FIN300

A project has a life of 10 years and a payback period of 10 years. Is the project NPV positive or negative?

Negative

A house painting business had revenues of $16,000 and expenses of $9,000 last summer. There were no depreciation expenses. However, the business reported the following changes in working capital: Accounts receivable. $1,200 $4,500 Accounts payable 700 300 Calculate net cash flow for the business for this period.

Net cash flow. $3,300

A firm had after-tax income last year of $1.2 million. Its depreciation expenses were $ 0.4 million, and its total cash flow was $1.2 million. What happened to net working capital during the year? (Enter your answer in millions rounded to 1 decimal place.)

Net working capital 0.4. million

The following are the cash flows of two projects: Year. Project A. Project B 0. $(200) $(200) 1 80 100 2 80 100 3 80 100 4 80 Is the project with the higher IRR the better project?

No

When reviewing a graph of data from sensitivity analysis, the ____________ the line, the ____________ the sensitivity of the estimated Net Present Value.

Steeper, greater

What does mutually exclusive mean?

Taking one project means that we cannot take the other.

The ABC Corporation has the following information. How much is the Operating Cash Flow? ABC Corporation Earnings before interest & taxes. $1,588 Depreciation 130 Beginning net fixed assets 1,650 Net new equity raised 450 Taxes 424

$1,294

Smith Corporation has variable costs equal to $5.10 per unit, fixed costs of $11,000, and total output equal to 240 units. What is the total cost?

$12,224

Ranger Corporation is currently selling widgets for $40 at a cost of $20 per unit. Fixed costs are currently $500 and the current production is 100 widgets. What is the Operating Cash Flow at this output level?

$2,000

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

N Corp has a variable cost per unit of $1.20, and the lease payment on the production facility runs $4,200 per month. N Corp sells the units at $4.60 and has depreciation equal to $225. What is the amount of units that N Corp needs in order to break-even?

1,301

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

1.08

Ranger Corporation is currently selling widgets for $40 at a cost of $20 per unit. Fixed costs are currently $500 and the current production is 100 widgets. What is the Degree of Operating Leverage at this output level?

1.25

Quick Computing currently sells 10 million computer chips each year at a price of $20 per chip. It is about to introduce a new chip, and it forecasts annual sales of 12 million of these improved chips at a price of $25 each. However, demand for the old chip will decrease, and sales of the old chip are expected to fall to 3 million per year. The old chips cost $6 each to manufacture, and the new ones will cost $8 each. What is the proper cash flow to use to evaluate the present value of the introduction of the new chip? (Enter your answer in millions.)

Cash Flow. $ 106. million

Gluon Inc. is considering the purchase of a new high pressure glueball. It can purchase the glueball for $120,000 and sell its old low-pressure glueball, which is fully depreciated, for $20,000. The new equipment has a 10-year useful life and will save $28,000 a year in expenses. The opportunity cost of capital is 12%, and the firm's tax rate is 40%. What is the equivalent annual savings from the purchase if Gluon uses straight-line depreciation? Assume the new machine will have no salvage value. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Equivalent annual savings $361.90

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

Estimate the future cash flows.

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

False

The Accounting Break-Even is the sales level that results in the same project net income as the prior year.

False

The higher the degree of operating leverage, the lower the potential danger from forecasting risk.

False

Tubby Toys estimates that its new line of rubber ducks will generate sales of $7 million, operating costs of $4 million, and a depreciation expense of $1 million. If the tax rate is 35%, what is the firm's operating cash flow? (Enter your answer in millions rounded to 1 decimal place.)

Firm's operating cash flow. $2.3 million

_____________ are sunk costs because the company will have to pay the cost no matter production or other variables in operations.

Fixed Costs

The owner of a bicycle repair shop forecasts revenues of $160,000 a year. Variable costs will be $50,000, and rental costs for the shop are $30,000 a year. Depreciation on the repair tools will be $10,000. Prepare an income statement for the shop based on these estimates. The tax rate is 35%.

INCOME STATEMENT Revenue. $160,000 Rental costs. 30,000 Variable costs. 50,000 Depreciation. 10,000 Pretax profit. 70,000 axes 24,500 Net income $45,500

Laurel's Lawn Care, Ltd., has a new mower line that can generate revenues of $120,000 per year. Direct production costs are $40,000, and the fixed costs of maintaining the lawn mower factory are $15,000 a year. The factory originally cost $1 million and is being depreciated for tax purposes over 25 years using straight-line depreciation. Calculate the operating cash flows of the project if the firm's tax bracket is 35%. (Enter your answer in dollars not in millions.)

Operating cash flows $56,250

Based upon the following graph, which variable should Simmons Corporation be most concerned about?

Price

What is the profitability index of a project that costs $10,000 and provides cash flows of $3,000 in years 1 and 2 and $5,000 in years 3 and 4? The discount rate is 9%. (Do not round intermediate calculations. Round your answer to 4 decimal places.)

Profitability index. 0.2680

The following are the cash flows of two projects: Year. Project A. Project B 0. $(200) $(200) 1 80 100 2 80 100 3 80 100 4 80 What is the payback period of each project? (Round your answers to 1 decimal place.)

Project Payback Period A 2.5 B 2

The following are the cash flows of two projects: Year. Project A. Project B 0. $(200) $(200) 1 80 100 2 80 100 3 80 100 4 80 If the opportunity cost of capital is 11%, what is the profitability index for each project? (Do not round intermediate calculations. Round your answers to 4 decimal places.)

Project Profitability Index A $23.85 B $24.58

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.

A corporation donates a valuable painting from its private collection to an art museum. Which of the following are incremental cash flows associated with the donation? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. Any boxes left with a question mark will be automatically graded as incorrect.)

The current market value of the painting The reduction in taxes due to its declared tax deduction

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

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

What is the first step when calculating the crossover rate?

To calculate the cash flow differences between each project.

If a substantial percentage of the scenarios look bad, the degree of forecasting risk is high and further investigation is in order.

True

Marginal, or incremental revenue is the change in revenue that occurs when ther is a small change in output.

True

An auto plant that costs $100 million to build can produce a line of flexfuel cars that will produce cash flows with a present value of $140 million if the line is successful but only $50 million if it is unsuccessful. You believe that the probability of success is only about 50%. You will learn whether the line is successful immediately after building the plant. a-1. Calculate the expected NPV. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answer in millions.) a-2. Would you build the plant? Suppose that the plant can be sold for $95 million to another automaker if the auto line is not successful. b-1. Calculate the expected NPV. (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Enter your answer in millions rounded to 1 decimal place.) b-2. Would you build the plant?

a-1. Expected NPV. $(5). million a-2. No b-1. Expected NPV. $17.5 million b-2. Yes

A project currently generates sales of $10 million, variable costs equal 50% of sales, and fixed costs are $2 million. The firm's tax rate is 35%. Assume all sales and expenses are cash items. a. What are the effects on cash flow, if sales increase from $10 million to $11 million? (Input the amount as positive value. Enter your answer in dollars not in millions.) b. What are the effects on cash flow, if variable costs increase to 65% of sales? (Input the amount as positive value. Enter your answer in dollars not in millions.)

a. Cash flow. increases by. $325,000 b. Cash flow. decreases by $975,000

State whether the following statements are true or false. a. Approval of the capital budget allows the manager to go ahead with any project included in the budget. b. Project authorizations are mostly developed "bottom-up." Strategic planning is a "top-down" process. c. Project sponsors are likely to be overoptimistic. d.The problem of overoptimism in cash-flow forecasts can always be solved by setting a higher discount rate.

a. False b. True c. True d. False

In a slow year, Deutsche Burgers will produce 2 million hamburgers at a total cost of $3.5 million. In a good year, it can produce 4 million hamburgers at a total cost of $4.5 million. a. What are the fixed costs of hamburger production? (Do not round intermediate calculations. Enter your answer in millions rounded to 1 decimal place.) b. What is the variable cost per hamburger? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. What is the average cost per burger when the firm produces 1 million hamburgers? (Do not round intermediate calculations. Round your answer to 2 decimal places.) d. What is the average cost per burger when the firm produces 2 million hamburgers? (Do not round intermediate calculations. Round your answer to 2 decimal places.) e. Why is the average cost lower when more burgers are produced?

a. Fixed cost. $2.5. million b. Variable cost. $.50. per burger c. Average cost $3.00 per burger d. Average cost $1.75. per burger e. The fixed costs are spread across more burgers.

A project has fixed costs of $1,000 per year, depreciation charges of $500 a year, annual revenue of $6,000, and variable costs equal to two-thirds of revenues. a. If sales increase by 10%, what will be the percentage increase in pretax profits? (Do not round intermediate calculations. Enter your answer as a whole percent.) b. What is the degree of operating leverage of this project? (Do not round intermediate calculations.)

a. Pretax profit increase. 40% b. Degree of operating leverage. 4

The following are the cash flows of two projects: Year. Project A. Project B 0. $(200) $(200) 1 80 100 2 80 100 3 80 100 4 80 a. Calculate the NPV for both projects if the opportunity cost of capital is 16%. (Do not round intermediate calculations. Round your answers to 2 decimal places.) b. Suppose that you can choose only one of these projects. Which would you choose?

a. Project NPVDivision A $23.85 B $24.58 b. Project B

The following are the cash flows of two projects: Year. Project A. Project B 0. $(200) $(200) 1 80 100 2 80 100 3 80 100 4 80 a. If the opportunity cost of capital is 11%, calculate the NPV for both projects. (Do not round intermediate calculations. Round your answers to 2 decimal places.) b. Which of these projects is worth pursuing?

a. Project NPVDivision A $48.20 B $44.37 b. Both

The following are the cash flows of two projects: Year. Project A. Project B 0. $(200) $(200) 1 80 100 2 80 100 3 80 100 4 80 a. Calculate the NPV for both projects if the discount rate is 11%. (Do not round intermediate calculations. Round your answers to 2 decimal places.) b. Suppose that you can choose only one of these projects. Which would you choose?

a. Project NPVDivision A $48.20 B $44.37 b. Project A

Choose the term that matches each definition or description. a. Recalculation of project NPV by changing several inputs to new but consistent values. b. Opportunity to modify a project at a future date. c. Analysis of how project NPV changes if different assumptions are made about sales, costs, and other key variables. d. The degree to which fixed costs magnify the effect on profits of a shortfall in sales. e. A graphical technique for displaying possible future events and decisions taken in response to those events. f. Determination of the level of future sales at which project profitability or NPV equals zero.

a. Scenario analysis b. Real option c.Sensitivity analysis d.Operating leverage e.Decision tree f. Break-even analysis

State whether the following statements are true or false. a. Sensitivity analysis can be used to identify the variables most crucial to a project's success. b.Sensitivity analysis is used to obtain expected, optimistic, and pessimistic values for total project cash flows. c.Rather than basing one's estimate of NPV just on expected cash flows, it makes more sense to average the NPVs calculated from the pessimistic and optimistic estimates of cash flow. d.Risk is reduced when a high proportion of costs are fixed. e.The break-even level of sales for a project is higher when break-even is defined in terms of NPV rather than accounting income.

a. Ture b. False c. False d. False e. True

The four types of real options are option to expand, option to abandon, timing option, flexible production facilities. For each of the following cases choose which type of real option is involved. a. Deutsche Metall postpones a major plant expansion. The expansion has a positive NPV on a discounted cash-flow basis, but before proceeding, management wants to see how product demand grows. b. Western Telecom commits to production of digital switching equipment specially designed for the European market. The project has a negative NPV, but it is justified on strategic grounds by the need for a strong market position in a rapidly growing and potentially very profitable market. c. Western Telecom vetoes a fully integrated, automated production line for the new switches. It relies on standard, less expensive equipment. The automated production line is more efficient overall, according to a discounted cash-flow calculation. d. Mount Fuji Airways buys a jumbo jet with special equipment that allows the plane to be switched quickly from freight to passenger use and vice versa.

a.The timing option b.The option to expand c.The option to abandon d.Flexible production facilities

Cash flow from assets equals:

cash flow to creditors + cash flow to stockholders

The main focus of sensitivity analysis is to:

determine the one variable that has the highest level of risk.

It is recommended that at a minimum, we might want to investigate _________ scenarios in all, including the base case.

five

To get the worst case scenario, we assign the least favorable value to each item. This means to assign low values for items like units sold and price per unit and:

high values for costs

An asset's class established its ____________ for tax purposes.

life