ACC497
42. A firm is evaluating a potential investment that is expected to generate cash flows of $100 in years 1 through 4 and $400 in years 5 through 7. The initial investment is $750. What is the payback for this investment?
4.88 years
Future Value (If Positive)
439.23 1,969.88 330.00
38. All of the following are incremental cash flows attributable to the project EXCEPT:
Financing costs
1. Which of these is used as a measure of the total amount of available cash flow from a project?
Free cash flow
22. A local bank is contemplating adding a new ATM to their lobby. They will need another phone line to provide communications that has a monthly cost of $50 per month. This is an example of:
Incremental cash flow
37. Which of these is the process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements?
Pro forma analysis
46. The MIRR statistic is different from the IRR statistic in that:
The MIRR assumes that the cash inflows can be reinvested at the cost of capital.
26. Which statement is true regarding cost-cutting proposals?
The main benefits come from changes in costs.
4. With regard to depreciation, the time value of money concept tells us that:
Taking the depreciation expense sooner is always better.
2. All of the following can be included in the depreciable basis of an asset EXCEPT:
Variable costs
4. To correctly project cash flows, we need to consider all of the factors EXCEPT:
All of these are factors that need to be considered.
11. The net present value decision technique uses a statistic denominated in:
currency
17. A capital budgeting method that converts a project's cash flows using a more consistent reinvestment rate prior to applying the IRR decision rule is referred to as:
modified internal rate of return (MIRR)
Step 1 - Drag each step of the Five-Step Marketing Research Approach to the correct order on the numbered line. Please note that once you complete this part of the question, you will be unable to adjust your answers.
1. DEFINE THE PROBLEM 2. DEVELOP THE RESEARCH PLAN 3. COLLECT RELEVANT INFORMATION 4. DEVELO FINDINGS 5. TAKE MARKETING ACTIONS
48. Which of these is a capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows?
Net present value
43. All of the following are strengths of payback EXCEPT:
None of these
44. Which of these are sets of cash flows where all the initial cash flows are negative and all the subsequent ones are either zero or positive?
Normal cash flows
3. Which of these is the concept that a unit's sales will follow an approximate bell-shaped curve versus a steady sales life?
Product cycle
40. With regard to depreciation, the time value of money concept tells us that:
Taking the depreciation expense sooner is always better.
Sum of FV
$ 2,739.11
5. A new project would require an immediate increase in raw materials in the amount $17,000. The firm expects that accounts payable will automatically increase $7,000. How much must the firm expect its investment in net working capital to increase if they accept this project?
$10,000
7. Your company is considering a new project that will require $100,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $25,000 using straight-line depreciation. The cost of capital is 11 percent, and the firm's tax rate is 34 percent. Estimate the present value of the tax benefits from depreciation.
$15,017.54 Formula: Step 1: Annual depreciation expense = [100,000 − 25,000]/10 = 7,500; Step 2: Tax benefit = 7,500(0.34) = 2,550; Step 3: PV of tax benefits: PMT = 2550; FV = 0; N = 10; I = 11; => PV = 15,017.54
6. Your company is considering a new project that will require $250,000 of new equipment at the start of the project. The equipment will have a depreciable life of eight years and will be depreciated to a book value of $10,000 using straight-line depreciation. The cost of capital is 12 percent, and the firm's tax rate is 34 percent. Estimate the present value of the tax benefits from depreciation.
$50,669.93 Formula: Step 1: Annual depreciation expense = [250,000 − 10,000]/8 = 30,000; Step 2: Tax benefit = 30,000(0.34) = 10,200; Step 3: PV of tax benefits: PMT = 10,200; FV = 0; N = 8; I = 12; => PV = 50,669.93
Sum of PV
-$ 1,437.75
Time
0 1 2 3 4
20. Which of the following best describes the NPV profile?
A graph of a project's NPV as a function of possible capital costs.
21. Effects that arise from a new product or service that increase sales of the firm's existing products or services are referred to as:
Complementary effects
9. When looking at which of these types of projects, one must consider any cash flows that arise from surrendering old equipment before the end of its useful life?
Replacement projects
3. Effects that arise from a new product or service that decrease sales of the firm's existing products or services are referred to as:
Substitutionary effects
12. Compute the MIRR statistic for Project J and advise whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent. Project J Time 0 1 2 3 4 5 Cash Flow-$1,000 $300 $1,480 -$500 300 -$100
The project's MIRR is 13.76 percent and the project should be accepted
29. A project costs $91,000 today and is expected to generate cash flows of $11,000 per year for the next 20 years. The firm has a cost of capital of 8 percent. Should this project be accepted, and why?
Yes, the project should be accepted since it has a NPV = $16,999.62.
24. The process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements is referred to as:
pro forma analysis
25. Accelerated depreciation allows firms to:
receive less of the dollars of depreciation earlier in the asset's life.
35. The benchmark for the profitability index (PI) is the:
zero or anything larger than zero.
Cash Flow
-$ 10,000 $ 5,350 $ 4,180 $ 1,520 $ 2,000
Cash Flow
-$ 100,000 $ 36,000 $ 200,000 $ 210,000 $ 10,000
Cash Flow
-$ 15,000 $ 6,000 $ 10,000 $ 12,000 $ 1,000
Cash Flow
-$ 201,000 -$ 37,350 $ 460,180 $ 217,020 -$ 5,000
Cash Flow
-$ 8,000 $ 3,350 $ 4,180 $ 1,520 $ 2,000
Time
0 1 2 3 4 5
Time:
0 1 2 3 4 5
Modified CFs
-$ 1,437.75 $ 2,739.11
Cash Flow
-$ 10,000 $ 3,000 $ 4,000 $ 1,000 $ 2,000 $ 500
41. Your company is considering a new project that will require $100,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $5,000 using straight-line depreciation. The cost of capital is 14 percent, and the firm's tax rate is 30 percent. Estimate the present value of the tax benefits from depreciation.
$14,865.93 Formula: Step 1: Annual depreciation expense = [100,000 − 5,000]/10 = 9,500;
5. Your company is considering a new project that will require $100,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $25,000 using straight-line depreciation. The cost of capital is 11 percent, and the firm's tax rate is 34 percent. Estimate the present value of the tax benefits from depreciation.
$15,017.54 Formula: Step 1: Annual depreciation expense = [100,000 − 25,000]/10 = 7,500;
36. Equipment was purchased for $250,000 plus $500 in freight charges. Installation costs were $750 and sales tax totaled $18,750. Hiring a special consultant to provide advice during the selection of the equipment cost $500. What is this asset's depreciable basis?
$270,000
6. You are trying to pick the least expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $13,000 to purchase and which will have OCF of −$1,200 annually throughout the vehicle's expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $23,000 to purchase and which will have OCF of −$550 annually throughout that vehicle's expected five-year life. Both cars will be worthless at the end of their life. If you intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 12 percent, what is the difference in the EAC of the two cars?
$317.88
8. Your company is considering a new project that will require $2,000,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $250,000 using straight-line depreciation. The cost of capital is 12 percent, and the firm's tax rate is 39 percent. Estimate the present value of the tax benefits from depreciation.
$385,628 Formula: Depreciation = ($2,000,000 - $250,000)/10 = $175,000 $175,000 x .39 = $68250 tax savings each period. Across the entire project, these savings will constitute a 10 period annuity. Pmt = 68,250, FV = 0, I = 12, N = 10, PV = 385,627.72
Equipment was purchased for $45,000 plus $2,000 in freight charges. Installation costs were $1,500 and sales tax totaled $1,000. Hiring a special consultant to provide advice during the selection of the equipment cost $3,000. What is this asset's depreciable basis?
$49,500
39. Equipment was purchased for $50,000 plus $2,500 in freight charges. Installation costs were $1,500 and sales tax totaled $1,000. Hiring a special consultant to provide advice during the selection of the equipment cost $3,000. What is this asset's depreciable basis?
$55,000 Formula: 50,000 + 2,500 + 1,500 + 1,000 = 55,000
10. You are trying to pick the least expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $13,000 to purchase and which will have OCF of −$1,200 annually throughout the vehicle's expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $23,000 to purchase and which will have OCF of −$550 annually throughout that vehicle's expected five-year life. Both cars will be worthless at the end of their life. If you intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 16 percent, what is the difference in the EAC of the two cars?
$586.07 Formula: Step 1: Using financial calculator: NPV of Scion = −15695.07; NPV of Prius = −24800.86; Step 2: Find EAC of each: EAC of Scion: I = 16; FV = 0; PV = −15,695.07; N = 3; PMT = EAC = −$6,988.35; EAC of Prius: I = 16; N = 5; PV = −24,800.86; FV = 0; PMT = EAC = −$7,574.42; Step 3: Difference = 586.07
Cash Flow
-$ 1,000 $ 300 $ 1,480 -$ 500 $ 300 -$ 100
Cash Flow
-$ 1,000 $ 350 $ 380 $ 420 $ 300 $ 100
Present Value (If Negative)
-$ 1,000 - 375.66 - 62.09
Step 2 - Drag each step of the Five-Step Marketing Research Approach to the correct order on the numbered line. Please note that once you complete this part of the question, you will be unable to adjust your answers.
1. DEFINE THE PROBLEM: RESEACH OBJECTIVES 2 DEVELOP THE RESEARCH PLAN: DETERMINE CONSTRAINTS, BEST APPROACH 3. COLLECT RELEVANT INFORMATION: CHILDREN DON'T LIKE IT, OBSERVE CHILDREN, CONDUCT FOCUS GROUPS 4. DEVELOP FINDINGS: ANALYZE DATA, PRESENT RESULTS 5. TAKE MARKETING ACTIONS: LAUNCH PRODUCT, CHANGE NAME, OFFER DISCOUNT, MONITOR SALES
28. Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project plus interest at market rates?
Discounted payback
18. Which of these is a capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project's rate of return?
Internal rate of return
Cash flow:
−1,000 −75 100 100 0 2,000
Cash flow:
−175 75 0 100 75 50
Cash flow:
−250 75 0 100 75 50
Cash flow:
−5,000 1,000 1,000 0 2,000 2,000
Cash flow:
−75 −75 0 100 75 50
