk. Both the technique is simple for managers to compute and interpret and it is a good measure of liquidity risk.

Both the technique is simple for managers to compute and interpret and it is a good measure of liquidity risk.

Which of the following is one of the steps necessary for conducting a capital budgeting analysis of a project? Determining the systematic risk of the project Estimating the project's future cash flows Deciding on how the capital required will be raised Computing the debt-to-equity ratio of the firm

Estimating the project's future cash flows

Which of the following is a key disadvantage of the IRR method? The IRR method ignores all cash flows after the arbitrary cutoff period. With conventional cash flows, the IRR method can yield multiple answers. With mutually exclusive projects, the IRR method can lead to incorrect investment decisions. The IRR method is not based on a discounted cash flow technique.

With mutually exclusive projects, the IRR method can lead to incorrect investment decisions.

Capital rationing implies that the available capital will be allocated equally to all available projects. a firm has constraints to fund all of the available projects. funding needs are equal to funding resources. none of these.

a firm has constraints to fund all of the available projects.

A construction firm is evaluating two value-adding projects. The first project deals with building access roads to a new terminal at the local airport. The second project is to build a parking garage on a piece of land that the firm owns adjacent to the airport. If both projects are positive-NPV projects, then the firm should accept both projects because they are contingent projects. select the higher NPV project because they are mutually exclusive. not enough information is given to make a decision. accept both projects because they are independent projects.

accept both projects because they are independent projects.

Two projects are considered to be mutually exclusive if both selecting one would automatically eliminate accepting the other and the projects perform the same function. none of these. the projects perform the same function. selecting one would automatically eliminate accepting the other.

both selecting one would automatically eliminate accepting the other and the projects perform the same function.

Contingent projects would imply that both the acceptance of one project is dependent on the acceptance of the other and the projects can be either mandatory or optional. none of these. the projects can be either mandatory or optional. the acceptance of one project is dependent on the acceptance of the other.

both the acceptance of one project is dependent on the acceptance of the other and the projects can be either mandatory or optional.

In evaluating capital projects, the decisions using the NPV method and the IRR method may disagree if the projects are mutually exclusive. the projects are independent. both the cash flows pattern is unconventional the projects are mutually exclusive. the cash flows pattern is unconventional.

both the cash flows pattern is unconventional the projects are mutually exclusive.

Capital budgeting is the process of: determining how much capital a firm should raise. determining how much debt a firm should budget for in its capital structure. keeping track of all the revenues and expenses incurred by a firm during the year. determining which capital investments a firm should make.

determining which capital investments a firm should make.

The capital budgeting process starts with a firm's: business plan. financial plan. strategic plan. sales forecast.

strategic plan.

The internal rate of return is the discount rate that makes the NPV greater than zero. the discount rate that makes the NPV less than zero. both the discount rate that makes the NPV greater than zero and the discount rate that makes the NPV less than zero. the discount rate that makes the NPV equal to zero.

the discount rate that makes the NPV equal to zero.