corp exam 2
A new project with a life of four years will increase sales by $140,000 and cash expenses by $95,000 annually. The project will cost $100,000 and will be depreciated using the Year 2018 bonus depreciation method. The company has a marginal tax rate of 21 percent. What is the value of the depreciation tax shield in Year 2?
$0
The accounting break-even production quantity for a project with a life of one year is 35,173 units. The fixed costs are $318,290 and the contribution margin is $13.27. What is the projected depreciation expense?
$148,456
A project is expected to create operating cash flows of $26,500 a year for four years. The fixed assets required for the project cost $62,000 and will be worthless at the end of the project. An additional $3,000 of net working capital will be required throughout the life of the project. What is the project's net present value if the required rate of return is 12 percent?
$17,396.31
A project has estimated sales of 2,600 units, at $15.40 per unit, variable costs per unit of $6.79, ± 3 percent; annual fixed costs of $17,500, ± 3 percent; and depreciation of $2,850 per year. The company bases its sensitivity analysis on the expected scenario. If a sensitivity analysis is conducted using a variable cost of $7, what will be the total annual variable costs?
$18,200
Brennan's Boats is considering a project which will require additional inventory of $128,000, will decrease accounts payable by $7,000, and will increase accounts receivable by $56,000. What is the initial net working capital requirement for this project?
$191,000
Sue purchased a house for $89,000, spent $56,000 upgrading it, and currently had it appraised at $212,900. The house is being rented to a family for $1,200 a month, the maintenance expenses average $200 a month, and the property taxes are $4,800 a year. If she sells the house she will incur $20,000 in expenses. She is considering converting the house into professional office space. What opportunity cost, if any, should she assign to this property if she has been renting it for the past two years?
$192,900
The initial cost of one customized machine is $675,000 with an annual operating cost of $14,800, and a life of 4 years. The machine will be worthless and replaced at the end of its life. What is the equivalent annual cost of this machine if the required rate of return is 14.5 percent and we ignore taxes?
$248,841.99
At a production level of 5,600 units, a project has total costs of $89,000 and a variable cost per unit of $11.20. What is the amount of the total fixed costs?
$26,280
The Quick-Start Company has the following pattern of potential cash flows for a new project. If the company has a discount rate of 16 percent, what is the Time 1 net present value?
$50,807,953
Jensen's has a total value of $548,000 and debt valued at $262,000. What is the weighted average cost of capital if the aftertax cost of debt is 7.2 percent and the cost of equity is 12.6 percent?
10.02 percent
Winston's has a beta of 1.08 and a cost of debt of 8 percent. The current risk-free rate is 3.2 percent and the market rate of return is 11.47 percent. What is the company's cost of equity capital?
12.13 percent
Hilltop Paving has a levered equity cost of capital of 14.92 percent. The debt-to-value ratio is .4, the assumed tax rate is 23 percent, and the pretax cost of debt is 7.2 percent. What is the unlevered cost of equity?
12.30 percent
A food cart costs $4,500 and is expected to return $1,750 a year for three years and then be worthless. What is the payback period for this cart?
2.57
Homer is considering a project with cash inflows of $950 a year for Years 1 to 4, respectively. The project has a required discount rate of 11 percent and an initial cost of $2,100. What is the discounted payback period?
2.68 years
A global conglomerate has a debt beta of zero. If the cost of equity is 12.23 percent, and the risk-free rate is 4.36 percent, what is the firm's pretax cost of debt?
4.36 percent
Quorum Company has a prospective 6-year project that requires initial fixed assets costing $962,000, annual fixed costs of $403,400, variable costs per unit of $123.60, a sales price per unit of $249, a discount rate of 14 percent, and a tax rate of 21 percent. What is the present value break-even point in units per year?
5,375
The APV method is least useful in which one of these situations?
A project based on a target debt-to-value ratio
The potential decision to abandon a project has option value because:
A project may be worth more dead than alive
The acronym APV:
Adjusted present value
In order to value a project which is not scale enhancing you typically need to:
Calculate the equity cost of capital using the risk-adjusted beta of another firm
Variable costs:
Change in direct relationship to the quantity of output produced
If you discount a project's expected future unlevered aftertax cash flows by the _____ and then subtract the initial investment you will calculate the:
Cost of capital for the unlevered firm; all-equity net present value
Sensitivity analysis is primarily designed to determine the:
Degree to which the net present value reacts to changes in a single variable
The flow-to-equity (FTE) approach in capital budgeting is defined as the:
Discounting of a project's levered cash flows to the equity holders at the required return on equity
Comparing the NPV profile of an investment project to that of a financing project demonstrates why the:
IRR decision rule for investment projects is the opposite of the rule for financing projects
Break-even:analysis
Provides a means of determining the minimal number of units that need to be sold to prevent a financial loss
The cost of equity for an all-equity firm is designated as:
R0
Which one of these is an example of erosion that should be included in project analysis?
The anticipated loss of current sales when a new product is launched.
Which one of these statements is correct?
The cost of equity for an all equity firm is less than the cost of equity for a levered firm
The internal rate of return for an investment project is best defined as the:
The discount rate that causes the net present value to equal zero
Flotation costs:
are amortized using the straight-line method over the life of the loan.
Fixed costs:
are constant over the short-run regardless of the quantity of output produced.
Changes in the net working capital:
can affect the cash flows of a project every year of the project's life.
In calculating NPV using the flow-to-equity approach the discount rate is the:
cost of equity for the levered firm.
If you want the most detailed information possible about the potential outcome of a critical project you should conduct:
decision tree analysis.
The sales level that results in a project's net present value exactly equaling zero is called the _____ break-even.
financial
The contribution margin:
has a major effect on the present value break-even point.
A financing project is acceptable if its internal rate of return is:
less than the discount rate
A situation in which accepting one investment prevents the acceptance of another investment is called the:
mutually exclusive investment decision.
A project has an initial cost of $10,600 and produces cash inflows of $3,700, $4,900, and $2,500 for Years 1 to 3, respectively. What is the discounted payback period if the required rate of return is 7.5 percent?
never
The term (RBB) represents the:
pretax interest payment.
You spent $500 last week fixing the transmission in your car. Now, the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the $500 you spent fixing the transmission is a(n) _____ cost.
sunk
Which one of the following should be excluded from the analysis of a project?
sunk costs
The WACC approach to valuation is not as useful as the APV approach in leveraged buyouts because:
the future reductions in debt are known at the time of the LBO.
The cost of equity should be lowest when the debt-to-equity ratio is:
zero
Jackson & Sons uses packing machines to prepare its products for shipping. One machine costs $397,500 and lasts 5 years before it needs replaced. The machine will be worthless after the 5 years. The annual aftertax operating cost per machine is $38,400. What is the equivalent annual cost of one machine if the required rate of return is 16 percent?
$159,800.23
Ernie's Electrical is evaluating a project which will increase annual sales by $50,000 and costs by $30,000. The project has an initial asset cost of $150,000 that will be depreciated straight-line to a zero book value over the 10-year life of the project. Ignore bonus depreciation. The applicable tax rate is 25 percent. What is the annual operating cash flow for this project?
$18,750
Southern Markets is considering a project with total sales of $17,500, total variable costs of $9,800, total fixed costs of $3,500, and estimated production of 400 units. The depreciation expense is $2,400 annually. What is the contribution margin per unit?
$19.25
A project costing $6,200 initially should produce cash inflows of $2,860 a year for three years. After the three years, the project will be shut down and will be sold at the end of Year 4 for an estimated net cash amount of $3,300. What is the net present value of this project if the required rate of return is 11.3 percent?
$2,903.19
The Wolf's Den is considering replacing the equipment it uses to produce tents. The equipment would cost $1.4 million and lower manufacturing costs by an estimated $215,000 a year. The equipment will be depreciated over 8 years using straight-line depreciation to a book value of zero. Ignore bonus depreciation. The required rate of return is 13 percent and the tax rate is 21 percent. The equipment will be worthless after 8 years. What is the annual operating cash flow from this proposed project?
$206,600
The accounting break-even production quantity for a project is 5,799 units. The fixed costs are $92,640, the depreciation is $36,210, and the sales price per unit is $48.29. What is the variable cost per unit?
$26.07
Graham and Harvey (2001) found that ____ were the two most popular capital budgeting methods.
IRR and NPV
The top-down approach to computing the operating cash flow:
Ignores all noncash items
Payback is frequently used to analyze independent projects because:
It is easy and quick to calculate
Bruno's is analyzing two machines to determine which one it should purchase. The company requires a rate of return of 14.6 percent and uses straight-line depreciation to a zero book value over a machine's life. Ignore bonus depreciation and taxes. Machine A has a cost of $318,000, annual operating costs of $8,700, and a life of 3 years. Machine B costs $247,000, has annual operating costs of $9,300, and a life of 2 years. Whichever machine is purchased will be replaced at the end of its useful life. Which machine should Bruno's purchase and why?
Machine A; because it will save the company about $13,406 a year
The salvage value of an asset creates an aftertax cash flow in an amount equal to the sales price:
Minus[tax rate x (sales price - book value)
Monte Carlo simulation is:
More complex than sensitivity or scenario analysis
The difference between the present value of an investment's future cash flows and its initial cost is the:
NPV
Project A is opening a bakery at 10 Center Street. Project B is opening a specialty coffee shop at the same address. Both projects have unconventional cash flows, that is, both projects have positive and negative cash flows that occur following the initial investment. When trying to decide which project to accept, given sufficient funding to accept either project, you should rely most heavily on the _____ method of analysis.
Net present value
A project has an initial cost of $2,250. The cash inflows are $0, $500, $900, and $700 for Years 1 to 4, respectively. What is the payback period?
Never
Flo's Flowers has a proposed project with an initial cost of $40,000 and cash flows of $8,500, $15,600, and $22,700 for Years 1 to 3, respectively. Based on the profitability index rule, should the project be accepted if the discount rate is 9.5 percent? Why or why not?
No; because the PI is .95
Which method(s) of project analysis is(are) best suited for use by a department manager who has no knowledge of time value of money but can estimate the cash flows of small projects with short lives fairly accurately?
Payback
An investment project has an initial cost of $260 and cash flows $75, $105, $100, and $50 for Years 1 to 4, respectively. The cost of capital is 12 percent. What is the discounted payback period?
never
If a firm is more concerned about the quick return of its initial investment than it is about the amount of value created, then the firm is most apt to evaluate a capital project using the _____ method of analysis.
payback
Interest rates or rates of return on investments that have been adjusted for the effects of inflation are called _____ rates.
real
The increase you realize in buying power as a result of owning a bond is referred to as the _____ rate of return.
realthe
An analysis of what happens to the estimate of net present value when only one input variable is changed is called _____ analysis.
sensitivity
which one of these is an example of erosion that should be included in project analysis?
the anticipated loss of current sales when a new project is launched
For a tax-paying firm, the net present value of a project will increase when:
the operating cash flows increase.
Which one of the following is most likely a variable cost?
machinist wages
Which one of the following statements is correct?
An increase in the initial fixed assets required by a project will increase the accounting profit break-even point.
Net working capital:
Is frequently affected by the additional sales generated by a new project
Which of the following is the best tool to evaluate a capital budget?
It depends of timing & budget constraints.
The flow-to-equity approach to capital budgeting involves all the following except:
computing the PV of the cash flows using the cost of equity for an all-equity firm.
The discounted payback method:
considers the time value of money.
A capital budgeting project is usually evaluated on its own merits. That is, capital budgeting decisions are treated separately from capital structure decisions. In reality, these decisions may be highly interwoven. This interweaving is most apt to result in:
firms accepting some negative NPV all-equity projects because changing the capital structure adds enough positive leverage tax shield value to create a positive NPV.
The discount rate that makes the net present value of an investment exactly equal to zero is called the:
internal rate of return.
The Meldrum Co. expects to sell 3,000 units, ± 15 percent, of a new product. The variable cost per unit is $8, ± 5 percent, and the annual fixed costs are $12,500, ± 5 percent. The annual depreciation expense is $4,000 and the sale price is $18 a unit, ± 2 percent. The project requires $24,000 of fixed assets which will be worthless when the project ends in six years. Also required is $6,500 of net working capital for the life of the project. The tax rate is 21 percent and the required rate of return is 12 percent. What is the net present value of the pessimistic scenario?
$10,146.18
Adept Co. is analyzing a proposed project with annual sales of 5,200 units, ± 6 percent; variable costs per unit of $11, ± 3 percent; fixed costs of $17,500 per year, ± 3 percent; and a sales price of $22 per unit, ± 2 percent. The annual depreciation expense is $4,200. What is the annual sales revenue under the optimistic case scenario?
$123,689
A project has an unlevered NPV of $1.5 million. To finance the project, debt is being issued with associated flotation costs of $60,000. The flotation costs can be amortized over the project's 5-year life. The debt of $10 million is being issued at the market interest rate of 10 percent paid annually, with principal repaid in a lump sum at the end of the fifth year. If the firm's tax rate is 21 percent, calculate the project's APV.
$2,245,618
Joshua Industries is considering a new project with revenue of $478,000 for the indefinite future. Cash costs are 68 percent of the revenue. The initial cost of the investment is $685,000. The tax rate is 21 percent and the unlevered cost of equity is 14.2 percent. The firm is financing $200,000 of the project cost with debt. What is the adjusted present value of the project?
$207,975
Banisters is valued at $8.6 million and has debt of $2.1 million outstanding. The unlevered firm beta is 1.72, and the tax rate is 21 percent. What is the levered equity beta?
2.16
TTC is planning to raise $3.25 million for three years at an interest rate of 7.35 percent to finance their expansion. The Alban County Board of Commissioners has just offered the firm the $3.25 million they need at 5.25 percent if the firm builds in Alban County, pays the interest annually, and repays the principal at the end of three years. What is the net present value of the loan to TTC if the firm's tax rate is 21 percent and it accepts the county's offer?
$271,405
Blue Water Boats is considering a new project with perpetual revenue of $435,000, cash costs of $310,000, and a tax rate of 21 percent. The firm plans to issue $250,000 of debt at an interest rate of 7.3 percent to help finance the initial project cost of $475,000. The levered discount rate is 16.7 percent. What is the net present value of this project?
$279,985
A project has these estimated values: sales quantity of 4,600 units ± 2 percent; variable cost per unit of $17, ± 3 percent; annual fixed costs of $46,900, ± 1 percent; annual depreciation of $17,300; and a sales price of $39 a unit, ± 10 percent. The company bases its sensitivity analysis on the expected scenario. What will be the operating cash flow for a sensitivity analysis based on a sales price of $35 a unit and a tax rate of 21 percent?
$31,994
Vargo's has a target debt-to-value ratio of .6. The pretax cost of debt is 8.4 percent, the tax rate is 21 percent, and the unlevered cost of equity 13.2 percent. A project the firm is considering has a cash flow to the levered equity holders of $48,700 and an initial unborrowed cost of $216,000. What is the NPV of the project?
$41,836
Angie's expects annual sales of 2,400 units, ± 3 percent, of a new product at a price of $59 a unit, ± 2 percent. The expected variable cost per unit is $27.20, ± 2 percent, annual fixed costs are $32,500, and depreciation is $4,400 per year. What is the total annual expense per unit under the pessimistic scenario? Ignore taxes.
$43.59
Kelly Industries is given the opportunity to raise $5 million in debt for four years through a local government subsidized program. While Kelly would normally be required to pay 12 percent on its debt issues, the Hampton County program sets the rate at 9 percent. What is the NPV of this subsidized loan? Ignore taxes.
$455,602
The Meldrum Co. expects to sell 3,000 units, ± 15 percent, of a new product. The variable cost per unit is $8, ± 5 percent; annual fixed costs are $12,500, ± 5 percent; annual depreciation is $4,000; and the sale price is $18 a unit, ± 2 percent. What is the amount of the fixed cost per unit under the pessimistic scenario?
$5.15
NDS Industries is evaluating a project with an initial investment at Time 0 of $640,000. The present value of the levered cash flows is $729,400 and the net present value of the project is $157,000. Using the flow-to-equity method of valuation determine the amount borrowed.
$67,600
Webster Corp. is planning to build a new shipping depot. The initial cost of the investment is $1.18 million. Efficiencies from the new depot are expected to reduce aftertax annual costs by $105,000 forever. The corporation has a total value of $62.4 million and has outstanding debt of $38.7 million. What is the NPV of the project if the firm has an aftertax cost of debt of 5.8 percent and a cost equity of 12.6 percent?
$72,581
Webster's latest project has an initial cost of $1.23 million and unlevered perpetual cash flows of $238,000. The firm has a debt-equity ratio of .42, a pretax cost of debt of 7.6 percent, a cost of equity of 13.3 percent, and a tax rate of 21 percent. What is the NPV of the project?
$906,056
A firm is reviewing a project with a labor cost of $18.90 per unit, raw materials cost of $21.63 a unit, and fixed costs of $8,000 a month. Sales are projected at 7,200 units total for the 3-year life of the project. What are the total variable costs per year?
$97,272
Wilson's Antiques is considering a project with an initial cost today of $10,000. The project has a life of 2 years with cash inflows of $6,500 a year. Should the firm decide to wait one year to commence this project, the initial cost will increase by 5 percent, and the cash inflows will increase to $7,500 a year. What is the value of the option to wait at a discount rate of 10 percent?
- $1,006.76
Brewster's is considering a project with a life of 5 years and an initial cost of $120,000. The discount rate for the project is 12 percent. The firm expects to sell 2,100 units a year at a net cash flow per unit of $20. The firm will have the option to abandon this project after three years at which time it could sell the project for $50,000. The firm is interested in knowing how the project will perform if the sales forecasts for Years 4 and 5 of the project are revised such that there is a 50 percent chance the sales will be either 1,400 or 2,500 units a year. What is the net present value of this project given these revised sales forecasts
- $28,745
Brewster's is considering a project with a life of 5 years, an initial cost of $120,000, and a discount rate of 12 percent. The firm expects to sell 2,100 units a year at a cash flow per unit of $20. The firm will have the option to abandon this project after three years at which time it could sell the project for $50,000. At what level of sales should the firm be willing to abandon this project at the end of the third year?
- 1,479 units
The beta of debt is commonly assumed to be:
0
Kelso's is valued at $5.8 million, has riskless debt of $2.3 million outstanding, and has an equity beta of 1.81. What is the asset beta if there are no taxes?
1.09
The Boat Company has a capital structure of 30 percent riskless debt and 70 percent equity. The assumed tax rate is 23 percent. If the asset beta is .9, what is the equity beta?
1.20
Alpha Company has riskless debt, a debt-equity ratio of .46, a tax rate of 21 percent, and an unlevered firm beta of 1.23. What is the equity beta?
1.68
Alabaster Incorporated wants to be levered at a debt-to-value ratio of .6. The cost of debt is 9 percent, the tax rate is 21 percent, and the cost of equity for an all-equity firm is 12 percent. What will be the firm's cost of equity?
15.56
Beau Markets has a beta of 1.12, a cost of debt of 8.6 percent, and a debt-to-value ratio of .6. The current risk-free rate is 3.22 percent and the market rate of return is 14.47 percent. What is the company's cost of equity capital?
15.82 percent
Jelco has a target debt-to-value ratio of .55. The pretax cost of debt is 8.6 percent, the assumed tax rate is 24 percent, and the unlevered cost of equity 13.4 percent. What is the target cost of equity?
17.86 percent
Assume a project with a life of one year has projected depreciation of $720, fixed costs of $6,000, and total sales of $11,760 at a sales quantity of 300 units. The variable cost per unit is $17.40. What is the accounting break-even level of production?
309 units
BT Corporation has decided to build a new facility for its R&D department. The cost of the facility is estimated at $125 million. The firm plans to finance this project using its traditional debt-equity ratio of .65. The issue cost of equity is 6.1 percent and the issue cost of debt is 1.8 percent. What is the amount of the total flotation cost
5,507,576
A firm currently has debt outstanding with a coupon rate of 7 percent. The firm is obtaining subsidized financing for a new project at a rate of 5.5 percent. The current market rate is 6.8 percent and the firm's tax rate is 21 percent. What discount rate should be used to compute the NPV of the loan?
6.8%
A project requires an initial fixed asset investment of $148,000, has annual fixed costs of $39,800, a contribution margin of $14.62, a tax rate of 21 percent, a discount rate of 15 percent, and straight-line depreciation over the project's 3-year life. The assets will be worthless at the end of the project. What is the present value break-even point in units per year?
7,438
When the debt-equity ratio changes over time, the best method(s) to use when evaluating a project is(are):
APV
Which method(s) is(are) most applicable if a project's debt level is known over the life of the project?
APV
To calculate the adjusted present value, you should:
Add the additional effects of debt to the all-equity project value
The weighted average cost of capital is determined by _____ the weighted average cost of equity.
Adding the weighted average aftertax cost of debt to
Utilizing a decision tree, the NPV used to make the decision to commence the testing for a project is dependent on:
All the project's cash flows and probabilities over the project's entire life
Which of these methods discount levered cash flows?
FTE
The point where a project produces a rate of return equal to the required return is known as the:
Financial break-even point
The approach that further attempts to model real world uncertainty by analyzing projects the way one might analyze gambling strategies is called:
Monte Carlo simulation.
The sales level that results in a project's net income exactly equaling zero is called the _____ break-even.
accounting
Including the option to expand in your project analysis will tend to:
increase the net present value of a project.
Theoretically, the NPV is the most appropriate method to determine the acceptability of a project. A false sense of security can overcome the decision-maker when the procedure is applied properly but the positive NPV results are accepted blindly. Sensitivity and scenario analysis aid in the process by:
providing information on a number of potential outcomes.
Stage 2 of a decision tree shows that if a project is successful, the payoff will be $53,000 with a 2/3 chance of occurrence. There is also the 1/3 chance of a −$24,000 payoff. The cost of getting to Stage 2 (1 year out) is $24,000. The cost of capital is 15 percent. What is the NPV of the project at Stage 1?
−$231.88
The pretax salvage value of an asset is equal to the:
market value minus the book value.
Brewster's is considering a project with a life of 5 years and an initial cost of $120,000. The discount rate for the project is 12 percent. The firm expects to sell 2,100 units a year at a net cash flow per unit of $20. The firm will have the option to abandon this project after three years at which time it could sell the project for $50,000. The firm is interested in knowing how the project will perform if the sales forecasts for Years 4 and 5 of the project are revised such that there is a 50 percent chance the sales will be either 1,400 or 2,500 units a year. What is the net present value of this project given these revised sales forecasts?
$28,745
Matty's Place is considering the installation of a new computer system that will cut annual operating costs by $12,000. The system will cost $42,000 to purchase and install. This system is expected to have a life of 5 years and will be depreciated to zero using straight-line depreciation. Ignore bonus depreciation. What is the amount of the earnings before interest and taxes for each year of this project if the tax rate is 21 percent.
$3,600
Lottie's Boutique needs to maintain 15 percent of its sales in net working capital. The firm is considering a 3-year project which will increase sales from their current level of $110,000 to $125,000 the first year and to $135,000 a year for the following two years. When analyzing the project, what amount should be included for net working capital for the last year if the net working capital returns to its original level at that time?
$3,750
A proposed 12-month project has fixed costs of $3,600, depreciation expense of $1,500, and a sales quantity of 1,300 units. What is the contribution margin if the projected level of sales is the accounting break-even point?
$3.92
A project costing $218,000 has equal annual cash inflows over its 7-year life. If the discounted payback period is seven years and the discount rate is zero percent, what is the amount of the cash flow in each of the seven years?
$31,142.86 per year for each of the seven years
The Boat Works currently produces boat sails and is considering expanding its operations to include awnings. The expansion would require the use of land the firm purchased three years ago at a cost of $197,000 that is currently valued at $209,500. The expansion could use some equipment that is currently sitting idle if $7,500 of modifications were made to it. The equipment originally cost $387,500 five years ago, has a current book value of $132,700, and a current market value of $139,000. Other capital purchases costing $520,000 will also be required. What is the value of the opportunity costs that should be included in the initial cash outflow for the expansion project?
$348,500
Kurt's Cabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital. The project is expected to produce annual sales of $110,000 with associated costs of $70,000. The project has a life of 4 years. The company ignores bonus depreciation and instead uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 21 percent. What is the annual operating cash flow for this project?
$35,800
A project has a projected sales price of $99 a unit, variable costs per unit of $58, annual fixed costs of $238,000, and annual depreciation of $139,000. The tax rate is 22 percent. What is the contribution margin for an analysis using sales units of 12,800?
$41.00
The Down Towner is considering a project with a life of 4 years that will require $164,800 for fixed assets and $42,400 for net working capital. The fixed assets will be depreciated using the Year 2018 bonus depreciation method. At the end of the project, the fixed assets can be sold for $37,500 cash and the net working capital will return to its original level. The project is expected to generate annual sales of $195,000 and costs of $117,500. The tax rate is 24 percent and the required rate of return is 13 percent. What is the project's net present value?
$46,482.43
A project with a life of one year has an accounting break-even point of 2,962 units. The fixed costs are $46,308 and the depreciation expense is $22,147. The projected variable cost per unit is $23.10. What is the projected sales price?
$46.21
For this year, Jessica's has sales of $439,000, depreciation of $32,000, and net working capital of $56,000. The firm has a tax rate of 23 percent and a profit margin of 6 percent. The firm has no interest expense. What is the amount of the operating cash flow?
$58,340
You plan to bid on a project with a life of 5 years that will require $68,000 of fixed assets. These assets will be depreciated straight-line to zero over the project's life. Ignore bonus depreciation. The relevant discount rate is 12.5 percent, the tax rate is 21 percent, there is no interest expense, net working capital is unaffected, and there is no salvage value. What is the minimal required amount of annual sales revenue given annual cash costs of $47,900?
$68,459.58
Assume a project will increase inventory by $61,000, accounts payable by $28,000, and accounts receivable by $36,000. What is the initial net working capital requirement for this project?
$69,000
A project will produce an operating cash flow of $7,300 a year for three years. The initial investment for fixed assets will be $11,600, which will be depreciated straight-line to zero over the asset's 4-year life. Ignore bonus depreciation. The project will require an initial $500 in net working capital plus an additional $500 every year with all net working capital levels restored to their original levels when the project ends. The fixed assets can be sold for an estimated $2,500 at the end of the project, the combined tax rate is 23 percent, and the required rate of return is 12 percent. What is the net present value of the project?
$7,500.95
A project with a life of one year has earnings before interest and taxes of $5,750, fixed costs of $50,000, a selling price of $13 a unit, and a sales quantity of 11,500 units. Depreciation is $7,500. What is the variable cost per unit?
$7.50
A project has a contribution margin of $2.16 per unit. If the sales price per unit is $11 and the fixed costs are $24,700, what is the amount of total costs at a producti level of 6,000 units? Ignore depreciation.
$77,740
Northern Enterprises just purchased $1,900 of fixed assets that are classified as 3-year MACRS property. The MACRS rates are 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent for Years 1 to 4, respectively. What is the amount of the depreciation expense for Year 2? Ignore bonus depreciation.
$844.36
Stu is working on a bid for a contract. Thus far, he has determined that he will need $218,000 for fixed assets and another $41,000 for net working capital at Time 0. He has also determined that he can recover $79,900 aftertax for the combined fixed assets and net working capital at the end of the 3-year project. What operating cash flow will be required each year for the project to return 14 percent in nominal terms?
$88,330.01
Jamestown Ltd. currently produces boat sails and is considering expanding its operations to include awnings. The expansion would require the use of land the firm purchased three years ago at a cost of $142,000 that is currently valued at $137,500. The expansion could use some equipment that is currently sitting idle if $6,700 of modifications were made to it. The equipment originally cost $139,500 six years ago, has a current book value of $24,700, and a current market value of $39,000. Other capital purchases costing $780,000 will also be required. What is the amount of the initial cash outflow for this expansion project?
$963,200
A new 5-year project has expected sales of 3,400 units, ± 8 percent; variable costs per unit of $22, ± 2%; annual fixed costs of $47,500, ± 2 percent; annual depreciation of $33,000; and a sale price of $45 a unit, ± 3 percent. The project initially requires $165,000 of fixed assets and $42,000 of net working capital. At the end of the project, the net working capital will be recouped and the fixed assets will produce an aftertax cash inflow of $35,000. The tax rate is 21 percent and the discount rate is 14 percent. What is the net present value of the optimistic scenario?
-$22,584.66
Lew's Market invested in a project that returned 14.83 percent during a period when inflation averaged 2.69 percent. What real rate of return did the firm earn on its project?
11.82
An investment cost $10,000 with expected cash flows of $3,000 a year for 5 years. At what discount rate will the project's IRR equal its discount rate?
15.24 percent
Blue Bird Café is considering a project with an initial cost of $46,800, and cash flows of $8,500, $25,000, $19,000, and −$4,500 for Years 1 to 4, respectively. How many internal rates of return do you expect this project to have?
2
An investment has an initial cash outflow of $210,000 for fixed assets that will be depreciated straight-line to zero over 4 years, which is the life of the project. The sales price is set at $19.95 a unit, the annual fixed costs are $237,000, and the variable cost per unit is $8.87. The tax rate is 22 percent and the discount rate is 11 percent. At what sales quantity per year will the investment break even on a financial basis?
27,886 units
You are considering a project with an initial cost of $4,300. What is the payback period for this project if the cash inflows are $550, $970, $2,600, and $500 a year for Years 1 to 4, respectively?
3.36 years
An investment with an initial cost of $15,000 produces cash flows of $5,000 annually for 5 years. At a discount rate of 10 percent, what is the discounted payback period?
3.75
Consider an investment with an initial cost of $20,000 that expected to last for 5 years. The expected cash flows in Years 1 and 2 are $5,000 each, in Years 3 and 4 are $5,500 each, and the Year 5 cash flow is $1,000. Assume each annual cash flow is spread evenly over its respective year. What is the payback period?
3.82 years
Tech Enterprises is considering a new project that will require $325,000 for fixed assets, $160,000 for inventory, and $35,000 for accounts receivable. Short-term debt is expected to increase by $100,000. The project has a life of 5 years. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. Ignore bonus depreciation. At the end of the project, the fixed assets can be sold for 25 percent of their original cost and the net working capital will return to its original level. The project is expected to generate annual sales of $554,000 with costs of $430,000. The tax rate is 21 percent and the required rate of return is 15 percent. What is the net present value of this project?
33,278.35
All else constant, the accounting break-even level of sales will decrease when the:
Depreciation expenses decrease
Winslow Motors purchased $225,000 of MACRS 5-year property. The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. The tax rate is 21 percent. If the firm sells the asset after four years for $10,000, what will be the aftertax cash flow from the sale if the firm applies bonus depreciation?
7,900.00
What is the net present value of a project that has an initial cash outflow of $7,670 and cash inflows of $1,280 in Year 1, $6,980 in Year 3, and $2,750 in Year 4? The discount rate is 12.5 percent.
86.87
Kurt's Interiors is considering a project with a sales price of $11, variable cost per unit of $8.50, and annual fixed costs of $134,500. The tax rate is 23 percent and the discount rate is 14 percent. The project requires $224,000 of fixed assets that will be worthless at the end of the 4-year project. What is the present value break-even point in units per year if the firm uses straight line depreciation?
87,046
Bernstein's proposed project has an initial cost of $128,600 and cash flows of $64,500, $98,300, and −$15,500 for Years 1 to 3 respectively. If all negative cash flows are moved to Time 0 at a discount rate of 10 percent, what is the modified internal rate of return?
9.82 percent
Marguerite is reviewing a project with projected sales of 1,400 units a year, a cash flow of $39 a unit and project life of 3 years. The initial cost of the project is $94,000 and the discount rate is 14 percent. She has the option to abandon the project after one year at which time she feels she could sell the project for $63,000. At what quantity of annual sales should she be willing to abandon the project after the first year?
981 units
For a profitable firm, an increase in which one of the following will increase the operating cash flow?
Depreciation
The length of time required for a project's discounted cash flows to equal the initial cost of the project is called the:
Discounted payback period
To ascertain whether the inaccuracy of the variable cost estimate for a project will have much effect on the final outcome of the project, you should probably conduct _____ analysis.
Sensitivity
An analysis of what happens to the estimate of a project's net present value when you examine a vast number of different likely economic situations is called _____ analysis
Simulation
You are considering an investment project with an internal rate of return of 8.7 percent, a net present value of $393, and a payback period of 2.44 years. Which one of the following is correct given this information?
The discount rate used in computing the net present value was less than 8.7 percent.
The internal rate of return for a project will increase if:
The initial cost of the project can be reduced
Which one of the following statements is correct when a project is operating at its accounting profit break-even point?
The project is just recovering the cost of the initial investment.
How should a profitability index of zero be interpreted?
The project's cash flows subsequent to the initial cash flow have a present value of zero.
Management has decided to accept a new project but has yet to decide when the project should commence. Which type of analysis would be most helpful at this time?
Timing option analysis
The net working capital of a firm will decrease if there is:
a decrease in accounts receivable.
Sensitivity analysis is conducted by:
changing the value of a single variable and computing the resulting change in the project's NPV.
The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called the:
depreciation tax shield.
One purpose of identifying all the incremental cash flows related to a proposed project is to:
eliminate any cost which has previously been incurred so that it can be omitted from the analysis of the project.
Using the internal rate of return method, a conventional investment project should be accepted if the internal rate of return is:
equal to or greater than the discount rate.
If Lew's Steel Forms purchases $618,000 of new equipment, they can lower annual operating costs by $265,000. The equipment will be depreciated straight-line to a zero book value over its 3-year life. Ignore bonus depreciation. At the end of the three years, the equipment will be sold for an estimated $60,000. The equipment will require the company to hold an extra $23,000 of inventory over the 3-year period. What is the NPV if the discount rate is 14 percent and the tax rate is 21 percent?
−$7,014.54
