FIN 3716: Chapter 9

D

A bakery invests $40,000 in a light delivery truck. This was depreciated using the five-year MACRS schedule shown above. If the company sold it immediately after the end of year 3 for $21,000, what would be the after-tax cash flow from the sale of this asset, given a tax rate of 40%? A. $11,520 B. $9480 C. $3792 D. $17,208

A

A brewer is launching a new product: brewed ginger ale with a low alcohol content. The brewer plans to spend $4 million promoting this product this year, which is expected to expand the sales of this product to $11 million this year and $8 million new year. They do expect there will be loss of sales of $1 million this year and net year in their other products as customers switch to drinking the new ginger ale. The gross profit margin the for the new ginger ale is 40%, the gross product margin of all of the brewer's other products is 30%, and the brewer's marginal corporate tax rate is 35%. What are incremental earnings arising from the promotion campaign this year? A. $1.625 million B. $1.26 million C. $2.11 million D. $4.40 million

A

A company buys tracking software for its warehouse which, along with the computer system and ancillaries to run it, will cost $1.6 million. This purchase will be deducted over five years. It is expected that the software will reduce inventory by $10.7 million at the end of the first year after it is installed, though there will be an annual cost of $120,000 per year to run the system. If the company's marginal tax rate is 40%, how will the purchase of this item change the company's free cash flows in the first year? A. $10.756 million B. $10.380 million C. $9.680 million D. $11.832 million

B

A company is planning to market a new model of motor scooter analyzes the effect of changes in the selling price of the motor scooter, the number of units that will be sold, the cost of making the motor scooter, the effect on Net Working Capital, and the cost of capital for the project. They predict that the break-even point for sales price for the motor scooter is $2,480. What does this mean? A. If the motor scooter is sold for $2,480, then the project will make a profit. B. If the motor scooter is sold for $2,480, then the net present value (NPV) for the product will be zero. C. The predicted selling price of the motor scooter is $2,480. D. The maximum that the motor scooter can sell for and still make the project have a positive net present value (NPV) is $2,480.

A

A company spends $20 million researching whether it is possible to create a durable plastic from the process waste from feedstock preparation. The $20 million should best be considered _____. A. as a sunk cost B. as an opportunity cost C. as a fixed overhead expense D. as a capital cost

B

A consumer good company is developing a new brand of organic toothpaste. Above is the sensitivity analysis for this product. If the best-case assumptions for Net Working Capital are met, what will the net present value (NPV) of this project be? A. $0.65 million B. $1.7 million C. $2 million D. $3 million

C

A consumer good company is developing a new brand of organic toothpaste. Above is the sensitivity analysis for this product. The assumptions regarding which parameter should be scrutinized most carefully in the estimation process? A. units sold B. sales price C. cost of goods D. cost of capital

D

A fast-food company invests $2.2 million to buy machines for making Slurpees. These can be depreciated using the MACRS schedule shown above. If the cost of capital is 10%, what is the increase in the net present value (NPV) of the product gained by using MACRS depreciation over straight-line depreciation for three years? A. $28,559 B. $47,599 C. $76,158 D. $190,321

C

A firm is considering a new project that will generate cash revenue fo $1,300,000 and cash expenses of $700,000 per year for five years. The equipment necessary for the project will cost $300,000 and will be depreciated straight line over four years. What is the expected free cash flow in the second year of the project if the firm's marginal tax rate is 35%? A. $374,625 B. $341,250 C. $416,250 D. $499,500

D

A firm is considering changing their credit terms. It is estimated that this change would result in sales increasing by $1,600,000. This in turn would cause inventory to increase by $125,000, accounts receivable to increase by $100,000, and accounts payable to increase by $90,000. What is the firm's expected change in net working capital? A. $1,735,000 B. $315,000 C. $225,000 D. $135,000

B

A firm is considering investing in a new machine that will cots $400,000 and will be depreciated straight-line over five years. If the firm's marginal tax rate is 39%, what is the annual depreciation tax shield of purchasing the machine? A. $80,000 B. $31,200 C. $28,080 D. $156,000

A

A firm is considering the purchase of a new machine for $325,000. The firm is unsure if it should use the 3-Year MACRS schedule or straight-line depreciation over three years. What is the difference in the book value after three years if the firm uses MACRS instead of straight-line depreciation? A. $0 B. $24,083 C. $48,166 D. $300,918

B

A firm reports that in a certain year it had a net income of $5.0 million, depreciation expenses of $3.0 million, capital expenditures of $2.0 million, and Net Working Capital decreased by $1.1 million. What is the firm's free cash flow for that year? A. $11.1 million B. $7.1 million C. $5.1 million D. $4.9 million

D

A garage is installing a new "bubble-wash" car wash. It will promote the car wash as a fun activity for the family, and it is expected that the novelty of this approach will boost sales in the medium term. If the cost of capital is 10%, what is the net present value (NPV) of this project? A. -$135,493 B. -$143,021 C. $165,603 D. $150,548

D

A machine is purchased for $575,000 and is used through the end of Year 2. The machine will be depreciated using the 3-Year MACRS schedule. At the end of Year 2, the machine is sold for $75,000. What is the after-tax cash flow from the sale of the machine at the end of Year 2 if the firm's marginal tax rate is 35%? A. $42,608 B. $15,916 C. $32,392 D. $63,663

D

A maker of computer games expects to sell 475,000 games at a price of $48 per game. These units cost $10 to produce. Selling, general, and administrative expenses are $1.0 million and depreciation is $280,000. What is the EBIT break-even point for the number of games sold in this case? A. $26,667 B. $26,316 C. $100,000 D. $33,684

D

A maker of kitchenware is planning on selling a new chef-quality kitchen knife. The manufacturer expects to sell 1.6 million knives at a price of $120 each. These knives cost $80 each to produce. Selling, general, and administrative expenses are $500,000. The machinery required to produce the knives cost $1.4 million, depreciated by straight-line depreciation over five years. The maker determines that the EBIT break-even point for units sold and sale price is less than these estimates and that the EBIT break-even point for costs per unit, SG&A, and depreciation are greater than these estimates, so decides to go ahead with manufacturing the knife. Was this the correct decision? A. No, since the cost per unit should be greater than the EBIT break-even point for cost of goods if the project is to have a positive EBIT. B. Yes, since if the estimates for each parameter are correct, the EBIT will be positive. C. Yes, since a positive EBIT ensures that the project will have a positive net present value (NPV). D. It cannot be determined whether the decision was correct, since other factors contributing to the project's net present value (NPV), such as the upfront investment, have not been included in the analysis.

C

A small manufacturer that makes clothespins and other household products buys new injection molding equipment for a cost of $500,000. This will allow the manufacturer to make more clothespins in the same amount of time with an estimated increase in sales of 25%. If the manufacturer currently makes 75 tons of clothespins per year, which sell at $18,000 per ton, what will be the increase in revenue next year from the new equipment? A. $125,000 B. $303,750 C. $337,500 D. $837,500

D

A stationery company plans to launch a new type of indelible ink pen. Advertising for the new product will be heavy and will cost the company $8 million, although the company expects general revenues of $280 million next year from sources other than sales of the new pen. If the company has a corporate tax-rate of 35% on its pretax income, what effect will the advertising for the new pen have on its taxes? A. It will increase taxes by $8 million. B. It will increase taxes by $2.8 million C. It will have no effect on taxes. D. It will reduce taxes by $2.8 million.

D

A textile company invests $10 million in an open-end spinning machine. This was depreciated using the seven-year MACRS schedule shown above. If the company sold it immediately after the end of year 3 for $7 million, what would be the after-tax cash flow from the sale of this asset, given a tax rate of 40%? A. $1,550,400 B. $3,124,000 C. $3,876,000 D. $5,449,600

C

After research into where to place a new restaurant, Burger Billies, a small fast-food chain, plans to open a new store near a small college. The anticipated customer base is students attending the college. They learn that a major fast food chai will be opening a franchise within within the college, which leads the owners of Burger Billies to revise their estimate of sales to one below the break-even point. Which of the following is most likely the best real option for Burger Billies to take with regard to the proposed restaurant site? A. option to delay B. option to expand C. option to abandon D. option to switch

D

An analysis that breaks the net present value (NPV) calculation into its component assumptions and shows how the net present value (NPV) varies as one of the underlying assumptions changes is called _____. A. scenario analysis B. internal rate of return (IRR) analysis C. accounting break-even analysis D. sensitivity analysis

A

An exploration of the effect of changing multiple project parameters on net present value (NPV) is called _____. A. scenario analysis B. internal rate of return (IRR) analysis C. accounting break-even analysis D. sensitivity analysis

D

An insurance officer owns a large building downtown. The sixth floor of this building currently houses its entire Human Resources Department. After carrying out a survey to see whether the sixth floor could be rented and for what price, the company must decide whether to split the Human Resources Department between currently unoccupied spaces on several floors and rent out the entire sixth floor or to leave things as they currently are. Which of the following should NOT be considered when deciding whether to rent out the sixth floor? A. the amount obtained by renting the sixth floor B. the cost of refurbishing the new space to be occupied by the Human Resources Department C. cost involved with a loss of efficiency resulting from the Human Resources Department being split between several spaces D. the cost of the research into the feasibility of renting the sixth floor

C

An oil company is buying a semi-submersible oil rig for $15 million. Additionally, it will cost $1.5 million to move the oil rig to the oilfield and to prepare it for operations. If it is depreciated over five years using straight-line depreciation, what are the yearly depreciation expenses in this case? A. $2.7 million B. $3.0 million C. $3.3 million D. $3.8 million

B

Bubba Ho-Tep Company reported net income of $290 million for the most recent fiscal year. The firm had depreciation expenses of $100 million and capital expenditures of $150 million. Although it had no interest expense, the firm did have an increase in net working capital of $30 million. What is Bubba Ho-Tep's free cash flow? A. $10 million B. $210 million C. $270 million D. $570 million

B

Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $4 million to buy the machine and $12,000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to have a working life of six years. If straight-line depreciation is used, what are the yearly depreciation expenses in this case? A. $666,667 B. $668,667 C. $1,166,667 D. $1,168,667

C

Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $5,000,000 to buy the machine and $10,000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to raise gross profits by $4,500,000 per year, starting at the end fo the first year, with associated costs of $1 million for each of those year.s The marginal tax rate is 40%. What are incremental free cash flows associated with the new machine in year 2? A. $835,000 B. $2,665,000 C. $2,434,000 D. $831,667

C

Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $6 million to buy the machine and $10,000 to have it delivered an installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to have a working life of six years. Which of these activities will be reported as an operating expense? A. the delivery and install cost only B. the cost of the depositor only C. the redesign of the plant only D. the delivery and install cost and the cost of the depositor

A

Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $6,000,000 to buy the machine and $20,000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to raise gross profits by $4,000,000 per year, starting at the end of the first year, with associated costs of $1 million for each of those years. The machine is expected to have a working life of five years and will be depreciated over those five years. The marginal tax rate is 40%. What are the incremental free cash flows associated with the new machine in year 0? A. -$6,020,000 B. -$6,000,000 C. -$5,418,000 D. $1,204,000

A

CathFoods will release a new range of candies which contain anti-oxidants. New equipment to manufacture the candy will cost $4 million, which will be depreciated by straight-line depreciation over six years. In addition, there will be $5 million spent on promoting the new candy line. It is expected that the range of candies will bring in revenues of $6 million per year for five years with production and support costs of $1.5 million per year. If CathFood's marginal tax rate is 35%, what are the incremental earnings in the second year of this project? A. $2.492 million B. $2.100 million C. $3.833 million D. $1.342 million

A

CathFoods will release a new range of candies which contain antioxidants. New equipment to manufacture the candy will cost $2 million, which will be depreciated by straight-line depreciation over four years. In addition, there will be $5 million spent on promoting the new candy line. It is expected that the range of candies will bring in revenues of $4 million per year for four years with production and support costs of $1.5 million per year. If CathFood's marginal tax rate is 35%, what are the incremental free cash flows in the second year of this project? A. $1.800 million B. $1.400 million C. $2.000 million D. $0.700 million

C

Cromwell Industries is considering a new project which will have costs, revenues, etc. as shown by the data above. If the cost of capital is 8.0%, what is the net present value (NPV) of this project? A. -$56,662 B. -$59,810 C. $62,958 D. $69,254

C

Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects: The free cash flow for the first year of Epiphany's project is closest to ____. A. $45,600 B. $28,500 C. $38,000 D. $53,200

A

Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects: The free cash flow for the last year of Epiphany's project is closest to _____. A. $65,750 B. $59,175 C. $49,313 D. $52,600

A

Food For Less (FFL), a grocery store, is considering offering one-hour photo developing in their store. The firm expects that sales from the new one-hour machine will be $175,000 per year. FFL currently offers overnight film processing with annual sales of $90,000. While many of the one-hour photo sales will be to new customer, FFL estimates that 40% of their current overnight photo customers will switch and use the one-hour service. The level of incremental sales associated with introducing the new one-hour photo service is closest to _____. A. $139,000 B. $175,000 C. $36,000 D. $70,000

A

Ford Motor Company is considering launching a new line of hybrid diesel-electric SUVs. The heavy advertising expenses associated with the new SUV launch would generate operating losses of $30 million next year. Without the new SUC, Ford expects to earn pre-tax income of $80 million from operations next year. Ford pays a 30% tax rate on its pre-tax income. The amount that Ford Motor Company owes in taxes next year with the launch of the new SUC is closest to _____. A. $15.0 million B. $9.0 million C. $33.0 million D. $24.0 million

A

Ford Motor Company is considering launching a new line of hybrid diesel-electric SUVs. The heavy advertising expenses associated with the new SUV launch would generate operating losses of $35 million next year. Without the new SUV, Ford expects to earn pre-tax income of $80 million from operations next year. Ford pays a 35% tax rate on its pre-tax income. The amount that Ford Motor Company owes in taxes next year without the launch of the new SUC is closest to _____. A. $28.0 million B. $12.3 million C. $40.3 million D. $15.8 million

we're not paying less in taxes when using MACRS, but it is the timing of the tax payment that is different

How are the taxes paid under MACRS different from that paid under straight-line depreciation?

Yes, MACRS should be preferred to straight-line depreciation due to the time value of money. While both methods pay the same amount in taxes, MACRS gives more money in the pocket in the initial days.

If available, should MACRS be preferred to straight-line depreciation?

yes due to the time value of money; while both methods pay the same amount in taxes, MACRS gives more money in the pocket in the initial days

If available, should MACRS be preferred to straight-line depreciation?

A

Jim owns a farm that he wants to sell. He learns that a highway will be built near the farm in the future, giving access to the farmland from a nearby city and thus making the land attractive to housing developers. Expecting the net present value (NPV) of the sale to be greater after the highway is built, he decides not to sell at this time. What real option is Jim taking? A. option to delay B. option to expand C. option to abandon D. option to switch

A

Joe pre-orders a non-refundable movie ticket. He then reads a number of reviews of the movie in question that make him realize that he will not enjoy it. He goes to see it anyway, rationalizing that otherwise his money would have been wasted. Is Joe succumbing to the Sunk Cost Fallacy, and why? A. Yes, since he invested a valuable asset, his time, in a project based on its previous costs. B. No, because the cost of the movie was not recoverable and would have been lost whatever action he took. C. No, because going to see the movie means that the product of his initial investment was realized as originally planned. D. Yes, because he incurred no further costs by going to see the movie.

D

Luther Industries has outstanding tax loss carryforwards of $72 million from losses over the past four years. If Luther earns $15 million per year in pre-tax income from now on, in how many years will Luther first pay taxes? A. 7 years B. 2 years C. 4 years D. 5 years

B

Massive Amusements, an owner of theme parks, invests $65 million to build a roller coaster. This can be depreciated using the MACRS schedule shown above. How much less is the depreciation tax shield for year 4 under MACRS depreciation than under 7-year, straight-line depreciation, if the tax rate is 35%? A. $974,680 B. $1,218,350 C. $2,193,030 D. $6,091,750

B

Panjandrum Industries, a manufacturer of industrial piping, is evaluating whether it should expand into the sale of plastic fittings for home garden sprinkler systems. It has made the above estimates of free cash flows resulting from such a decision (all quantities in millions of dollars). It is thought that if marketing expenses are increased by 40%, then revenues will rise. By how much will revenues have to rise for the net present value (NPV) of the project to increase? A. at least 0.8% B. at least 1.4% C. at least 1.5% D. at least 2.0%

A

Panjandrum Industries, a manufacturer of industrial piping, is evaluating whether it should expand into the sale of plastic fittings for home garden sprinkler systems. It has made the above estimates of free cash flows resulting from such a decision (all quantities in millions of dollars). There are some concerns that estimates of manufacturing expenses may be low, due to the rising cost of raw materials. What is the break-even point for manufacturing expenses, if all other estimates are correct and the cost of capital is 9%? A. $1.66 million B. $1.83 million C. $1.99 million D. $2.32 million

D

Panjandrum Industries, a manufacturer of industrial piping, is evaluating whether it should expand into the sale of plastic fittings for home garden sprinkler systems. It has made the above estimates of free cash flows resulting from such a decision. There are concerns of the sensitivity of this project to changes in the cost of capital. For what cost of capital does this project break-even? A. 8% B. 10% C. 12% D. 14%

A

Shepard Industries is evaluating a proposal to expand its current distribution facilities. Management has projected that the project will produce the following cash flows for the first two years (in millions of dollars). The depreciation tax shield for Shepard Industries project in year 2 is closest to _____. A. $90 million B. $69 million C. $135 million D. $108 million

D

Shepard Industries is evaluating a proposal to expand its current distribution facilities. Management has projected the project will produce the following cash flows for the first two years (in millions). The depreciation tax shield for Shepard Industries project in year 1 is closest to _____. A. $84 million B. $104 million C. $83 million D. $69 million

A

Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $5 million to set up and will generate $21 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $8 million during this year and depreciation expense will be another $2 million. THSI will require no working capital for this investment. THSI's marginal tax rate is 35%. Assume that THSI's cost of capital for this project is 15%. The net present value (NPV) of this temporary housing project is closest to _____. A. $2,956,522 B. -$9.15 C. $5,913,044 D. -$2,956,522

D

Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $6 million to set up and will generate $22 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $11 million during this year and depreciation expense will be another $2 million. THSI will require no working capital for this investment. THSI's marginal tax rate is 35%. Ignoring the original investment of $5 million, what is THSI's free cash flow for the first and only year of operation? A. $6.00 million B. $3.85 million C. $9.81 million D. $7.85 million

A

The EBIT break-even point can be calculated using which of the following formulas? A. (Units Sold x Sale Price) - (Units Sold x Cost per unit) - SG&A - Depreciation = 0 B. (Units Sold x Sale Price) + (Units Sold x Cost per unit) - SG&A - Depreciation = 0 C. (Units Sold x Sale Price) - (Units Sold x Cost per unit) + SG&A + Depreciation = 0 D. (Units Sold x Sale Price) + (Units Sold x Cost per unit) + SG&A - Depreciation = 0

B

The Sisyphean Company is considering a new project that will have an annual depreciation expense of $3.6 million. If Sisyphean's marginal corporate tax rate is 35% and its average corporate tax rate is 30%, then what is the value of the depreciation tax shield on the company's new project? A. $1,080,000 B. $1,260,000 C. $1,890,000 D. $1,134,000

A

The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are estimated to grow by 10% each year through year 3. The price per cane that Sisyphean will charge its customers is $17 each and is to remain constant. The canes have a cost per unit to manufacture of $8 each. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 5% of its annual sales in accounts receivable, 10% of its annual sales in inventory, and 6% of its annual sales in accounts payable. The firm is in the 35% tax bracket and has a cost of capital of 9%. The required net working capital in the second year for the Sisyphean Corporation's project is closest to _____. A. $4114 B. $3740 C. -$3366 D. $8602

B

The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2400 canes in year 1. Sales are estimated to grow by 9% each year through year 3. The price per cane that Sisyphean will charge its customers is $15 each and is to remain constant. The canes have a cost per unit to manufacture of $8 each. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 3% of its annual sales in cash, 5% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 6% of its annual sales in accounts payable. The firm is in the 35% tax bracket and has a cost of capital of 8%. The change in net working capital from year 1 to year 2 is closest to _____. A. a decrease of $356 B. an increase of $356 C. an increase of $389 D. a decrease of $389

A

The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2500 canes in year 1. Sales are estimated to grow by 9% each year through year 3. The price per cane that Sisyphean will charge its customers is $16 each and is to remain constant. The canes have a cost per unit to manufacture of $10 each. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 3% of its annual sales in cash, 5% of its annual sales in accounts receivable, 10% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 35% tax bracket and has a cost of capital of 9%. The required net working capital in the first year for the Sisyphean Corporation's project is closest to _____. A. $5200 B. $5668 C. -$2800 D. $9200

B

The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are estimated to grow by 10% per year each year through year 3. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 35% tax bracket and has a cost of capital of 10%. The depreciation tax shield for the Sisyphean Corporation's project in the first year is closest to _____. A. $10,500 B. $3500 C. $3150 D. $2800

C

The balance sheet for a small firm is shown above. All amounts are in thousands of dollars. What is this firm's Net Working Capital? A. $126 thousand B. $7 thousand C. $46 thousand D. $86 thousand

C

The capital budgeting process begins by _____. A. analyzing alternate projects B. evaluating the net present value (NPV) of each project's cash flows C. compiling a list of potential projects D. forecasting the future consequences for the firm of preach potential project

C

The difference between scenario analysis and sensitivity analysis is _____. A. scenario analysis is based upon the internal rate of return (IRR) and sensitivity analysis is based upon net present value (NPV) B. only sensitivity analysis allows us to change estimated inputs of net present value (NPV) analysis C. scenario analysis considers the effect on net present value (NPV) of changing multiple project parameters D. only scenario analysis breaks the net present value (NPV) calculation into its component assumptions

D

The graph above shows the break-even analysis for the cost of making a certain good. Based on this chart, which of the following is true? A. The net present value (NPV) of the project increases with increased cost of goods sold. B. The project should not be undertaken if the predicted cost of goods sold is less than $110. C. The net present value (NPV) of the project will be positive if the cost of goods sold is greater than $110. D. If the good costs $110 to make, the net present value (NPV) of the project will be zero.

A

The manufacturer of a brand of kitchen knives is investigating the likely effects that an increase in the cost of the raw materials required to make these knives will have on the cost of manufacturing the knives, the selling price of the knives, the number of knives that will then be sold, and the project's net present value (NPV). Which of the following best describes what type of analysis the manager is performing? A. scenario analysis B. sensitivity analysis C. break-even analysis D. EBIT-break even analysis

A

The term "cannibalization" refers to _____. A. decrease in the sales of current project caused by the launching of new project B. decrease in the sunk cost caused by launching of new project C. decrease in overhead expenses incurred due to launch of new project D. cost of using a resource for the best value it could provide in its best alternative

D

The ultimate goal of the capital budgeting process is to _____. A. determine how the consequences of making a particular decision affects the firm's revenues and costs B. list the projects and investments that a company plans to undertake in the future C. forecast the consequences of a list of future projects for the firm D. determine the effect of the decision to accept or reject a project on the firm's cash flows

False

True or False: A capital budget lists the potential projects a company may undertake in future years.

False

True or False: A real option is the obligation to take a particular business action.

False

True or False: An announcement by the government that they will decrease corporate marginal tax rates in the future would increase the attractiveness of MACRS depreciation.

False

True or False: Capital budgeting decisions use the Net Present Value rule so that those decisions maximize net present value (NPV).

True

True or False: Firms should use the most accelerated depreciation scheme allowable.

True

True or False: Interest and other financing-related expenses are excluded when determining a project's unlevered net income.

True

True or False: The cash flow effect from a change in Net Working Capital is always equal in size and opposite in sign to the changes in Net Working Capital.

True

True or False: The most difficult part of the capital budgeting process is accurately estimating cash flows and cost of capital.

False

True or False: To evaluate a capital budgeting decision, it is sufficient to determine its consequences for the firm's earnings.

False

True or False: When evaluating the effectiveness of an improved manufacturing process we should evaluate the total sales and costs generated by this process

D

Vernon-Nelson Chemicals is planning to release a new brand of insecticide, Bee-Safe, that will kill many insect pests but not harm useful pollinators. Buying new equipment to manufacture the product will cost $15 million, and there will be an additional $2 million cost to reconfigure existing plant. The equipment is expected to have a lifetime of nine years and will be depreciated by the straight-line method over its lifetime. The firm expects that they should be able to sell 1,500,000 gallons per year at a price of $53 per gallon. It will take $36 per gallon to manufacture and support the product. If Vernon-Nelson's marginal tax rate is 40%, what are the incremental earnings after tax in year 3 of this project? A. $25.5 million B. $14.3 million C. $23.8 million D. $9.5 million

A

Visby Rides, a livery car company, is considering buying some new luxury cars. After extensive research, they come up with the above estimate of free cash flows from this project. By how much could the discount rate rise before the net present value (NPV) of this project is zero, given that it is currently 10%? A. 12% B. 17% C. 27% D. 22%

B

Visby Rides, a livery car company, is considering buying some new luxury cars. After extensive research, they come up with the above estimates of free cash flow from this project. The depreciation schedule shown is for three-year, straight-line depreciation. By how much would the net present value (NPV) of this project be increased, if the cars were depreciated by the MACRS schedule shown below given that the cost of capital is 10%? A. $7266 B. $9082 C. $10,898 D. $22,705

D

Visby Rides, a livery car company, is considering buying some new luxury cars. After extensive research, they come up with the above estimates of free cash flow from this project. Visby learns that a competitor is thinking of offering similar services, thus reducing Visby's sales. By how much could sales fall before the net present value (NPV) was zero, given that the cost of capital is 8%, and that cost of goods sold is 45% of revenues? A. 28% B. 34% C. 45% D. 56%

deciding how to estimate the cash flows and the cost of capital

What are the most difficult parts of capital budgeting?

an extension of sensitivity analysis basically telling us the minimum level of different parameters that would give a zero net present value (NPV)

What do you understand by break-even analysis?

Sensitivity analysis focuses on the impact of changing one variable, holding all other variables constant. Scenario analysis allows for multiple variables to change at once, typically such that the change will impact NPV in the same direction (all change such that NPV increases or all change such that NPV decreases).

What is the major different between scenario analysis and sensitivity analysis?

shows how the net present value (NPV) varies as the underlying assumptions change; thus we understand the critical assumptions underlying the project

What is the most important function of sensitivity analysis?

D

Which of the following adjustments should NOT be made when computing free cash flow from incremental earnings? A. adding depreciation B. adding all non-cash expenses C. subtracting increases in Net Working Capital D. subtracting depreciation expenses from taxable earnings

B

Which of the following best defines incremental earnings? A. cash flows arising from a particular investment decision B. the amount by which a firm's earnings are expected to change as a result of an investment decision C. the earnings arising from all projects that a company plans to undertake in a fixed time span D. the net present value (NPV) of earnings that a firm is expected to receive as the result of an investment decision

C

Which of the following best describes why the predicted incremental earnings arising from a given decision are not sufficient in and of themselves whether that decision is worthwhile? A. They do not tell how the decision affects the firm's reported profits from an accounting perspective. B. They are not easily predicted from historical financial statements of a firm and its competitors. C. These earnings are not actual cash flows.

D

Which of the following best explains why is it sensible for a firm to use an accelerated depreciation schedule such as MACRS rather than straight-line depreciation? A. The firm will substantially decrease its depreciation tax shield across all of the depreciation timeline. B. The firm can decide over how many years an item may be depreciated, thus allowing it full control of its depreciation expenses. C. The firm will have substantially fewer depreciation expenses later in the depreciation timeline. D. The firm will receive greater benefits to its cash flow earlier in the depreciation timeline and thus increase net present value (NPV).

B

Which of the following costs would you consider when making a capital budgeting decision? A. sunk cost B. opportunity cost C. interest expense D. fixed overhead cost

B

Which of the following formulas will correctly calculate Net Working Capital? A. Cash + Inventory + Receivables + Payables B. Cash + Inventory + Receivables - Payables C. Cash + Inventory - Receivables + Payables D. Cash - Inventory + Receivables + Payables

B

Which of the following is NOT a factor that a manager should bear in mind when estimating a project's revenues and costs? A. Sales of a product will typically accelerate, stabilize, and then decline as the product becomes outdated or faces increased competition. B. A new product typically has its highest sales immediately after release as customers are attracted by the novelty of the product. C. The prices of technology products tend to fall over time as newer, superior technologies emerge and production costs decline.

A

Which of the following is an example of cannibalization? A. A toothpaste manufacturer adds a new line of toothpaste (that contains baking soda) to its product line. B. A grocery store begins selling T-shirts featuring the local university's mascot. C. A basketball manufacturer adds basketball hoops to its product line. D. A convenience store begins selling pre-paid cell phones.

A

Which of the following is usually NOT a factor that must be considered when estimating the revenues and costs arising from a new product? A. the fluctuations in the cost of capital over the period in question B. the sales of a new product will typically accelerate, plateau, and ultimately decline over time C. the prices of technology products generally fall over time D. competition tends to reduce profit margins over time in most industries

C

Which of the following statements i FALSE? A. We begin the capital budgeting process by determining the incremental earnings of a project. B. The marginal corporate tax rate is the tax rate the firm will pay on an incremental dollar of pre-tax income. C. Investments in plant, property, and equipment are directly listed as expense when calculating earnings.

B

Which of the following statements is FALSE? A. Many projects use a resource that the company already owns. B. When evaluating a capital budgeting decision, we generally include interest expense. C. Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project. D. As a practical matter, to derive the forecasted cash flows of a project, financial managers often begin by forecasting earnings.

D

Which of the following statements is FALSE? A. Sensitivity analysis allows us to explore the effects of errors in our estimated inputs in our net present value (NPV) analysis for the project. B. To compute the net present value (NPV) for a project, you need to estimate the incremental cash flows and choose a discount rate. C. Estimates of the cash flows and cost of capital are often subject to significant uncertainty. D. When we are certain regarding the input to a capital budgeting decision, it is often useful to determine the break-even level of that input.

A

Which of the following statements is FALSE? A. The break-even level of an input is the level for which the investment has an internal rate of return (IRR) of zero. B. The most difficult part of capital budgeting is deciding how to estimate the cash flows and the cost of capital. C. When evaluating a capital budgeting project, financial managers should make the decision that maximizes net present value (NPV). D. Sensitivity analysis reveals those aspects of the project which are most critical when we are actually managing the project.

D.

Which of the following statements is FALSE? A. We can use scenario analysis to evaluate alternative pricing strategies for our project. B. Scenario analysis considers the effect on net present value (NPV) of changing multiple project parameters. C. The difference between the internal rate of return (IRR) of a project and the cost of capital tells you how much error in the cost of capital it would take to change the investment decision. D. Scenario analysis breaks the net present value (NPV) calculation into its component assumptions and shows how the net present value (NPV) varies as each one of the underlying assumptions changes.

B

Which of the following statements regarding real options is NOT correct? A. Real options should only be exercised when they increase the NPV of a project. B. Real options enhance the forecast of a project's expected future cash flows by incorporating, at the start of their project, the effect of decisions that will be made at a later date. C. Real options give owners the right, but not the obligation, to exercise these opportunities at a later date. D. Real options build greater flexibility into a project and thus increase its net present value (NPV).

A

Which of the following will cause the EBIT Break-Even for sales to increase? A. a decrease in the sales price B. a decrease in depreciation expense C. a decrease in selling, general, and administrative expenses D. a decrease in the number of units sold

B

Which of the following would you NOT consider when making a capital budgeting decision? A. the additional taxes a firm would have to pay in the next year B. the cost of a marketing study completed last year C. the opportunity to lease out a warehouse instead of using it to house a new production line D. the change in direct labor expense due to the purchase of a new machine

because it allows a firm to drop a project if the project turns out to be unsuccessful, which allows the firm to cut its losses

Why does the option to abandon a project have value?

D

You are considering adding a microbrewery onto one of your firm's existing restaurants. This will entail an increase in inventory of $8700, an increase in accounts payable of $2300, and an increase in property, plant, and equipment of $48,000. All other accounts will remain unchanged. The change in net working capital resulting from the addition of the microbrewery is _____. A. $54,400 B. $11,000 C. $7680 D. $6400

A

You are considering adding a microbrewery onto one of your firm's existing restaurants. This will entail an investment of $47,000 in new equipment. This equipment will be depreciated straight-line over five years. If your firm's marginal corporate tax rate is 35%, then what is the value of the microbrewery's depreciation tax shield in the first year of operation? A. $3290 B. $16,450 C. $6110 D. $30,550

A

Your firm is considering building a new office complex. Your firm already owns land suitable for the new complex. The current book value of the land is $130,000; however, a commercial real estate agent has informed you that an outside buyer is interested in purchasing this land would be willing to pay $700,000 for it. When calculating the net present value (NPV) of your new office complex, ignoring taxes, the appropriate incremental cash flow for the use of this land is _____. A. $700,000 B. $0 C. $130,000 D. $830,000