FIN 325 - Quiz 4

A company has a project available with the following cash flows: Year / Cash Flow 0 ($35,270) 1 $12,660 2 $14,740 3 $19,870 4 $11,180 If the required return for the project is 8.3 percent, what is the project's NPV?

$12,864.24

Integrity Materials is considering expanding on some land that it currently owns. The initial cost of the land was $364,500 and it is currently valued at $357,900. The company has some unused equipment that it currently owns valued at $29,000 that could be used for this project if $8,200 is spent for equipment modifications. Other equipment costing $157,900 will also be required. What is the amount of the initial cash flow for this expansion project?

$553,000 Explanation CF0 = −$357,900 − 29,000 − 8,200 − 157,900CF0 = −$553,000

A 7-year project is expected to generate annual sales of 8,200 units at a price of $69 per unit and a variable cost of $40 per unit. The equipment necessary for the project will cost $261,000 and will be depreciated on a straight-line basis over the life of the project. Fixed costs are $155,000 per year and the tax rate is 21 percent. How sensitive is the operating cash flow to a $1 change in the per unit sales price?

$6,478

Iron Works International is considering a project that will produce annual cash flows of $39,200, $47,900, $58,600, and $24,100 over the next four years, respectively. What is the internal rate of return if the project has an initial cost of $111,800?

19.84%

A project has an initial cost of $18,400 and expected cash inflows of $7,200, $8,900, and $7,500 over Years 1 to 3, respectively. What is the discounted payback period if the required rate of return is 11.2 percent?

2.87 years

Filter Corporation has a project available with the following cash flows: Year / Cash Flow 0 ($14,500) 1 $6,100 2 $7,400 3 $5,100 4 $4,700 What is the project's IRR?

23.58%

There is a project with the following cash flows: Year / Cash Flow 0 ($23,400) 1 $6,800 2 $7,900 3 $7,000 4 $7,600 5 $6,400 What is the payback period?

3.22 years

There is a project with the following cash flows: Year / Cash Flow 0 ($28,650) 1 $8,300 2 $9,400 3 $7,750 4 $8,350 5 $7,900 What is the payback period?

3.38 years

A project that costs $17,000 today will generate cash flows of $4,100 per year for seven years. What is the project's payback period?

4.15 years

When evaluating two mutually exclusive projects, the final decision on which project to accept ultimately depends upon which one of the following?

Net present value

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted?

Net present value

The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following?

Tax due on the current salvage value of that asset

Which one of the following statements related to the internal rate of return (IRR) is correct?

The IRR is equal to the required return when the net present value is equal to zero.

The length of time a firm must wait to recoup the money it has invested in a project is called the:

payback period.

Pro forma financial statements can best be described as financial statements:

that state projected values for future time periods.

Changes in the net working capital requirements:

can affect the cash flows of a project every year of the project's life.

Sensitivity analysis determines the:

degree to which the net present value reacts to changes in a single variable.

The internal rate of return is defined as the:

discount rate which causes the net present value of a project to equal zero.

Forecasting risk is defined as the possibility that:

incorrect decisions will be made due to erroneous cash flow projections.

The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's:

incremental cash flows.

A project has a net present value of zero. Given this information:

the project's cash inflows equal its cash outflows in current dollar terms.

Why is payback often used as the sole method of analyzing a proposed small project?

The benefits of payback analysis usually outweigh the costs of the analysis.

A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project?

The cash flow in Year 2 is valued just as highly as the cash flow in Year 1.

Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold?

Degree of operating leverage

Mutually exclusive projects are best defined as competing projects that:

both require the total use of the same limited resources.

Which one of the following best illustrates erosion as it relates to a snack stand located on the beach?

Selling fewer cookies because ice cream was added to the menu

Your company has a project available with the following cash flows: ear / Cash Flow 0 ($80,700) 1 $21,700 2 $25,400 3 $31,200 4 $26,200 5 $20,200 What is the project's IRR?

Yes, because the iRR is 16.51%

Operating leverage is the degree of dependence a firm places on its:

fixed costs

Which one of the following types of costs was incurred in the past and cannot be recouped?

sunk

A company has a project available with the following cash flows: Year / Cash Flow 0 ($35,030) 1 $12,690 2 $14,740 3 $19,940 4 $11,240 If the required return for the project is 8.3 percent, what is the project's NPV?

$13,123.12

Meek's is considering a five-year project that will require $738,000 for new fixed assets that will be depreciated straight-line to a zero book value over five years. No bonus depreciation will be taken. At the end of the project, the fixed assets can be sold for 18 percent of their original cost. The project is expected to generate annual sales of $679,000 with costs of $321,000. The tax rate is 22 percent and the required rate of return is 15.2 percent. What is the amount of the aftertax salvage value?

$13,615.20 Explanation Aftertax salvage value = $738,000(.18)(1 − .22)Aftertax salvage value = $103,615.20

A project with a life of 8 years is expected to provide annual sales of $320,000 and costs of $221,000. The project will require an investment in equipment of $580,000, which will be depreciated on a straight-line method over the life of the project. You feel that both sales and costs are accurate to +/−15 percent. The tax rate is 21 percent. What is the annual operating cash flow for the best-case scenario?

$157,544 Explanation OCF = [$320,000(1.15) − $221,000(.85)](1 − .21) + .21($580,000/8)OCF = $157,544

Phone Home, Incorporated, is considering a new five-year expansion project that requires an initial fixed asset investment of $6.089 million. The fixed asset will be depreciated straight-line to zero over the project's life, after which time it will be worthless. No bonus depreciation will be taken. The project is estimated to generate $4,389,000 in annual sales, with costs of $1,731,200. The tax rate is 24 percent. What is the annual operating cash flow for this project?

$2,312,200 Explanation OCF = ($4,389,000 − 1,731,200)(1 − .24) + ($6,089,000/5)(.24)OCF = $2,312,200

Guerilla Radio Broadcasting has a project available with the following cash flows : Year / Cash Flow 0 ($15,200) 1 $6,300 2 $7,600 3 $4,700 4 $4,300 What is the payback period?

2.28 years

A project is expected to generate annual revenues of $118,500, with variable costs of $75,100, and fixed costs of $15,600. The annual depreciation is $3,900 and the tax rate is 21 percent. What is the annual operating cash flow?

$22,781 Explanation OCF = ($118,500 − 75,100 − 15,600)(1 − .21) + .21($3,900)OCF = $22,781

Bruno's Lunch Counter is expanding and expects operating cash flows of $24,600 a year for 6 years as a result. This expansion requires $76,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $6,000 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 10 percent?

$28,526 Explanation NPV = −$76,000 − 6,000 + 24,600(PVIFA10%, 6) + $6,000/1.106NPV = $28,526

Blink of an Eye Company is evaluating a 5-year project that will provide cash flows of $37,300, $70,230, $62,770, $60,700, and $43,820, respectively. The project has an initial cost of $168,960 and the required return is 8.7 percent. What is the project's NPV?

$46,018.20

A 6-year project is expected to provide annual sales of $181,000 with costs of $92,500. The equipment necessary for the project will cost $310,000 and will be depreciated on a straight-line method over the life of the project. You feel that both sales and costs are accurate to +/−15 percent. The tax rate is 21 percent. What is the annual operating cash flow for the worst-case scenario?

$48,355 Explanation OCF = [$181,000(.85) − $92,500(1.15)](1 − .21) + .21($310,000/6)OCF = $48,355

Bennett Company has a potential new project that is expected to generate annual revenues of $259,400, with variable costs of $142,800, and fixed costs of $60,400. To finance the new project, the company will need to issue new debt that will have an annual interest expense of $23,000. The annual depreciation is $24,600 and the tax rate is 21 percent. What is the annual operating cash flow?

$49,564

Currently, Rangel Accessories sells 42,600 handbags annually at an average price of $149 each. It is considering adding a lower-priced line of handbags that sell for $79 each. The firm estimates it can sell 21,000 of the lower-priced handbags but expects to sell 7,200 fewer of the higher-priced handbags by doing so. What is the amount of annual sales that should be used when evaluating the addition of the lower-priced handbags?

$586,200

A 6-year project is expected to generate annual sales of 9,700 units at a price of $84 per unit and a variable cost of $55 per unit. The equipment necessary for the project will cost $381,000 and will be depreciated on a straight-line basis over the life of the project. Fixed costs are $230,000 per year and the tax rate is 21 percent. How sensitive is the operating cash flow to a $1 change in the per unit sales price?

$7,663 Explanation Base OCF = [9,700($84 − 55) − $230,000](1 − .21) + .21($381,000/6) Base OCF = $53,862 New OCF = [9,700($85 − 55) − $230,000](1 − .21) + .21($381,000/6)New OCF = $61,525 Change in OCF = ($53,862 − 61,525)/($84 − 85) Change in OCF = $7,663

A project with an initial investment of $451,700 will generate equal annual cash flows over its 8-year life. The project has a required return of 8.9 percent. What is the minimum annual cash flow required to accept the project?

$81,307.55

Shelton Company purchased a parcel of land six years ago for $856,500. At that time, the firm invested $128,000 in grading the site so that it would be usable. Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $45,500 a year. The company is now considering building a warehouse on the site as the rental lease is expiring. The current value of the land is $908,000. What value should be included in the initial cost of the warehouse project for the use of this land?

$908,000 Explanation The opportunity cost of the building is what it could be sold for today, or $908,000.

Shelton Company purchased a parcel of land six years ago for $862,500. At that time, the firm invested $134,000 in grading the site so that it would be usable. Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $48,500 a year. The company is now considering building a warehouse on the site as the rental lease is expiring. The current value of the land is $914,000. What value should be included in the initial cost of the warehouse project for the use of this land?

$914,000

Assume a project has cash flows of −$54,300, $18,200, $37,300, and $14,300 for Years 0 to 3, respectively. What is the profitability index given a required return of 12.6 percent?

1.02

Projects A and B are mutually exclusive and have an initial cost of $78,000 each. Project A has annual cash flows for Years 1 to 3 of $28,300, $31,500, and $22,300, respectively. Project B has annual cash flows for Year 1 of $36,900 and $40,500 for Year 2. What is the crossover rate?

16.99%

A project has an initial cost of $7,900 and cash inflows of $2,100, $3,140, $3,800, and $4,500 per year over the next four years, respectively. What is the payback period?

2.70 years

A project has an initial cost of $52,700 and a market value of $61,800. What is the difference between these two values called?

Net present value.

The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following?

Opportunity cost

Humberto is fairly cautious when analyzing a new project and thus he projects the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected. Which type of analysis is he using?

Scenario analysis

Your company has a project available with the following cash flows: Year / Cash Flow 0 ($80,700) 1 $21,700 2 $25,400 3 $31,200 4 $26,200 5 $20,200 What is the payback period?

Yes, because the IRR is 16.51%

The operating cash flow of a cost-cutting project:

can be positive even though there are no sales.