finance exam 3 final

The Internal Rate of Return (IRR) is the discount rate that equates the NPV of an investment opportunity with $0

True

match the definition to the term: The dividend decision

If you can't find investments that make your minimum acceptable rate, return the cash to the owners of your business

capital budgeting plan Step 4

Implementation

match the definition to the term: investment decision

Invest in assets that earn a return greater than the minimum acceptable hurdle rate

____________________ results from the use of fixed - cost assets or funds to magnify returns to a firm's owners.

Leverage

In theory, a firm should maintain financial leverage consistent with a capital structure that

Maximize the owner's wealth

What are the advantages of the payback period?

Measures liquidity, easy to communicate Does not require a discount rate Does not require complex calculations

Projects that compete with one another so that the acceptance of one eliminates from further consideration all other projects that serve a similar function.

Mutually Exclusive

The "gold standard" of investment criteria refers to:

NPV

The disadvantage of the IRR period method is that it

Only works for normal cash flows Requires complex calculations Requires a lot of data (estimates of all CFs)

capital budgeting plan Step 1

Proposal generation

The capital budgeting process consists of five steps:

Proposal generation Review and analysis Decision making Implementation Follow-up

The disadvantages of the IRR period method is that it

Requires a lot of data (estimates of all CFs) Only works for normal cash flows Requires complex calculations

capital budgeting plan Step 2

Review and analysis

Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $115 at the end of the next three years and then $1,948 per year for the three years after that. If the discount rate is 7.3% then what is the NPV?

-584.28

What are advantages of payback period?

-Measures Liquidity, Easy to communicate -Does not require complex calculations -Does not require discount rate

Jon Stevens, BNSF Vice President and Controller describes the capital spending process primarily as

-a balancing act that requires careful evaluation of the costs and benefits of each project - a means to ensure regulatory compliance

What types of analyses do the BNSF strategic studies team conduct?

-sensitivity -discounted cash flow

What is the profitability index for Project A with a cost of capital of 8%? Year. Project A. Project B 0. ($42,000.0). ($45,000.00) 1 $14,000.00. $28,000.00 2 $14,000.00 $12,000.00 3 $14,000.00 $10,000.00 4 $14,000.00. $10,000.00 5 $14,000.00 $10,000.00

1.33

Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $900 at the end of the next three years and then $1400 per year for the three years after that. If the discount rate is 8% then what is the PI? Answer in % format with 2 number after the decimal point

103.67

Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $900 at the end of the next three years and then $1400 per year for the three years after that. If the discount rate is 8% then what is the PI? Answer in % format with 2 numbers after the decimal point

103.67%

12.2 Lipscomb Technologies' annual sales are $5,965,853 and all sales are made on credit, it purchases $3,030,231 of materials each year (and this is its cost of goods sold). Lipscomb also has $522,489 of inventory, $491,684 of accounts receivable, and $471,694 of accounts payable. Assume a 365 day year.

12.13 times

Libscomb Technologies' annual sales are $6,781,280 and all sales are made on credit, it purchases $4,416,366 of materials each year (and this is its cost of goods sold). Libscomb also has $517,645 of inventory, $509,066 of accounts receivable, and $487,344 of accounts payable. Assume a 365 day year. What is Libscomb's Receivables Turnover?

13.32

You are considering the following three mutually exclusive projects. The required rate of return for all three projects is 14%. Year A. B. C 0$ (1,000). (5,000). $(50,000) 1$ 300. $ 1,700. $ 0 2$300. $ 1,700. $15,000 3$ 600. $1,700. $ 28,500 4$300. $1,700. $ 33,000

14.23

10.4 Quiz What is the net effect on a firm's working capital if a new project requires: $33,143 increase in inventory, $43,659 increase in accounts receivable, $35,000.00 increase in machinery, and a $42,564 increase in accounts payable? Round to nearest dollar amount.

34,238

A company just paid $10 million for a feasibility study. If the company goes ahead with the project, it must immediately spend another $100 million now, and then spend $20 million in one year. In two years it will receive $80 million, and in three years it will receive $90 million. If the cost of capital for the project is 11 percent, what is the project's IRR? % terms to 2 decimal places and without the % sign.

15.945

A company just paid $10 million for a feasibility study. If the company goes ahead with the project, it must immediately spend another $100 million now, and then spend $20 million in one year. In two years it will receive $80 million, and in three years it will receive $90 million. If the cost of capital for the project is 11 percent, what is the project's IRR? % terms to 2 decimal places and without the % sign.

15.95

Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $33,599 2 $40,000 3 $20,000 4. $10,000 Thereafter 0 Expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $40,000 in plant and equipment that will be depreciated using the straight-line method over 5 years. The firm recently spent $2,000 on a study to estimate the revenues of the new product. The tax rate is 20%. What is the operating cash flow in year 1? Answer to nearest whole dollar amount.

16,273.6

A new restaurant is ready to open for business. It is estimated that the food cost (variable cost) will be 40% of sales, while fixed cost will be $409,865. The first year's sales estimates are $1,250,000. Calculate the firm's degree of operating leverage (DOL). Answer to 2 decimal places.

2.21

Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles​ (who wants to ride on a cloudy day​ anyway?) The proposed project has the following​ features; ​• The firm just spent​ $300,000 for a marketing study to determine consumer demand​ (@ t=0). ​• Aero Motorcycles purchased the land the factory will be built on 5 years ago for​ $2,000,000 and owns it outright​ (that is, it does not have a​ mortgage). The land has a current market value of​ $2,600,000. ​• The project has an initial cost of​ $22,482,497 (excluding​ land, hint: the land is not subject to​ depreciation). ​​• If the project is​ undertaken, the company will realize an additional​ $8,000,000 in sales over each of the next ten years.​ (i.e. sales in each year are​ $8,000,000) ​• The company's operating cost​ (not including​ depreciation) will equal​ 50% of sales. ​• The company's tax rate is 35 percent. ​• Use a​ 10-year straight-line depreciation schedule. ​• At t​ = 10, the project is expected to cease being economically viable and the factory​ (including land) will be sold for ​$4,500,000 (assume land has a book value equal to the original purchase​ price). ​• The project's WACC​ = 10 percent ​• Assume the firm is profitable and able to use any tax credits​ (i.e. negative​ taxes) .0 What is the​ project's outflow at​ t=0? Answer to the nearest whole dollar value.

25,082,497

What is the equivalent annual cost for a project that requires a $50,000 investment at time-period zero, and a $10,000 annual expense during each of the next 4 years, if the opportunity cost of capital is 10%?

25,773.54

A company just paid $10 million for a feasibility study. If the company goes ahead with the project, it must immediately spend another $84,391,290 now, and then spend $20 million in one year. In two years it will receive $80 million, and in three years it will receive $90 million. If the cost of capital for the project is 11 percent, what is the project's NPV?

28,327,710.96

What is the amount of the operating cash flow for a firm with $303,516 profit before tax, $100,000 depreciation expense, and a 35% marginal tax rate?

297,285.4

11.5 quiz Maverick Technologies has sales of $3,000,000. The company's fixed operating costs total $500,000 and its variable costs equal 60% of sales, so the company's current operating income is $700,000. The company's interest expense is $493,336. What is the company's degree of financial leverage (DFL)? Answer to 2 decimal places.

3.39

Compute the payback period for a project that requires an initial outlay of $138,098 that is expected to generate $40,000 per year for 9 years.

3.45

What is the NPV of a project that costs $100,000.00 and returns $50,000.00 annually for three years if the opportunity cost of capital is 6.93%?

31383.8

10.5 Quiz What is the amount of the operating cash flow for a firm with $334,901 profit before tax, $100,000 depreciation expense, and a 35% marginal tax rate?

317,685.65

What is the net effect on a firm's working capital if a new project requires: $31,060 increase in inventory, $42,469 increase in accounts receivable, $35,000.00 increase in machinery, and a $40,343 increase in accounts payable? Round to nearest dollar amount.

33,186

A company just paid $10 million for a feasibility study. If the company goes ahead with the project, it must immediately spend another $78,173,236 now, and then spend $20 million in one year. In two years it will receive $80 million, and in three years it will receive $90 million. If the cost of capital for the project is 11 percent, what is the project's NPV?

34,545,764.9

12.5 Carlisle Transport had $4,605 cash at the beginning of the period. During the period, the firm collected $1,622 in receivables, paid $2,006 to the supplier, had credit sales of $5,441, and incurred cash expenses of $500. What was the cash balance at the end of the period?

3721

12.3 Lipscomb Technologies' annual sales are $6,405,051 and all sales are made on credit, it purchases $3,396,479 of materials each year (and this is its cost of goods sold). Lipscomb also has $529,198 of inventory, $515,690 of accounts receivable, and beginning and ending of year $412,688 and $479,039 account payables (respectively). Assume a 365 day year. What is Lipscomb's Cash Cycle (in days)?

38.34

Maverick Technologies has sales of $3,000,000. The company's fixed operating costs total $500,000 and its variable costs equal 60% of sales, so the company's current operating income is $700,000. The company's interest expense is $527,025. What is the company's degree of financial leverage (DFL)? Answer to 2 decimal places.

4.05

12.2 Lipscomb Technologies' annual sales are $5,082,355 and all sales are made on credit, it purchases $4,313,408 of materials each year (and this is its cost of goods sold). Lipscomb also has $508,477 of inventory, $521,672 of accounts receivable, and $411,552 of accounts payable. Assume a 365 day year. What is Lipscomb's Inventory Period (in days)?

43.03 days

What is the internal rate of return for a project with an initial outlay of $10,000 that is expected to generate cash flows of $2,000 per year for 6 years?

5.47

12.2 Lipscomb Technologies' annual sales are $5,094,573 and all sales are made on credit, it purchases $3,143,365 of materials each year (and this is its cost of goods sold). Lipscomb also has $564,426 of inventory, $531,876 of accounts receivable, and $440,467 of accounts payable. Assume a 365 day year. What is Lipscomb's Inventory Turnover?

5.57 times

11.5 quiz Maverick Technologies has sales of $3,000,000. The company's fixed operating costs total $501,046 and its variable costs equal 60% of sales. The company's interest expense is $500,000. What is the company's degree of total leverage (DTL)? Answer to 2 decimal places.

6.03

Maverick Technologies has sales of $3,000,000. The company's fixed operating costs total $512,241 and its variable costs equal 60% of sales. The company's interest expense is $500,000. What is the company's degree of total leverage (DTL)? Answer to 2 decimal places.

6.39

Libscomb Technologies' annual sales are $5,790,872 and all sales are made on credit, it purchases $3,221,342 of materials each year (and this is its cost of goods sold). Libscomb also has $539,653 of inventory, $498,477 of accounts receivable, and $416,602 of accounts payable. Assume a 365 day year. What is Libscomb's Inventory Period (in days)?

61.15

A new restaurant is ready to open for business. It is estimated that the food cost (variable cost) will be 37.19% of sales, while fixed cost will be $450,000. The first year's sales estimates are $1,298,279. Calculate the firm's operating breakeven level of sales. Answer to 2 decimal places.

716,446.43

11.5 A new restaurant is ready to open for business. It is estimated that the food cost (variable cost) will be 38.75% of sales, while the fixed cost will be $450,000. The first year's sales estimates are $1,067,821. Calculate the firm's operating breakeven level of sales. Answer to 2 decimal places.

734693.88

12.2 Lipscomb Technologies' annual sales are $6,907,636 and all sales are made on credit, it purchases $3,235,864 of materials each year (and this is its cost of goods sold). Lipscomb also has $583,323 of inventory, $1,475,000 of accounts receivable, and $1,400,000 of accounts payable. Assume a 365 day year. What is Lipscomb's Receivables Period (in days)?

77.94 days

Libscomb Technologies' annual sales are $6,442,303 and all sales are made on credit, it purchases $3,502,576 of materials each year (and this is its cost of goods sold). Libscomb also has $586,493 of inventory, $1,475,000 of accounts receivable, and $1,400,000 of accounts payable. Assume a 365 day year. What is Libscomb's Receivables Period (in days)?

83.57

12.2 Lipscomb Technologies' annual sales are $5,830,127 and all sales are made on credit, it purchases $3,587,171 of materials each year (and this is its cost of goods sold). Lipscomb also has $500,998 of inventory, $548,292 of accounts receivable, and $469,136 of accounts payable. Assume a 365 day year. What is Lipscomb's Operating Cycle (in days)?

85.30 days

12.8 Mavericks Cosmetics buys $4,100,531 of the product (net of discounts) on terms of 6/10, net 60, and it currently pays on the 10th day and takes discounts. Mavericks plans to expand, and this will require additional financing. If Mavericks decides to forego discounts, what would the effective percentage cost of its trade credit be, based on a 365-day year?

856.83%

12.8 Mahrouq Technologies buys $16,115,771 of materials (net of discounts) on terms of 7/30, net 60, and it currently pays within 30 days and takes discounts. Mahrouq plans to expand, and this will require additional financing. If Mahrouq decides to forego discounts and thus to obtain additional credit from its suppliers, calculate the nominal cost of that credit.

91.57%

Libscomb Technologies' annual sales are $5,223,062 and all sales are made on credit, it purchases $3,575,756 of materials each year (and this is its cost of goods sold). Libscomb also has $576,797 of inventory, $542,091 of accounts receivable, and $488,029 of accounts payable. Assume a 365 day year. What is Libscomb's Operating Cycle (in days)?

96.76

Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $276 at the end of the next three years and then $1,533 per year for the three years after that. If the discount rate is 3.4% then what is the NPV?

9667.18

Which of the following changes, if of a sufficient magnitude, could turn a negative NPV project into a positive NPV project?

A decrease in the fixed costs

A corporation is contemplating an expansion project. The CFO plans to calculate the project's NPV by discounting the relevant cash flows (which include the initial up-front costs, the operating cash flows, and the terminal cash flows) at the corporation's cost of capital (WACC). Which of the following factors should the CFO include when estimating the relevant cash flows?

Any opportunity costs associated with the project.

A corporation is contemplating an expansion project. The CFO plans to calculate the project's NPV by discounting the relevant cash flows (which include the initial up-front costs, the operating cash flows, and the terminal cash flows) at the corporation's cost of capital (WACC). Which of the following factors should the CFO include when estimating the relevant cash flows? a)Any sunk costs associated with the project. b)Any interest expenses associated with the project. C)Any opportunity costs associated with the project. D)All past costs associated with the oringinal project.

Any opportunity costs associated with the project.

Identify which of these are the relevant cash flows when considering a capital budgeting project. A. test marketing costs B. fraction of CEO salary C. lost rent from retail facility D. remodeling expenses for new store E. increase in inventory F. expected salvage value of manufacturing equipment

C. lost rent from retail facility D. remodeling expenses for new store E. increase in inventory F. expected salvage value of manufacturing equipment

match the definition to the term: The financial decision

Find the right kind of debt for your firm and the right mix of debt and equity to fund your operations

11.5 quiz A new restaurant is ready to open for business. It is estimated that the food cost (variable cost) will be 40% of sales, while the fixed cost will be $441,559. The first year's sales estimates are $1,250,000. Calculate the firm's degree of operating leverage (DOL). Answer to 2 decimal places.

DOL = 2.43

capital budgeting plan Step 3

Decision making

What types of projects does the BNSF strategic studies team evaluate?

Discretionary

NPV assumes intermediate cash flows are reinvested at the cost of equity, while IRR assumes that they are reinvested at the cost of capital

False

True or False: It should not usually be clear whether we are describing independent or mutually exclusive projects in the following chapters because when we only describe one project then it can be assumed to be independent

False

True or False: Net present value (NPV) is a sophisticated capital budgeting technique; found by adding a project's initial investment from the present value of its cash inflows discounted at a rate equal to the firm's cost of capital.

False

The degree of operating leverage has which of the following characteristics?

The DOL relates the change in sales to the change in net operating income.

Which of the following statements is correct for a project with a negative NPV?

The cost of capital exceeds the IRR

Which of the following statements is correct? a) The degree of operating leverage (DOL) depends on a company's fixed costs, variable costs, and sales. The DOL formula assumes (1) that fixed costs are constant and (2) that variable costs are a constant proportion of sales. b)The degree of total leverage (DTL) is equal to the DOL plus the degree of financial leverage (DFL). c) Arithmetically, financial leverage and operating leverage offset one another so as to keep the degree of total leverage constant. Therefore, the formula shows that the greater the degree of financial leverage, the smaller the degree of operating leverage. d)For a given change in sales, the corresponding percentage change in net income could be more or less than the percentage change in operating income. e)The degree of total leverage (DTL) is equal to the DFL divided by the degree of operating leverage (DOL).

The degree of operating leverage (DOL) depends on a company's fixed costs, variable costs, and sales. The DOL formula assumes (1) that fixed costs are constant and (2) that variable costs are a constant proportion of sales.

11.4 quiz Which of the following statements is correct?

The degree of operating leverage (DOL) depends on a company's fixed costs, variable costs, and sales. The DOL formula assumes (1) that fixed costs are constant and (2) those variable costs are a constant proportion of sales.

The multiple IRR problem occurs when the signs of a project's cash flows change more than once.

True

True or False: The multiple IRR problem occurs when the signs of a project's cash flows change more than once

True

True or False: The multiple IRR problem occurs when the signs of a project's cash flows change more than once.

True

Jon Stevens, BNSF Vice President, and Controller describes the capital spending process primarily as

a means to ensure regulatory compliance a balancing act that requires careful evaluation of the costs and benefits of each project

If a 20% reduction in forecast sales would not extinguish a project's profitability, then sensitivity analysis would suggest:

deemphasizing that variable as a critical factor.

What types of projects does the BNSF strategic studies team evaluate?

discretionary

capital budgeting plan Step 5

follow up

According to the article, "Sunk cost fallacy: Throwing good money after bad," how can banks limit losses from bad loans?

increase bank executive turnover

Generally, increases in leverage result in______________ return and _____________________ risk.

increased; increased

Identify which of these are the relevant cash flows when considering a capital budgeting project.

lost rent from a retail facility remodeling expenses for new store increase in inventory expected salvage value of manufacturing equipment

The primary purpose of capital budgeting is to:

maximize the shareholders' wealth.

In theory, a firm should maintain financial leverage consistent with a capital structure that ____________

maximizes the owner's wealth

Capital rationing may be beneficial to a firm if it:

weeds out proposals with weaker or biased NPVs.