FIN/307T: Finance For Business Wk 5 - Apply: Homework [due Day 7]

Which of these describe groups or pairs of projects where you can accept one but not all?

Mutually Exclusive

When looking at which of these types of projects, one must consider any cash flows that arise from surrendering old equipment before the end of its useful life?

Replacement projects

How many possible IRRs could you find for the following set of cash flows? Time 0 1 2 3 4 Cash Flow -$ 15,000 $ 6,000 $ 10,000 $ 12,000 $ 1,000

1

Compute the NPV for Project X with the cash flows shown as follows if the appropriate cost of capital is 10 percent. Time 0 1 2 3 4 Cash Flow -$ 100,000 $ 36,000 $ 200,000 $ 210,000 $ 10,000

$262,622.77

Equipment was purchased for $250,000 plus $500 in freight charges. Installation costs were $750 and sales tax totaled $18,750. Hiring a special consultant to provide advice during the selection of the equipment cost $500. What is this asset's depreciable basis?

$270,000

Compute the NPV statistic for Project U given the following cash flows if the appropriate cost of capital is 9 percent. Project U Time 0 1 2 3 4 5 Cash Flow -$ 1,000 $ 350 $ 1,480 -$ 520 $ 400 -$ 100

$383.63

Equipment was purchased for $50,000 plus $2,500 in freight charges. Installation costs were $1,500 and sales tax totaled $1,000. Hiring a special consultant to provide advice during the selection of the equipment cost $3,000. What is this asset's depreciable basis?

$55,000

You are trying to pick the least expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $13,000 to purchase and which will have OCF of −$1,200 annually throughout the vehicle's expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $23,000 to purchase and which will have OCF of −$550 annually throughout that vehicle's expected five-year life. Both cars will be worthless at the end of their life. If you intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 16 percent, what is the difference in the EAC of the two cars?

$586.07

Compute the PI statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent. Time: 0 1 2 3 4 5 Cash flow: −75 −75 0 100 75 50

1.1896, accept

Compute the payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 11 percent and the maximum allowable payback is one year. Time: 0 1 2 3 4 5 Cash flow: −100 75 100 300 75 200

1.25 years, reject

Compute the MIRR statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent. Time: 0 1 2 3 4 5 Cash flow: −175 75 0 100 75 50

15.73 percent, accept

Compute the IRR for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 9 percent. Time: 0 1 2 3 4 5 Cash flow: −1,000 −75 100 100 0 2,000

16.61 percent, accept

Compute the discounted payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent and the maximum allowable discounted payback is three years. Time: 0 1 2 3 4 5 Cash flow: −1,000 500 480 400 300 150

2.49 years, accept

A firm is evaluating a potential investment that is expected to generate cash flows of $100 in years 1 through 4 and $400 in years 5 through 7. The initial investment is $750. What is the payback for this investment?

4.88 years

All of the following are strengths of NPV EXCEPT

Managers have a preference for using a statistic that is in percent instead of dollars

The research chemists at MegaClean created a new cleaner that keeps car and truck tires shiny and clean for one year. They believe that this product will be highly successful and will attract customers to purchase their existing line of household cleaning products. This is an example of

complementary effect

Concerning incremental project cash flow, which of these is a cost one would never count as an expense of the project?

financing costs

Which of the following is NOT included when calculating the depreciable basis for real property?

financing fees

Which of the following measures the operating cash flow a project produces minus the necessary investment in operating capital, and is as valid for proposed new projects as it is for the firm's current operations?

free cash flow

A local bank is contemplating adding a new ATM to their lobby. They will need another phone line to provide communications that has a monthly cost of $50 per month. This is an example of

incremental cash flow.

Which of these is a capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project's rate of return?

internal rate of return

All of the following are strengths of payback EXCEPT

none of the options.

Which of the following is a technique for evaluating capital projects that is particularly useful when firms face time constraints in repaying investors?

payback

The process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements is referred to as

pro forma analysis

Which of these is the concept that a unit's sales will follow an approximate bell-shaped curve versus a steady sales life?

product life cycle

A decision rule and associated methodology for converting the NPV statistic into a rate-based metric is referred to as

profitability index

Accelerated depreciation allows firms to

receive more of the dollars of depreciation earlier in the asset's life.

If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a(n)

sunk cost

With regard to depreciation, the time value of money concept tells us that

taking the depreciation expense sooner is always better.

When choosing between two mutually exclusive projects using the payback period method for evaluating capital projects, one would choose

the project that pays back the soonest if it is equal to or less than managers' maximum payback period.