FIN 5243 - HW 5

When choosing between mutually exclusive projects, what is the best method to use?

The highest NPV is always the best option.

All of the following are useful for understanding Profitability Index, except:

The initial investment is included when calculating the present value of the future cash flows.

All of the following are disadvantages of the Payback Period, except:

The method incorporates the time value of money.

Net present value:

is the best method of analyzing mutually exclusive projects.

The balance sheet for the Capella Corporation is as follows: Assets Liabilities and Shareholders' Equity Current assets:$300 Current liabilities:$110 Net fixed assets 1,200 Long-term debt 500 Shareholders' equity 890 Total assets$1,500 Total liabilities & shareholders' equity$1,500 What is the Net Working Capital for Capella Corporation?

$190

Simpson Corporation expects to sell the following number of units of their newest product: Year Unit Sales 1 8,000 2 9,000 3 12,000 4 15,000 The revenue per unit is $180. NWC starts out at $50,000, then rises to 15% of sales. What is the change in cash flow for the NWC balance at the end of year 2?

$27,000

Poplar products is evaluating a piece of machinery. The cost of the machinery is $1,700,000. The machinery will be depreciated over five years. At the end of the project, the equipment will be worth 25% of its original value. The tax rate is 35%. What is the after-tax proceeds at the end of the project?

$276,250

Pet Supply purchased $62,800 of fixed assets two years ago. The company no longer needs these assets so it is going to sell them today for $29,500. The assets are classified as five-year property for MACRS. The MACRS rates are .2, .32, .192, .1152, .1152, .0576, for Years 1 to 6, respectively. What is the net cash flow from this sale if the firm's tax rate is 23 percent and no bonus depreciation is taken?

$29,648.12

Phantom Corporation purchased equipment for $50,000, four years ago. The accumulated depreciation to date is $41,360. If they were able to sell the equipment today for $20,000, what would be the amount of tax due? Assume the company is in the 34% tax bracket.

$3,862

Using the method of your choice, calculate the Net Present Value of the following cash flows.Assume that the required return on this project is 15% Project AI nitial Cost-$150 Year 1$175 Year 2$100

$78

Based upon the following data: calculate the Profitability Index. Cost = $325 Present value of future cash flows = $350

1.08

Based upon the following data: calculate the Payback Period. Project A Initial Cost-$50,000 Year 1$20,000 Year 2$15,000 Year 3$20,000

2.75 years

Using the discounting approach, calculate the MIRR of the following cash flows: Assume that the required return on this project is 15% Project A Initial Cost-$50 Year 1$175 Year 2-$115

27.74%

What are non-conventional cash flows?

A combination of cash outflows and inflows.

What is the first step in the Net Present Value (NPV) process?

Estimate the future cash flows.

All of the following are commonly cited reasons for using the Internal Rate of Return, except:

Multiple IRR's allow the company to choose the best one when evaluating projects.

According the video, one of the biggest challenges for the Net Present Value method is:

Identifying the appropriate discount rate to use.

Based upon the following data, which of the following mutually exclusive projects should you choose if your required return is 10%? Year Investment A Investment B 0 −$150 −$150 1 80 40 2 40 50 3 40 60 4 30 55

Investment B with an NPV of $10.33

All of the following are advantages of the Profitability Index, except:

It is useful for comparing mutually exclusive investments.

Which one of the following should not be included in the analysis of a new product?

Money already spent for research and development of the new product

The combination approach for calculating the Modified Internal Rate of Return (MIRR) differs because:

Negative cash flows are discounted back and positive cash flows are compounded forward.

Salazar's Salads is considering two projects. Project X consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project Z would instead 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?

Net present value

When considering Net Working Capital, a project will generally need all of the following, except:

Only long-term assets to get the project started.

Two mutually exclusive projects have an initial cost of $47,500 each. Project A produces cash inflows of $25,300, $37,100, and $22,000 for Years 1 through 3, respectively. Project B produces cash inflows of $43,600, $19,800 and $10,400 for Years 1 through 3, respectively. The required rate of return is 14.7 percent for Project A and 14.9 percent for Project B. Which project(s) should be accepted and why?

Project A, because it has the larger NPV.

Which one of the following types of costs was incurred in the past and cannot be recouped?

Sunk

What does mutually exclusive mean?

Taking one project means that we cannot take the other.

What does the Modified Internal Rate of Return (MIRR) assume?

The MIRR assumes that cash flows will be reinvested at the cost of capital.

The Discounted Payback Period Rule states that a company will accept a project if:

The calculated payback is less than a pre-specified number of years.

The Payback Period Rule states that a company will accept a project if:

The calculated payback is less than a pre-specified number of years.

The Internal Rate of Return (IRR) represents which of the following:

The discount rate that makes the net present value equal to zero.

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:

accepted because the profitability index is greater than 1.

The depreciation tax shield is best defined as the:

amount of tax that is saved because of the depreciation expense.

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

incremental cash flows.

Net working capital represents current assets plus current liabilities.

false

Since depreciation is a noncash deduction, it does not have cash flow consequences.

false

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 multiple rates of return.

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

profitability index.

If a project has a net present value equal to zero, then:

the project earns a return exactly equal to the discount rate?