Fina 3313 TEST 3

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 9.98%?

24,386.39

The dividend decision

If you can't find investment that make your min. acceptable rate, return the cash to the owners of the business.

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 Investment decision

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

The "gold standard" of investment criteria refers to:

NPV

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

discounted cash flow sensitivity

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

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

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

103.67

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

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

The Financing Decision

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

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

True

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

True

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.

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

increase bank executive turnover

The primary purpose of capital budgeting is to:

maximize the shareholders' wealth.

Capital rationing may be beneficial to a firm if it:

weeds out proposals with weaker or biased NPVs

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

discretionary

Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $474 at the end of the next three years and then $1,456 per year for the three years after that. If the discount rate is 8.74% then what is the NPV?

-914.85

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.

What are advantages of payback period?

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

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

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

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

List Steps of the capital budgeting process.

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.

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

TRUE

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

The cost of capital exceeds the IRR

What is the net effect on a firm's working capital if a new project requires: $48,210 increase in inventory, $48,542 increase in accounts receivable, $35,000.00 increase in machinery, and a $46,067 increase in accounts payable? Round to nearest dollar amount.

50,685

Compute the payback period for a project that requires an initial outlay of $297,771 that is expected to generate $40,000 per year for 9 years.

7.44