Corporate Finance Final

Gateway Communications is considering a project with an initial fixed asset cost of $2.872 million which will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $300,000. The project will not directly produce any sales but will reduce operating costs by $714,000 a year. The tax rate is 35 percent. The project will require $52,000 of inventory which will be recouped when the project ends. What is the net present value at the required rate of return of 13.6 percent? $68,019.24 $101,414.14 $152,108.10 $70,475.57 $136,691.88

$136,691.88

A new molding machine is expected to produce operating cash flows of $68,000 a year for 6 years. At the beginning of the project, inventory will decrease by $14,700, accounts receivables will increase by $5,500, and accounts payable will increase by $3,200. All net working capital will be recovered at the end of the project. The initial cost of the molding machine is $279,000. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating a $51,600 aftertax cash inflow. What is the net present value of this project given a required return of 13 percent? $24,061.87 -$418.80 $28,336.01 $22,863.16 $7,925.54

$24,061.87

Winnebagel Corp. currently sells 28,200 motor homes per year at $42,300 each, and 11,280 luxury motor coaches per year at $79,900 each. The company wants to introduce a new portable camper to fill out its product line. It hopes to sell 19,740 of these campers per year at $11,280 each. An independent consultant has determined that if Winnebagel introduces the new campers, it should boost the sales of its existing motor homes by 4,700 units per year, and reduce the sales of its motor coaches by 1,222 units per year. What is the amount that should be used as the annual sales figure when evaluating this project? $297,613,400 $301,002,300 $314,141,800 $323,839,400 $327,289,500

$323,839,400

A project will produce an operating cash flow of $31,200 a year for 7 years. The initial fixed asset investment in the project will be $204,900. The net aftertax salvage value is estimated at $62,000 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 11 percent? -$22,627.54 -$28,016.66 $4,120.52 $9,070.26 $21,040.83

-$28,016.66

ALUM, Inc. uses high-tech equipment to produce specialized aluminum products for its customers. Each one of these machines costs $1,520,000 to purchase plus an additional $48,000 a year to operate. The machines have a five-year life after which they are worthless. What is the equivalent annual cost of one these machines if the required return is 15.5 percent? -$506,819.32 -$427,109.10 -$335,803.37 -$295,666.67 -$556,947.08

-$506,819.32

Country Breads uses specialized ovens to bake its bread. One oven costs $189,000 and lasts about 7 years before it needs to be replaced. The annual operating cost per oven is $23,800. What is the equivalent annual cost of an oven if the required rate of return is 11 percent? -$63,908.69 -$48,313.04 -$52,407.49 -$50,561.10 -$96,210.00

-$63,908.69

The internal rate of return is: -the discount rate that makes the net present value of a project equal to the initial cash outlay. -equivalent to the discount rate that makes the net present value equal to one. -tedious to compute without the use of either a financial calculator or a computer. -highly dependent upon the current interest rates offered in the marketplace. -a better methodology than net present value when dealing with unconventional cash flows.

-tedious to compute without the use of either a financial calculator or a computer

Which one of the following statements is correct? -Project analysis should only include the cash flows that affect the income statement. -A project can create a positive operating cash flow without affecting sales. -The depreciation tax shield creates a cash outflow for a project. -Interest expense should always be included as a cash outflow when analyzing a project. -The opportunity cost of a company-owned building that is going to be used in a new project should be included as a cash inflow to the project.

A project can create a positive operating cash flow without affecting sales.

Eads Industrial Systems Company (EISC) is trying to decide between two different conveyor belt systems. System A costs $538,000, has a 4-year life, and requires $133,000 in pretax annual operating costs. System B costs $630,000, has a five-year life, and requires $102,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have a zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. The tax rate is 34 percent and the discount rate is 16 percent. Which system should the firm choose and why? A; The net present value is -$655,664. A; The net present value is -$314,216. B; The net present value is $308,222. B: The net present value is -$990,696.

A; The net present value is -$655,664.

A project has a discounted payback period that is equal to the required payback period. Given this, which of the following statements must be true? I. The project must also be acceptable under the payback rule. II. The project must have a profitability index that is equal to or greater than 1.0. III. The project must have a zero net present value. IV. The project's internal rate of return must equal the required return.

I and II only

Which of the following characteristics relate to the cash break-even point for a given project? I. The project never pays back. II. The IRR equals the required rate of return. III. The NPV is negative and equal to the initial cash outlay. IV. The operating cash flow is equal to the depreciation expense.

I and III

All of the following are related to a proposed project. Which of these should be included in the cash flow at time zero? I. purchase of $1,400 of parts inventory needed to support the project II. loan of $125,000 used to finance the project III. depreciation tax shield of $1,100 IV. $6,500 of equipment needed to commence the project

I and IV only

Danielle's is a furniture store that is considering adding appliances to its offerings. Which of the following should be considered incremental cash flows of this project? I. utilizing the credit offered by a supplier to purchase the appliance inventory II. benefiting from increased furniture sales to appliance customers III. borrowing money from a bank to fund the appliance project IV. purchasing parts for inventory to handle any appliance repairs that might be necessary

I, II, and IV only

Which of the following statements are identified with financial break-even point? I. The present value of the cash inflows exactly offsets the initial cash outflow. II. The payback period is equal to the life of the project. III. The NPV is zero. IV. The discounted payback period equals the life of the project.

I, III, and IV

Which one of the following correctly applies to the average accounting rate of return? It can be compared to the return on assets ratio. It considers the time value of money. It measures net income as a percentage of the sales generated by a project. It is the best method of analyzing mutually exclusive projects from a financial point of view. It is the primary methodology used in analyzing independent projects.

It can be compared to the return on assets ratio.

Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero? (Sales - Costs) × (1 - D) × (1- T) (Sales - Costs) × (1 - T) NI + D EBIT + D EBIT - T

NI + D

Which one of the following statements related to payback and discounted payback is correct? -Payback is a better method of analysis than is discounted payback. -Discounted payback is used more frequently in business than is payback. -Discounted payback does not require a cutoff point like the payback method does. -Discounted payback is biased towards long-term projects while payback is biased towards short-term projects. -Payback is used more frequently even though discounted payback is a better method.

Payback is used more frequently even though discounted payback is a better method.

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and a net present value of $6,800. Project B has an expected payback period of 3.1 years with a net present value of $28,400. Which projects should be accepted based on the payback decision rule? Project A only Project B only Both A and B Neither A nor B Answer cannot be determined based on the information given.

Project A only

Three years ago, Knox Glass purchased a machine for a 3-year project. The machine is being depreciated straight-line to zero over a 5-year period. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (T represents the relevant tax rate) Sale price + (Sales price - Book value) × T Sale price + (Sales price - Book value) × (1 - T) Sale price + (Book value - Sale price) × T Sale price + (Book value - Sale price) × (1 - T) Sale price × (1 - T)

Sale price + (Book value - Sale price) × T

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 project is acceptable whenever the payback period exceeds three years. -The cash flow in year two is valued just as highly as the cash flow in year one. -The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted. -The cash flow in year three is ignored. -The project's cash flow in year three is discounted by a factor of (1 + R)3.

The cash flow in year two is valued just as highly as the cash flow in year one.

Dexter Smith & Co. is replacing a machine simply because it has worn out. The new machine will not affect either sales or operating costs and will not have any salvage value at the end of its 5-year life. The firm has a 34 percent tax rate, uses straight-line depreciation over an asset's life, and has a positive net income. Given this, which one of the following statements is correct? -As a project, the new machine has a net present value equal to minus one times the machine's purchase price. -The new machine will have a zero rate of return. -The new machine will generate positive operating cash flows, at least in the first few years of its life. -The new machine will create a cash outflow when the firm disposes of it at the end of its life. -The new machine creates erosion effects.

The new machine will generate positive operating cash flows, at least in the first few years of its life.

Douglass Interiors is considering two mutually exclusive projects and have determined that the crossover rate for these projects is 11.7 percent. Project A has an internal rate of return (IRR) of 15.3 percent and Project B has an IRR of 16.5 percent. Given this information, which one of the following statements is correct? -Project A should be accepted as its IRR is closer to the crossover point than is Project B's IRR. -Project B should be accepted as it has the higher IRR. -Both projects should be accepted as both of the project's IRRs exceed the crossover rate. -Neither project should be accepted since both of the project's IRRs exceed the crossover rate. -You cannot determine which project should be accepted given the information provided.

You cannot determine which project should be accepted given the information provided.

A project's average net income divided by its average book value is referred to as the project's average:

accounting return.

Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the: method of analysis used to make the decision. initial cash outflow. ability to recoup any investment in net working capital. accuracy of the projected cash flows. length of the project.

accuracy of the projected cash flows.

Which one of the following would make a project unacceptable? -cash inflow for net working capital at time zero -requiring fixed assets that would have no salvage value -an equivalent annual cost that exceeds that of an alternative project -lack of revenue generation -a depreciation tax shield that exceeds the value of the interest expense

an equivalent annual cost that exceeds that of an alternative project

Roger's Meat Market is considering two independent projects. The profitability index decision rule indicates that both projects should be accepted. This result most likely does which one of the following? -agrees with the decision that would also apply if the projects were mutually exclusive -bases the accept/reject decision on the same variables as the average accounting return -fails to provide useful information as the firm must reject at least one of the projects -assumes the firm has sufficient funds to undertake both projects -conflicts with the results of the net present value decision rule

assumes the firm has sufficient funds to undertake both projects

The net book value of equipment will: -decrease slower under straight-line depreciation than under MACRS. -remain constant over the life of the equipment. -vary in response to changes in the market value. -decrease at a constant rate when MACRS depreciation is used. -increase over the taxable life of an asset.

decrease slower under straight-line depreciation than under MACRS.

The internal rate of return is defined as the: -maximum rate of return a firm expects to earn on a project. -rate of return a project will generate if the project in financed solely with internal funds. -discount rate that equates the net cash inflows of a project to zero. - discount rate which causes the net present value of a project to equal zero. -discount rate that causes the profitability index for a project to equal zero.

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

Which one of the following methods of project analysis is defined as computing the value of a project based upon the present value of the project's anticipated cash flows? average accounting return expected earnings model internal rate of return discounted cash flow valuation constant dividend growth model

discounted cash flow valuation

The length of time a firm must wait to recoup, in present value terms, the money it has in invested in a project is referred to as the:

discounted payback period.

Which one of the following is an advantage of the average accounting return method of analysis? inclusion of time value of money considerations the use of a cutoff rate as a benchmark easy availability of information needed for the computation the use of pre-tax income in the computation use of real, versus nominal, average income

easy availability of information needed for the computation

Decreasing which one of the following will increase the acceptability of a project? equivalent annual cost accounts payable requirement sunk costs salvage value depreciation tax shield

equivalent annual cost

Which one of the following is defined as the sales level that corresponds to a zero NPV? accounting break-even leveraged break-even marginal break-even cash break-even financial break-even

financial break-even

There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to: have two net present value profiles. have operational ambiguity. have multiple rates of return create a mutually exclusive investment decision. produce multiple economies of scale.

have multiple rates of return

Scenario analysis is best suited to accomplishing which one of the following when analyzing a project? -determining how fixed costs affect NPV -estimating the residual value of fixed assets -identifying the potential range of reasonable outcomes -determining the minimal level of sales required to break-even on an accounting basis -determining the minimal level of sales required to break-even on a financial basis

identifying the potential range of reasonable outcomes

The top-down approach to computing the operating cash flow: applies only if a project increases sales. applies only to cost cutting projects. is equal to sales - costs - taxes + depreciation. is used solely to compute a bid price. ignores noncash expenses.

ignores noncash expenses.

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

incremental cash flows.

Which two methods of project analysis were the most widely used by CEO's as of 1999? net present value and payback internal rate of return and payback net present value and average accounting return internal rate of return and net present value payback and average accounting return

internal rate of return and net present value

Webster Iron Works started a new project last year. As it turns out, the project has been operating at its accounting break-even level of output and is now expected to continue at that level over its lifetime. Given this, you know that the project: -will never pay back. -has a zero net present value. -is operating at a higher level than if it were operating at its cash break-even level. -is operating at a higher level than if it were operating at its financial break-even level. -is lowering the total net income of the firm.

is operating at a higher level than if it were operating at its cash break-even level.

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

mutually exclusive.

Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods? profitability index internal rate of return payback net present value accounting rate of return

net present value

Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm? discounted payback internal rate of return profitability index payback NPV

net present value

The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following? salvage value wasted value sunk cost opportunity cost erosion

opportunity cost

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

profitability index

Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project? net present value payback internal rate of return average accounting return profitability index

profitability index

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? -providing both ketchup and mustard for its customer's use -repairing the roof of the hot dog stand because of water damage -selling fewer hot dogs because hamburgers were added to the menu -offering French fries but not onion rings -losing sales due to bad weather

selling fewer hot dogs because hamburgers were added to the menu

Applying the discounted payback decision rule to all projects may cause: -some positive net present value projects to be rejected. -the most liquid projects to be rejected in favor of the less liquid projects. -projects to be incorrectly accepted due to ignoring the time value of money. -a firm to become more long-term focused. -some projects to be accepted which would otherwise be rejected under the payback rule.

some positive net present value projects to be rejected.

Which one of the following best describes the concept of erosion? -expenses that have already been incurred and cannot be recovered -change in net working capital related to implementing a new project -the cash flows of a new project that come at the expense of a firm's existing cash flows -the alternative that is forfeited when a fixed asset is utilized by a project -the differences in a firm's cash flows with and without a particular project

the cash flows of a new project that come at the expense of a firm's existing cash flows

Which one of the following will be used in the computation of the best-case analysis of a proposed project? -minimal number of units that are expected to be produced and sold -the lowest expected salvage value that can be obtained for a project's fixed assets -the most anticipated sales price per unit -the lowest variable cost per unit that can reasonably be expected -the highest level of fixed costs that is actually anticipated

the lowest variable cost per unit that can reasonably be expected

The equivalent annual cost method is useful in determining: -which one of two machines to purchase if the machines are mutually exclusive, have differing lives, and are a one-time purchase. -the tax shield benefits of depreciation given the purchase of new assets for a project. -the operating cash flows of a cost-cutting project. -which one of two investments to accept when the investments have different required rates of return. -which one of two machines should be purchased when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.

which one of two machines should be purchased when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.