chpt 10

Trust Engineering Company is considering the purchase of a new machine to replace an existing, worn machine. The old machine was purchased five years ago at a cost of $20,000, and it is being depreciated on a straight line basis to a salvage value of zero over its 10-year life. The new machine, which costs $30,000, falls into the Modified Accelerated Cost Recovery System (MACRS) 5-year class, and it has an estimated life of five years. If the old machine is replaced with the new machine, the change in depreciation expense that will occur in Year 3 of the new machine's life will be _____. The MACRS rates for 5-year class are Year 1 - 20%, Year 2 - 32%, Year 3 - 19%, Year 4 - 12%, Year 5 - 11%, Year 6 - 6%.

$5,700

Triblaze Corp. is considering buying a new truck. The cost of the truck is $62,000 (the only initial investment outlay), and the cash savings the new truck is expected to generate during its life are $19,920, $22,800, and $31,280, respectively. Trailblaze's required rate of return is 10 percent. The net present value (NPV) of the truck is _____

-$1,546.81

Triblaze Corp. is considering buying a new truck. The cost of the truck is $62,000 (the only initial investment outlay), and the cash savings the new truck is expected to generate during its life are $19,920, $22,800, and $31,280, respectively. Trailblaze's required rate of return is 10 percent. The net present value (NPV) of the truck is _____.

-$1,546.81

Klott Company used scenario analysis to evaluate a capital budgeting project. The analysis generated a net present value (NPV) equal to $10,500 and a standard deviation (σ) equal to $12,083. The project's coefficient of variation (CVNPV) is _____.

1.15

Chovita Sports Company is evaluating a project that has lower-than-average risk. When evaluating projects that have different risks than its existing assets, Chovita normally adjusts its average required rate of return, which is 12 percent, by 2 percent. What required rate of return should Chovita use to compute the net present value (NPV) of the project it is currently evaluating

10%

If the risk-free rate is 6 percent, the return on an average stock is 10 percent, and the beta of a capital budgeting project is 1.50, the project's required rate of return from the project is _____.

12%

Ziker Golf Company is evaluating a capital budgeting project that has a higher risk than the average risk of its existing assets. When evaluating projects that are riskier than average, Ziker normally adjusts its required rate of return by 4 percent. Ziker requires a 12 percent return on average-risk projects. What required rate of return should Ziker use to compute the net present value (NPV) of the risky project it is currently evaluating?

16%

Tech Engineering Company is considering the purchase of a new machine to replace an existing one. The current market value of the old machine is $14,000 and its book value is $5,000. The new machine's cost is $30,000. If the firm's marginal tax rate is 40%, the initial investment outlay for the new machine is _____.

19,600

Topsider Inc. is evaluating whether to replace an existing leather-cutting machine with a new machine that has a five-year life. The old machine has current salvage value equal to $3,000; its salvage value in five years is expected to be zero. The net (after-tax) salvage value of the new machine in five years is expected to be $6,000. If the new machine is purchased, Topsider will have to invest $3,520 in its net working capital. Based on this information, what is the new machine's terminal cash?

9,520

Which of the following statements about the opportunity cost associated with a capital budgeting project is correct?

A project's opportunity cost is the return (cash flow) that will not be earned (generated) if funds are invested in a particular capital budgeting project.

Which of the following should be included in the computation of an expansion project's terminal cash flow?

Any change in net working capital that was recognized at the time the project was purchased

A sunk cost is a cash outlay that has already been incurred. But, it is a cost that can be recovered if a capital budgeting project is purchased. Consequently, these sunk costs are extremely important in capital budgeting analyses.

False

Because stockholders are very concerned with the "bottom-line" net income that the firm generates, capital budgeting decisions should be based on the accounting income a project generates.

False

Suppose a firm's senior management is careful to make decisions that contribute to the goal of wealth maximization. If our basic assumptions about the relationship between risk and return are valid, which of the following statements is correct?

If the beta coefficient of a capital budgeting project is greater than the firm's existing beta coefficient, the firm's required rate of return will increase if the project is purchased.

Hill Top Lumber Company is considering building a sawmill in the state of Washington because the company doesn't have such a facility to service its growing customer base located on the west coast. When evaluating the acceptability of the project, which of the following would be considered a relevant cash flow that should be included when determining the sawmill's initial investment outlay?

It will cost Hill Top $3 million to clear the land on which the sawmill will be built.

When evaluating capital budgeting projects, how do most firms incorporate risk in their decision-making analyses?

Most firms increase the required rate of return used in their capital budgeting analyses when evaluating projects with higher-than-average risks.

Which of the following statements about capital budgeting analyses is correct?

Only incremental cash flows, which are the cash flows that will change if a project is purchased, should be included in capital budgeting analyses.

Zinc Corp. is planning to purchase a new machine. The initial investment outlay is expected to be $40,000, and the annual supplemental operating cash flows that the machine is expected to generate during its three-year life are $11,000, $15,000, and $18,000, respectively. The company's required rate of return is 9 percent. Which of the following statements is correct about the machine's net present value (NPV) and the decision of Zinc Corp. should make?

Reject the project because NPV = -$3,384

Stonewood Manufacturing is evaluating whether to replace one of its existing machines with a new, more technologically advanced one. Which of the following statements concerning a replacement decision analysis is correct?

The net cash flow from the sale of old machine should be included as part of the new machine's initial investment outlay.

To expand sales, Sandine Corporation is evaluating whether to purchase a machine to manufacture a new product line. Which of the following statements is correct concerning an expansion analysis like the one Sandine faces?

The shipping and installation costs associated with purchasing the new machine are included in the computation of its initial investment outlay.

A major problem with Monte Carlo simulation analysis is that while the analysis provides insights into the riskiness of a project, it does not lead to a clear-cut accept/reject decision.

True

Which of the following statements is correct?

Undiversified stockholders, including the owners of small businesses, probably are more concerned about the corporate risk associated with a particular firm than are diversified stockholders.

A project's depreciation expense must be considered when evaluating its incremental operating cash flows because:

depreciation has an impact on the taxes paid by the firm, which is a cash flow.

A major difference between capital budgeting for domestic operations and foreign operations is that:

estimating cash flows generated from foreign operations is more complex due to fluctuating exchange rates.

If a capital budgeting project has a higher corporate risk than the average risk contained in the firm's portfolio of assets, it generally has a:

greater beta risk.

A firm is considering the purchase of an asset whose stand-alone risk is greater than the average risk of its existing portfolio of assets. In evaluating this asset, the decision maker should:

increase the required rate of return that is used to evaluate the asset to reflect its higher risk.

The incremental cash flows associated with a capital budgeting project that occur only at the start of a project's life are included in the computation of the project's _____.

initial investment outlay

When evaluating the cash flows associated with a capital budgeting project, the shipping and installation costs associated with the purchase of an asset are included in the computation of the:

initial investment outlay, because these expenses are part of the project's depreciable basis.

The process of sending cash from a foreign subsidiary back to the parent company is known as _____.

repatriation of earnings

Sensitivity analysis is a technique in which:

the values of key input variables are changed to observe the resulting changes in a project's net present value (NPV) and its internal rate of return (IRR).

Monte Carlo simulation:

uses the probability distributions of variables as inputs to estimate the project's net present value (NPV).