FIN Test 4
Six years ago, USP paid cash for a new packaging machine that cost $287,000. Three years ago, the firm spent $2,900 on repairs and modifications to the machine. The machine is now fully depreciated and has just sat idly in a back corner of the shop for the past 7 months. The estimated value of the machine today is $124,500. The firm is considering using this machine in a new project. If it does so, what value should be assigned to this machine and included in the initial costs of the new project?
$124,500
The Purple Rain has a printing press sitting idly in its back room. The press has no market value to another printer because the machine utilizes old technology. The firm could get $125 for the press as scrap metal. The press is 6 years old and originally cost $148,000. The current book value is $2,370. The president of the firm is considering a new project and feels he can use this press for that project. What value, if any, should be assigned to the press as an initial cost of the new project?
$125
Cardinals Shirts is a specialty retailer offering T-shirts, sweatshirts, and caps. Its most recent annual sales consisted of $14,000 of T-shirts, $11,000 of sweatshirts, and $1,300 of caps. The company is adding polo shirts to the line-up and projects that this addition will result in sales next year of $12,000 of T-shirts, $8,000 of sweatshirts, $7,800 of polo shirts, and $1,300 of caps. What sales amount should be used when evaluating the Polo shirt project?
$2,800
Curtis is considering a project with cash inflows of $918, $867, $528, and $310 over the next four years, respectively. The relevant discount rate is 11 percent. What is the net present value of this project if it the start up cost is $2,100?
$20.98
A project will reduce costs by $34,000 but increase depreciation by $16,500. What is the operating cash flow of this project based on the tax shield approach if the tax rate is 35 percent?
$27,875
A project has annual depreciation of $16,200, costs of $87,100, and sales of $123,000. The applicable tax rate is 34 percent. What is the operating cash flow according to the tax shield approach?
$29,202
An all-equity firm has net income of $27,300, depreciation of $7,400, and taxes of $2,050. What is the firm's operating cash flow?
$34,700
J Cool currently sells blue jeans and T-shirts. Management is considering adding fleece tops to its inventory to provide a cooler weather option. The tops would sell for $49 each with expected sales of 3,600 tops annually. By adding the fleece tops, management feels the firm will sell an additional 220 pairs of jeans at $59 a pair and 350 fewer T-shirts at $18 each. The variable cost per unit is $36 on the jeans, $9 on the T-shirts, and $21 on the fleece tops. With the new item, the depreciation expense is $27,000 a year and the fixed costs are $62,000 annually. The tax rate is 34 percent. What is the project's operating cash flow?
$36,049
What is the net present value of the following set of cash flows at a discount rate of 7 percent? At 20 percent?
$4,518.47; -$321.76
You just returned from a trip to Germany and have 356 euros in your pocket. How many dollars will you receive when you exchange this money if the U.S. dollar equivalent of the euro is 1.2452?
$443.29
Cardinals is considering a project with a five-year life. The project requires $110,000 of fixed assets and this investment will be depreciated evenly over the next 5 years. Variable costs equal 71 percent of sales, fixed costs are $9,600, and the tax rate is 35 percent. What is the operating cash flow for year 4 given the following sales estimates and straight-line depreciation?
$5,607
A project has an annual operating cash flow of $43,700. Initially, this 4-year project required $3,800 in net working capital, which is recoverable when the project ends. The firm also spent $21,500 on equipment to start the project. This equipment will have a book value of $4,300 at the end of year 4. What is the cash flow for year 4 of the project if the equipment can be sold for $5,400 and the tax rate is 34 percent?
$52,526
A new project you are considering is expected to generate an operating cash flow of $48,210 and will initially free up $21,630 in net working capital. Purchases of fixed assets costing $67,800 will be required to start up the project. What is the total cash flow for this project at time zero?
-$46,170
A firm is reviewing a project that has an initial cost of $71,000. The project will produce annual cash inflows, starting with year 1, of $8,000, $13,400, $18,600, $33,100 and finally in year five, $37,900. What is the profitability index if the discount rate is 11 percent?
1.07
What is the degree of operating leverage (DOL) for a firm currently with fixed operating costs of $2,000, variable operating costs of $3,000, and net sales of $10,000?
1.40
What is the degree of total leverage (DTL) for a firm currently with degree of operating leverage of 1.5 and degree of financial leverage of 1.6?
2.4
What is the payback period for a project with the following cash flows?
3.17 years
A project has the following cash flows. What is the payback period?
3.21 years
What is the discounted payback period for a project with the following cash flows, if the interest rate is 5%?
3.74 years
A project has the following cash flows. What is the modified internal rate of return if interest rate is 8%?
9.07 percent
A project has the following cash flows. What is the internal rate of return?
9.75 percent
T.L.C., Inc. is considering an investment with an initial cost of $175,000 that would be depreciated straight line to a zero book value over the life of the project. The cash inflows generated by the project are estimated at $76,000 for the first two years and $30,000 for the following two years. What is the internal rate of return?
9.98 percent
Assume you can exchange $1 for either C$1.1417 or ¥118.62. What is the cross-rate between the Canadian dollar and the Japanese yen?
C$.009625/¥1
Which one of the following is the primary advantage of payback analysis?
Ease of use
Which term is defined as having international operations in a world where relative currency values change?
Exchange rate risk
20. A positive net present value of a project occurs when the cost of the money to finance a project is less than the firm's cost of capital.
False
23. Depreciation and other non-cash expenditures, are non-cash in nature, and can thus be ignored in determining incremental project cash flows.
False
25. Projects with positive net present values increase the value of the firm because the cost of financing the project is less than the firm's cost of capital.
False
27. 'Space Invader' has an investment project has expected cash flows of $70,000 per year, has a cost of $195,000 and an expected life of five years. The project is in the 30% tax bracket and is associated with a previous sunk cost property purchase of $100,000. The project has a payback of 4.2 years.
False
30. When the cash flows of a project change sign more than once, the internal rate of return model is the model preferred for project analysis.
False
31. In evaluating capital budgeting projects, incremental cash flows must be evaluated on a pre-tax basis to avoid financial financing effects.
False
32. Capital budgeting project investment costs should include the purchase of the project as well as installation but not delivery costs as these are normally considered sunk costs since projects must always be delivered in some way.
False
33. A profitability index of .85 means that the present value of the benefits provided by a project being evaluated for acceptability exceed the present value of the project's costs by 85%.
False
35. 'Space Invader' has an investment project has expected cash flows of $70,000 per year, has a cost of $195,000 and an expected life of five years. The project is in the 30% tax bracket and is associated with a previous sunk cost property purchase of $100,000. The project has a payback of 3.98 years.
False
4. The acceptance of an independent project must include the effect that project has on other projects under consideration and their acceptability.
False
6. Internal rate of return is the capital budgeting methodology viewed by most academicians as the theoretically best model for project acceptance or rejection.
False
6. The operating breakeven point is defined as that level of sales or revenue where the firm's net profit is equal to zero.
False
8. Because it eliminates the multiple internal rates of return, and requires reinvestment at the cost of capital, the modified internal rate of return is the capital budgeting methodology viewed by most academicians as the theoretically best model for project acceptance or rejection.
False
A firm's degree of total or combined level of leverage is determined as the sum of the degree of operating leverage and the degree of financial leverage.
False
A firm's operating breakeven point will decrease if fixed costs increase.
False
A firm's operating breakeven point will decrease if variable costs increase.
False
A firm's operating breakeven point will increase if sales increase.
False
Although tax laws can change, and firm's can change their operations and/or modes of financing, the determination of the firm's optimal capital structure is a relatively simple process.
False
Business risk is concerned with the acceptance or substitution of variable costs for fixed operating costs.
False
Financial risk is concerned with the acceptance or substitution of variable costs for fixed financing costs.
False
Firms attempt to identify an optimal capital structure because that structure is the one which provides the maximum cost of capital for the firm.
False
If a company's degree of financial leverage is 3, which of the following statements is true?
If its EBIT increases by 1%, its EAT will increase by 3%
If a company's degree of operating leverage is 3, which of the following statements is true?
If its sales increase by 1%, its EBIT will increase by 3%
If a company's degree of total leverage is 3, which of the following statements is true?
If its sales increases by 1%, its EAT will increase by 3%.
Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as which one of the following?
Incremental cash flows
Which one of the following is most closely related to the net present value profile?
Internal rate of return
Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities?
Net present value
You are considering an investment for which you require a 14 percent rate of return. The investment costs $58,900 and will produce cash inflows of $25,000 for 3 years. Should you accept this project based on its internal rate of return? Why or why not?
No; because the IRR is 13.13 percent
Which one of the following terms refers to the best option that was foregone when a particular investment is selected?
Opportunity cost
Which one of the following methods of analysis has the greatest bias towards short-term projects?
Payback
Which one of the following methods of analysis ignores the time value of money?
Payback
Which one of the following indicates that a project is expected to create value for its owners?
Positive net present value
You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and only wants to know what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests?
Profitability index
Which one of the following indicates that a project is definitely acceptable?
Profitability index greater than 1.0
You are considering the following two mutually exclusive projects. The required return on each project is 14 percent. Which project should you accept and what is the best reason for that decision?
Project A; because it has the higher net present value
24. Projects with negative net present values reduce the value of the firm.
True
26. The discounted payback model allows for risk to be assessed in two ways, the time it takes to discounted payback, and via a required rate of return commensurate with the risk of the project.
True
28. 'Space Invader' has an investment project has expected cash flows of $70,000 per year, has a cost of $195,000 and an expected life of five years. The project is in the 30% tax bracket and is associated with a previous sunk cost property purchase of $100,000. The project has a payback of 2.8 years.
True
3. Sensitivity or "what-if" analysis involves the identification of the sensitivity of project related variables to a project's acceptability for example with regard to its net present value.
True
A firm's degree of total or combined level of leverage is determined as the product of the degree of operating leverage and the degree of financial leverage.
True
Firms attempt to identify an optimal capital structure because that structure is the one which provides the minimum cost of capital for the firm.
True
Assume the exchange rates for the Canadian dollar versus the U.S. dollar are... Which statement is correct given this information?
You would have made a profit if you had invested $100 in Canadian dollars last week and then converted your money back to U.S. dollars this week. Ignore any interest earnings.
The profitability index reflects the value created per dollar:
invested
The tax shield approach to computing the operating cash flow, given a tax-paying firm:
recognizes that depreciation creates a cash inflow.
The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:
recoup its initial cost
The net working capital invested in a project is generally:
recouped at the end of the project
The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:
tax shield
Pear Republic currently sells short leather jackets for $349 each. The firm is considering selling long coats also. The coats would sell for $689 each and the company expects to sell 900 a year. If the firm decides to carry the long coat, management feels that the sales of the short jacket will decline from 1,420 to 1,265 units. Variable costs on the jacket are $210 and $445 on the long coat. The fixed costs for this project are $42,000, depreciation is $11,000 a year, and the tax rate is 33 percent. What is the projected operating cash flow for this project?
$108,187
Soft Touch has a proposed project that will generate sales of 1,680 units annually at a selling price of $22 each. The fixed costs are $12,700 and the variable costs per unit are $5.95. The project requires $28,000 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the 4-year life of the project. The salvage value of the fixed assets is $6,900 and the tax rate is 34 percent. What is the operating cash flow for year four?
$11,794
Your local athletic center is planning a $1.23 million expansion to its current facility. This cost will be depreciated on a straight-line basis over a 20-year period. The expanded area is expected to generate $524,000 in additional annual sales. Variable costs are 48 percent of sales, the annual fixed costs are $79,400, and the tax rate is 35 percent. What is the operating cash flow for the first year of this project?
$147,027
A 9-year project is expected to generate annual revenues of $114,500, variable costs of $73,600, and fixed costs of $14,000. The annual depreciation is $3,500 and the tax rate is 34 percent. What is the annual operating cash flow?
$18,944
1. If the Internal Rate of Return for a project exceeds the cost of financing the project, the project is acceptable
False
11. Costs which are not directly related to projects or products, but which are still incurred by the firm in order to operate are called sunk costs.
False
13. Costs attributed to past investment and which cannot be recovered regardless of whether or not the new investment is undertaken are called overhead costs.
False
18. The internal rate of return model may provide more than one solution when the sign of the project's cash flows only changes one time.
False
Profit and/or Loss magnification or leverage is provided by both operating and financial variable costs.
False
Profit and/or Loss magnification or leverage is provided by financial but not by operating fixed costs.
False
Profit and/or Loss magnification or leverage is provided by operating but not by financial fixed costs.
False
Profit and/or Loss magnification or leverage is provided by operating but not by financial variable costs.
False
The operating breakeven point for a firm currently with fixed operating costs of $1,000, variable operating costs of $2,500, sales of $4,000, and expected dividends of $500 is in fact, $4,000.
False
Which of the following parties are participants in the foreign exchange market?
I, II, III, and IV
Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive?
Net present value
19. In capital budgeting, the crossover Rate is that rate where the net present value's of alternative projects is the same.
True
Charles Henri is considering investing $36,000 in a project that is expected to provide him with cash inflows of $12,000 in each of the first two years and $18,000 for the following year. At a discount rate of zero percent this investment has a net present value of _____, but at the relevant discount rate of 17 percent the project's net present value is _____.
$6,000; -$5,739
You are going to London and plan on spending £4,500. How many dollars will this trip cost you if the currency per $1 is £.6391?
$7,041.15
A project has sales of $462,000, costs of $274,000, depreciation of $28,000, interest expense of $3,400, and a tax rate of 35 percent. What is the value of the depreciation tax shield?
$9,800
What is the net present value of a project with the following cash flows if the discount rate is 17 percent?
-$7,231.71
A project has an initial investment of 100. You have come up with the following estimates of the projects with perpetual cash flows.
-50, 20, +100
What is the contribution margin per unit for a firm currently with fixed operating costs of $3,000, variable operating costs of $2.5 per unit, and price of $4 per unit?
0.375
A project has the following cash flows: C0 = -100,000; C1 = 50,000; C2 = 150,000; C3 = 100,000. If the discount rate changes from 12% to 15%, what is the change in the NPV of the project (approximately)?
12,750 decrease
A project has the following cash flows. What is the internal rate of return?
13.82 percent
What is the operating breakeven point for a firm currently with fixed operating costs of $3,000, variable operating costs of $2.5 per unit, and price of $4 per unit?
2,000
What is the degree of financial leverage (DFL) for a firm currently with EBIT of $3,000, interest expense of $1,500, and common dividends of $1,000?
2.00
What is the degree of operating leverage (DOL) for a firm currently with EBIT of $4,000, variable operating costs of $2,000, and net sales of $10,000?
2.00
Generally, the simulation models for projects are developed using a:
Computer
29. Projects such as parking lots, daycare centers, and employee gyms, though not the primary business of a firm, must be evaluated for capital budgeting effects on the value of the firm or for any other reason because they should only be accepted if they have positive net present values.
False
Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B?
Mutually exclusive
The U.S. dollar equivalent is .3897 for the Brazilian real and 1.5649 for the UK pound. Which one of the following statements is correct given this information?
One UK pound will buy 1.5649 U.S. dollars.
A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as which type of cost?
Sunk
The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following?
The investment is mutually exclusive with another investment under consideration
Uncle Crazy owns several restaurants and hotels near a local interstate. One restaurant, FusionNew, needs modernized. He is trying to decide whether to accept an offer and sell FusionNew as is for the offer price of $1.1 million or renovate the restaurant himself. The projected renovation cost is $1.3 million. The restaurant would need to be shut down completely during the renovation which would cause a net operating cash flow loss of $210,000 in today's dollars. The estimated present value of the cash inflows from the renovated restaurant are $3.2 million. When analyzing the renovation project, what opportunity cost, if any should be included for the current restaurant? Assume the restaurant is totally paid for and any future costs will be paid in cash.
The opportunity cost is the value of the current offer to buy the restaurant.
Suppose you could buy 1,200 South Korean won or 20 Mexican peso last year for $1. Today, $1 will buy you 1,150 won or 22 peso. Which one of the following occurred over the past year?
The peso depreciated against the dollar.
Today, Crunchy Snacks is investing $487,000 in a new oven. As a result, the company expects its cash flows to increase by $62,000 a year for the next two years and by $98,000 a year for the following three years. How long must the firm wait until it recovers all of its initial investment?
The project never pays back
Assume you can exchange $1 for either £1 or €1.50 in the U.S. In the London market, you can exchange £1 for €1.52. This situation creates an opportunity to profit immediately from which one of the following?
Triangle arbitrage
10. Costs which are not directly related to projects or products, but which are still incurred by the firm in order to operate are called overhead costs.
True
12. Costs attributed to past investment and which cannot be recovered regardless of whether or not the new investment is undertaken are called sunk costs.
True
14. Incremental flows are those specifically incurred by the project and do not include pre-project flows.
True
15. Cash flow is defined as accounting income plus non-cash charges or expenses such as depreciation.
True
16. One drawback to the use of the internal rate of return model is that there may be more than one internal rate of return for the project.
True
17. The internal rate of return model may provide more than one solution when the sign of the project's cash flows changes more than once.
True
2. If the Internal Rate of Return for a project exceeds the cost of capital for the firm, the projects net present value will be positive.
True
21. A positive net present value of a project occurs when the return earned on a project exceeds the firm's cost of capital.
True
22. Depreciation and other non-cash expenditures, are non-cash in nature, but they cannot be ignored in determining incremental project cash flows.
True
34. A project with a positive net present value will always have an internal rate of return that exceeds the cost of capital.
True
5. The acceptance of a mutually exclusive project must include the effect that project has on other projects under consideration and their acceptability.
True
7. Net Present Value is the capital budgeting methodology viewed by most academicians as the theoretically best model for project acceptance or rejection.
True
9. The payback capital budgeting model assumes that all of the flows from the project have the same time value regardless of the timeframe in which they occur.
True
A firm's operating breakeven point will increase if fixed costs increase.
True
A firm's operating breakeven point will increase if variable costs increase.
True
Business risk is concerned with the acceptance or substitution of fixed costs for variable operating costs.
True
Financial risk is concerned with the acceptance or substitution of fixed costs for variable financing costs.
True
Profit and/or Loss magnification or leverage is provided by both operating and financial fixed costs.
True
The operating breakeven point is defined as that level of sales or revenue where the firm's operating profit or earnings before interest and tax (EBIT) is equal to zero.
True
Which one of the following statements is correct?
When the internal rate of return is greater than the required return, the net present value is positive.
The net present value:
decreases as the required rate of return increases.
Assume a firm has positive net earnings. The operating cash flow of this firm:
increases when tax rates decrease.
If an investment is producing a return that is equal to the required return, the investment's net present value will be:
zero
Assume you can exchange $1 for either €.8031 euro or £.6390. What is the cross-rate between the pound and the euro?
£.7957/€1
