Corporate Finance Connect Questions

If the cash flows for project A are C0 = -3,000, C1 = +500; C2 = +1,500; and C3 = +5,000, calculate the NPV of the project using a 15 percent discount rate.

$1,857

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

Music Company is considering investing in a new project. The project will need an initial investment of $2,400,000 and will generate $1,200,000 (after-tax) cash flows for three years. Calculate the NPV for the project if the cost of capital is 15 percent.

$339,870

Given the following data for Project M calculate the NPV of the project.

$51.70

Your boss asked you to evaluate a project with an infinite life. Sales and costs project to $1,000 and $500 per year, respectively. (Assume sales and costs occur at the end of the year [i.e., profit of $500 at the end of year one]). There is no depreciation and the tax rate is 21 percent. The real required rate of return is 10 percent. The inflation rate is 4 percent and is expected to be 4 percent forever. Sales and costs will increase at the rate of inflation. If the project costs $3,000, what is the NPV?

$950.00

The components of working capital are:

- inventory - accounts receivable - accounts payable.

A firm's net working capital changes when:

- raw materials inventory is purchased - short-term credit obligations of the firm are paid down

Three attributes of NPV are that it:

- uses cash flows - uses all the cash flows of the project - discounts the cash flows properly

True or false: Sunk costs should be considered when deciding whether to accept or reject a project.

False

The following are some of the shortcomings of the IRR method except

IRR is conceptually easy to communicate.

For project Z, year 5 inventories increase by $6,000; accounts receivable by $4,000; and accounts payable by $3,000. Calculate the increase or decrease in working capital for year 5.

Increases by $7,000

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.

Which of the following is true for a project with a negative initial cash flow followed by positive cash flows?

accept if NPV is greater than zero

For a project with a positive initial cash flow followed by negative cash flows, we should:

accept if the IRR is less than R

If the IRR is greater than the opportunity cost of capital, we should ___.

accept the project

Incremental cash flows of a project are changes in a firm's cash flows that occur as a direct consequence of ____.

accepting a project

The property of value ______ implies that the contribution of any project to a firm's value is simply the NPV of the project.

additivity

Opportunity costs are ____.

benefits lost due to taking on a particular project

In capital budgeting, the net present value is the value of a project's ______ to the company.

cash flows

Which of the following is given greater importance in capital budgeting problems in corporate finance?

cash flows

Which of the following should be discounted when determining the feasibility of a capital budgeting project(s)?

cash flows

If the discount rate is stated in nominal terms, then in order to calculate the NPV in a consistent manner, the project requires that

cash flows be estimated in nominal terms.

The three most important components of working capital are all of the following except:

depreciation

Internal rate of return (IRR) must be compared to the ______ rate in order to determine the acceptability of a project.

discount

The IRR is the _________ that makes the NPV of a project equal to zero.

discount rate

You must know the _________ rate to compute _______, while the discount rate is necessary to apply ______.

discount, NPV, IRR

NPV ______ cash flows properly.

discounts

True or false: A project with an initial cash outflow followed by a cash inflow has an NPV that is positively related to the discount rate.

false

True or false: Discounting involves determining the future value of present cash flow.

false

True or false: It is appropriate to ignore all incidental effects that a project has on the firm's existing business.

false

Sunk costs are costs that ____.

have already occurred and are not affected by accepting or rejecting a project

______ cash flows earlier in a project's life are more valuable than higher cash flows later on.

higher

Interest expenses incurred on debt financing are ______ when computing cash flows from a project.

ignored

______ incurred on debt financing are ignored when computing cash flows from a project.

interest expenses

For the case of an electric car project, the following costs should be treated as incremental costs when deciding whether to go ahead with the project except

interest payments on debt incurred to finance the project.

The most important alternative to NPV is the ______ method.

internal rate of return (IRR)

An analyst wishes to determine the value of resources used by a proposed project. Which values should the analyst use to approximate opportunity costs?

market values

A project with an initial cash outflow followed by a cash inflow and then a cash outflow ____.

may have multiple rates of return

Higher cash flows earlier in a project's life are ______ valuable than higher cash flows later on.

more

When an initial cash outflow is followed by cash inflows, NPV is ______ if the opportunity cost of capital is greater than the IRR.

negative

The difference between a firm's short-term assets and its short-term liabilities is known as the _____.

net working capital

Using your personal savings as investment in your business has an ________ _______ because you are giving up the use of these funds for other investments or uses, such as a vacation or paying off a debt.

opportunity cost

For "normal" cash flows (the outflows occur before the inflows), the NPV is ______ if the discount rate is less than the IRR, and it is ______ if the discount rate is greater than the IRR.

positive; negative

In capital budgeting, the net ______ is the value of a project to the company.

present value

Opportunity costs are classified as ____ costs in project analysis.

relevant

Money that a firm has already spent, or committed to spend regardless of whether a project is taken, is called a(n)

sunk cost

A project will have only one internal rate of return if

there is a one-sign change in the cash flows.

It is inappropriate to ignore all incidental effects that a project has on a firm's existing business.

true

True or false: A project with an initial cash outflow followed by a cash inflow has an NPV that is negatively related to the discount rate.

true

True or false: Corporate finance techniques emphasize the importance of cash flows rather than accounting income.

true

True or false: Two challenges with the IRR approach when comparing two projects are scale and differing cash flow patterns over time.

true

If an investment project (normal project) has an IRR equal to the cost of capital, the NPV for that project is

zero

The IRR is the discount rate that makes the NPV of a project equal to ______.

zero

Which of the following are true for a project with a negative initial cash flow followed by positive cash flows?

-Accept if NPV is greater than zero. -Reject if IRR is less than market rate of financing.

According to the basic IRR rule, we should ____ a project if the IRR is ____ than the opportunity cost of capital.

-accept; greater -reject; less

The decision rule for a project for which the first cash flow is an inflow and subsequent cash flows are negative states that we should ____ the project when the IRR is ____ than the discount rate.

-accept; less -reject; greater

Two mutually exclusive projects can be evaluated by:

-comparing the NPVs of the two projects -comparing the incremental IRR to the discount rate.

When an initial cash outflow is followed by cash inflows, NPV is:

-positive when the opportunity cost of capital is less than the IRR. -negative when the opportunity cost of capital is greater than the IRR. -equal to zero when the opportunity cost of capital equals the IRR.

The discount rate assigned to a project reflects the ____.

-risk of the project -opportunity cost to the investor

What does value additivity mean for a firm?

-the NPV values of individual projects can be added together. -The value of a firm is simply the combined value of the firm's projects, divisions, and entities owned by the firm.

If a firm's short-term assets are $150,000, its total assets are $320,000, and its short-term liabilities are $80,000, what is its net working capital?

150,000-80,000 = 70,000

If the cash flows for Project M are C0 = -1,000; C1 = +200; C2 = +700; and C3 = +698, calculate the IRR for the project.

23 percent

A project with a cash inflow of $200 followed by a cash outflow of (-$250) one year later will have an IRR of ___ percent.

25

A project with a cash inflow of $185 followed by a cash outflow of (-$250) one year later will have an IRR of ___ percent.

35

What is the IRR for a project with an initial investment of $250 and subsequent cash inflows of $100 per year for 3 years?

9.70%

You must know the discount rate to compute ____, while the discount rate is necessary to apply ___.

NPV,IRR

Which of the following is an example of an opportunity cost?

Rental income likely to be lost by using a vacant building for an upcoming project

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

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

The internal rate of return is a function of ____.

a project's cash flows