FINA EXAM 3
Projects that compete with one another so that the acceptance of one eliminates from further consideration all other projects that serve a similar function.
Mutually Exclusive
Libscomb Technologies' annual sales are $6,330,727 and all sales are made on credit, it purchases $4,384,985 of materials each year (and this is its cost of goods sold). Libscomb also has $507,252 of inventory, $1,475,000 of accounts receivable, and $1,400,000 of accounts payable. Assume a 365 day year. What is Libscomb's Receivables Period (in days)?
=1475000/6330727*365 =85.04
What are advantages of payback period?
Does not require complex calculations Measures Liquidity, Easy to communicate Does not require discount rate
It should not usually be clear whether we are describing independent or mutually exclusive projects in the following chapters because when we only describe one project then it can be assumed to be independent
False
NPV assumes intermediate cash flows are reinvested at the cost of equity, while IRR assumes that they are reinvested at the cost of capital
False
Net present value (NPV) is a sophisticated capital budgeting technique; found by adding a project's initial investment from the present value of its cash inflows discounted at a rate equal to the firm's cost of capital.
False
Jon Stevens, BNSF Vice President and Controller describes the capital spending process primarily as
- a means to ensure regulatory compliance - a balancing act that requires careful evaluation of the costs and benefits of each project
What types of analyses do the BNSF strategic studies team conduct?
- discounted cash flow - sensitivity
A company just paid $10 million for a feasibility study. If the company goes ahead with the project, it must immediately spend another $100 million now, and then spend $20 million in one year. In two years it will receive $80 million, and in three years it will receive $90 million. If the cost of capital for the project is 11 percent, what is the project's IRR? % terms to 2 decimal places and without the % sign.
100+20/1.0x=80/1.0x^2+90/1.0x^3 =15.945% https://www.chegg.com/homework-help/questions-and-answers/company-paid-10-million-feasibility-study-company-goes-ahead-project-must-immediately-spen-q23381046
Grill Master Johnnys is thinking about purchasing a new, energy-efficient grill. The grill will cost $53,000.00 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $11,750.00. The grill will have no effect on revenues but will save Johnny's $23,500.00 per year in energy expenses. The tax rate is 40%. The 3-year MACRS schedule; Year Depr % 1 33.33 2 44.45 3 14.81 4 7.41 What is the total cash flow in year 3?
25860.64 https://www.chegg.com/homework-help/questions-and-answers/grill-master-johnnys-thinking-purchasing-new-energy-efficient-grill-grill-cost-53-00000-de-q54259110
Gillstrap Promotions has projected the following values for the next three months: All sales are credit sales with 40% collected in the month of sale, 50% collected the following month, and the remainder collected in the second month after the sale. Credit purchases are paid in 30 days and all other items require immediate payment. Compute the net cash inflow for March.
=0.4*448196+0.5*379000+0.1*352000 = 403978.40 =240000+94000+41000+25000 =400000 = 403978.40-400000 = 3978.40
Suppose the capital budget in the lecture example worksheet in $WIKI_REFERENCE$/pages/capital-budgeting-and-cash-flows-the-lectures?module_item_id=g9a89e790298905497957e6a4658e2a67 Video #11 was $100,000. What is the NPV of the best project(s)? Click here downloadfor the spreadsheet and open the "Capital Rationing" worksheet.
45000 https://www.chegg.com/homework-help/questions-and-answers/suppose-capital-budget-100-000-npv-best-project-s-q60520827
A new restaurant is ready to open for business. It is estimated that the food cost (variable cost) will be 71.07% of sales, while fixed cost will be $450,000. The first year's sales estimates are $603,758. Calculate the firm's operating breakeven level of sales. Answer to 2 decimal places.
=100-71.07 =28.93 = 450000/28.93% = 1555478.742
What is the internal rate of return for a project with an initial outlay of $10,000 that is expected to generate cash flows of $2,000 per year for 6 years?
5.47% PUT IN EXCEL -10000 2000 2000 2000 2000 2000 2000 =IRR(those numbers above) Round to 2nd decimal point ORRRRR PV=-10,000 FV=0 PMT=2,000 N=6 CPT I/Y =5.47
Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet demand for a new line of solar charged motorcycles (who wants to ride on a cloudy day anyway?) The proposed project has the following features; • The firm just spent $300,000 for marketing study to determine consumer demand (@ t=0). • Aero Motorcycles purchased the land the factory will be built on 5 years ago for $2,000,000 and owns it outright (that is, it does not have a mortgage). The land has a current market value of $2,600,000. • The project has an initial cost of $27,044,194 (excluding land, hint: land is not subject to depreciation). • If the project is undertaken, the company will realize an additional $8,000,000 in sales over each of the next ten years. (i.e. sales in each year are $8,000,000) • The company's operating cost (not including depreciation) will equal 50% of sales. • The company's tax rate is 35 percent. • Use a 10-year straight-line depreciation schedule. • At t = 10, the project is expected to cease being economically viable and the factory (including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase price). • The project's WACC = 10 percent • Assume the firm is profitable and able to use any tax credits (i.e. negative taxes) .0 What is the project's outflow at t=0? Answer to the nearest whole dollar value.
=2600000+27044194 = 29644194
Which of the following changes, if of a sufficient magnitude, could turn a negative NPV project into a positive NPV project?
A decrease in the fixed costs
You are considering the following three mutually exclusive projects. The required rate of return for all three projects is 14%. What is the IRR of the best project? % terms to 2 decimal places w/o % sign
A: Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period) =300/1.14+300/1.14^2+600/1.14^3+300/1.14^4 =1076.61 NPV=Present value of inflows-Present value of outflows =1076.61-1000 =$76.61(Approx) B: Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period) =1700/1.14+1700/1.14^2+1700/1.14^3+1700/1.14^4 =4953.31 NPV=Present value of inflows-Present value of outflows =4953.31-5000 =-46.69(Approx)(Negative) C: Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period) =15000/1.14^2+28500/1.14^3+33000/1.14^4 =50317.35 NPV=Present value of inflows-Present value of outflows =50317.35-50000 =$317.35(Approx) Hence C is the best project having highest NPV. Let irr be x%At irr,present value of inflows=present value of outflows. 50,000=15000/1.0x^2+28500/1.0x^3+33000/1.0x^4 x=irr=14.23(Approx)
The dividend decision
If you can't find investments that make your minimum acceptable rate, return the cash to owners of your b
____________________ results from the use of fixed - cost assets or funds to magnify returns to a firm's owners.
Leverage
The "gold standard" of investment criteria refers to:
NPV
The disadvantages of the IRR period method is that it
Only works for normal cash flows Requires a lot of data (estimates of all CFs) Requires complex calculations
Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $194 at the end of the next three years and then $1,958 per year for the three years after that. If the discount rate is 7.86% then what is the NPV?
See excel Column 1 0-6 Column 2 -5000 194 194 194 1958 1958 1958 Column 3 1 =1/(1+7.86%)^A2 (do the same 5 more times
List steps of the capital budgeting process
Step 1 Proposal generation Step 2 Review and analysis Step 3 Decision making Step 4 Implementation Step 5 Follow-up
The degree of operating leverage has which of the following characteristics?
The DOL relates the change in sales to the change in net operating income.
Which of the following statements is correct for a project with a negative NPV?
The cost of capital exceeds the IRR
Which of the following statements is correct?
The degree of operating leverage (DOL) depends on a company's fixed costs, variable costs, and sales. The DOL formula assumes (1) that fixed costs are constant and (2) that variable costs are a constant proportion of sales.
Compute the payback period for a project that requires an initial outlay of $297,771 that is expected to generate $40,000 per year for 9 years.
Time Amount Cumulative (297,771) (297,771) (basically subtract 40,000 every line) 1 40,000 (257,771) 2 40,000 (217,771) 3 40,000 (177,771) 4 40,000 (137,771) 5 40,000 (97,771) 6 40,000 (57,771) 7 40,000 (17,771) 8 40,000 22,229 9 40,000 62,229 Look at the last number before going over the 40,000 and the year = 7+(17,771/40,000) = 7.44
The Internal Rate of Return (IRR) is the discount rate that equates the NPV of an investment opportunity with $0
True
The multiple IRR problem occurs when the signs of a project's cash flows change more than once.
True
Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $900 at the end of the next three years and then $1400 per year for the three years after that. If the discount rate is 8% then what is the PI? Answer in % format with 2 number after the decimal point
USE EXCEL FOR THIS! This problem is also on Chegg PI = Profitability Index
If a 20% reduction in forecast sales would not extinguish a project's profitability, then sensitivity analysis would suggest:
deemphasizing that variable as a critical factor.
What types of projects does the BNSF strategic studies team evaluate?
discretionary
Revenues generated by a new fad product are forecast as follows: ear Revenues 1 $72,075 2 40,000 3 20,000 4 10,000 Thereafter 0 Expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $40,000 in plant and equipment that will be depreciated using the straight-line method over 5 years. The firm recently spent $2,000 on a study to estimate the revenues of the new product. The tax rate is 20%. What is the operating cash flow in year 1? Answer to nearest whole dollar amount.
https://www.chegg.com/homework-help/questions-and-answers/105-tax-operating-cash-flows-1-revenues-generated-new-fad-product-forecast-follows-year-re-q61705719 72075 =72075*50% =36037.5 =40000/5 =8000 =72075-36037.5-8000 = 28037.5 =28037.5*20% 5607.5 =28037.5-5607.5 =22430 =22430+8000 =30430 <- THIS IS THE ANSWER!!!
Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $323 at the end of the next three years and then $1,709 per year for the three years after that. If the discount rate is 9.5% then what is the NPV?
https://www.chegg.com/homework-help/questions-and-answers/question-5-1-pts-firm-potential-project-cost-5-000-begin-project-generate-tax-cash-flows-3-q60281178 SEE EXCEL SHEET
According to the article, "Sunk cost fallacy: Throwing good money after bad," how can banks limit losses from bad loans?
increase bank executive turnover
Generally, increases in leverage result in______________ return and _____________________ risk.
increased; increased
The investment decision
invest in assets that earn a rate greater than the minimum acceptable hurdle rate
The primary purpose of capital budgeting is to:
maximize the shareholders' wealth.
In theory, a firm should maintain financial leverage consistent with a capital structure that
maximizes the owner's wealth
Capital rationing may be beneficial to a firm if it:
weeds out proposals with weaker or biased NPVs.
Libscomb Technologies' annual sales are $6,131,211 and all sales are made on credit, it purchases $3,299,391 of materials each year (and this is its cost of goods sold). Libscomb also has $508,496 of inventory, $540,133 of accounts receivable, and beginning and ending of year $444,453 and $444,298 accounts payables (respectively). Assume a 365 day year. What is Libscomb's Cash Cycle (in days)?
= (Accounts receivable / Sales) x 365 + (inventory / Cost of goods sold) x 365 - (Average accounts payable / Cost of goods sold) x 365 Average payables is computed as: = ($ 444,453 + $ 444,298) / 2 = $ 444,375.5 So, the cash cycle is: = ($ 540,133 / $ 6,131,211) x 365 + ($ 508,496 / $ 3,299,391) x 365 - ($ 444,375.5 / $ 3,299,391) x 365 = 32.15491116 days + 56.25312065 days - 49.15969568 days = 39.25 days Approximately
What is the equivalent annual cost for a project that requires a $50,000 investment at time-period zero, and a $10,000 annual expense during each of the next 4 years, if the opportunity cost of capital is 10%?
= 25773.54 https://www.chegg.com/homework-help/questions-and-answers/grill-master-johnnys-thinking-purchasing-new-energy-efficient-grill-grill-cost-53-00000-de-q54717577
What is the profitability index for Project A with a cost of capital of 8%? Year Project A Project B 0 ($42,000.00) ($45,000.00) 1 $14,000.00 $28,000.00 2 $14,000.00 $12,000.00 3 $14,000.00 $10,000.00 4 $14,000.00 $10,000.00 5 $14,000.00 $10,000.00
=( (14000/1.08)+(14000/ (1.08)^2+(14000/(1.08)^3+(14000/(1.08)^4+(14000/(1.08)^5) = (12962.96+ 12002.74+11113.65+10290.41+9528.16) = 55898 (Approx) =[55898/42000] <-PROJECT A!!! =1.33
Mavericks Cosmetics buys $3,828,691 of product (net of discounts) on terms of 6/10, net 60, and it currently pays on the 10th day and takes discounts. Mavericks plans to expand, and this will require additional financing. If Mavericks decides to forego discounts, what would the effective percentage cost of its trade credit be, based on a 365-day year? Answer in % terms to 2 decimal places.
=((1 +( 0.06/(1 -0.06)))^(365/10) -1 =8.568268 =8.568268*100% 856.8268 -> 856.83%
Mahrouq Technologies buys $12,726,823 of materials (net of discounts) on terms of 1/30, net 60, and it currently pays within 30 days and takes discounts. Mahrouq plans to expand, and this will require additional financing. If Mahrouq decides to forego discounts and thus to obtain additional credit from its suppliers, calculate the nominal cost of that credit. Answer in % terms to 2 decimal places (no % sign).
=(0.01/(1- 0.01))*(365/(60- 30)) =0.122896 12.29%
What is the NPV of a project that costs $100,000.00 and returns $50,000.00 annually for three years if the opportunity cost of capital is 8.94%?
=-100000 + 50000/(1+0.0894)^1 + 50000/(1+0.0894)^2 + 50000/(1+0.0894)^3 = 26700.20 USE EXCEL
A company just paid $10 million for a feasibility study. If the company goes ahead with the project, it must immediately spend another $108,876,917 now, and then spend $20 million in one year. In two years it will receive $80 million, and in three years it will receive $90 million. If the cost of capital for the project is 11 percent, what is the project's NPV?
=-108876917-20000000/(1+0.11)^1+80000000/(1+0.11)^2+90000000/(1+0.11)^3 =3842084 PLUG INTO EXCEL
A new restaurant is ready to open for business. It is estimated that the food cost (variable cost) will be 40% of sales, while fixed cost will be $460,707. The first year's sales estimates are $1,250,000. Calculate the firm's degree of operating leverage (DOL). Answer to 2 decimal places.
=1250000*40% =500000 =1250000-500000 =750,000 =750,000-460,707 =289,293 =750000/289293 =2.59
Maverick Technologies has sales of $3,000,000. The company's fixed operating costs total $487,464 and its variable costs equal 60% of sales. The company's interest expense is $500,000. What is the company's degree of total leverage (DTL)? Answer to 2 decimal places.
=3000000*(1-0.6)/(3000000*(1-0.6)-487464-500000) =5.646102
What is the net effect on a firm's working capital if a new project requires: $40,013 increase in inventory, $30,461 increase in accounts receivable, $35,000.00 increase in machinery, and a $43,704 increase in accounts payable? Round to nearest dollar amount.
=30461+40013-43704 = 26770
What is the amount of the operating cash flow for a firm with $378,840 profit before tax, $100,000 depreciation expense, and a 35% marginal tax rate?
=378,840*35% =132594 =378,840-132594 =246,246 =100000+246246 =346,246
Libscomb Technologies' annual sales are $6,382,355 and all sales are made on credit, it purchases $4,300,590 of materials each year (and this is its cost of goods sold). Libscomb also has $584,357 of inventory, $484,935 of accounts receivable, and $400,215 of accounts payable. Assume a 365 day year. What is Libscomb's Inventory Turnover?
=4300590/584357 =7.359525 =7.36
Carlisle Transport had $4,802 cash at the beginning of the period. During the period, the firm collected $1,765 in receivables, paid $1,857 to supplier, had credit sales of $5,512, and incurred cash expenses of $500. What was the cash balance at the end of the period?
=4802+1765-1857-500 =4210
Libscomb Technologies' annual sales are $5,453,137 and all sales are made on credit, it purchases $4,438,622 of materials each year (and this is its cost of goods sold). Libscomb also has $507,663 of inventory, $535,660 of accounts receivable, and $412,720 of accounts payable. Assume a 365 day year. What is Libscomb's Receivables Turnover?
=5453137/535660 =10.18
Libscomb Technologies' annual sales are $6,686,441 and all sales are made on credit, it purchases $3,074,363 of materials each year (and this is its cost of goods sold). Libscomb also has $560,747 of inventory, $530,117 of accounts receivable, and $499,425 of accounts payable. Assume a 365 day year. What is Libscomb's Inventory Period (in days)?
=560747*365/3074363 =66.57
Libscomb Technologies' annual sales are $6,907,896 and all sales are made on credit, it purchases $3,318,081 of materials each year (and this is its cost of goods sold). Libscomb also has $569,158 of inventory, $567,312 of accounts receivable, and $417,495 of accounts payable. Assume a 365 day year. What is Libscomb's Operating Cycle (in days)?
=569158/3318081*365 =62.61 =567312/6907896*365 =29.98 =62.61+29.98 =92.59
Maverick Technologies has sales of $3,000,000. The company's fixed operating costs total $500,000 and its variable costs equal 60% of sales, so the company's current operating income is $700,000. The company's interest expense is $550,832. What is the company's degree of financial leverage (DFL)? Answer to 2 decimal places.
=700,000/(700,000-492284) =4.692695
Davis Supply maintains an average inventory of 2,000 dinosaur skulls for sale to filmmakers. The carrying cost per skull per year is estimated to be $150.00 and the fixed order cost is $85. What is the economic order quantity (EOQ)? (Round to the nearest whole number.)
=SQRT((2*2000*85)/150) =47.60952 =48 (ROUNDED TO THE NEAREST WHOLE NUMBER)
Hammond Supplies expects sales of 236,304 units per year with carrying costs of $3.21 per unit and ordering cost of $9.75 per order. Assuming the level of inventory is stable, what is the optimal average number of units in inventory? Round to the nearest whole number.
=SQRT((2*236304*9.75)/3.21) =1198.12 -> 1198 =1198/2 =599
Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles (who wants to ride on a cloudy day anyway?) The proposed project has the following features; • The firm just spent $300,000 for a marketing study to determine consumer demand (@ t=0). • Aero Motorcycles purchased the land the factory will be built on 5 years ago for $2,000,000 and owns it outright (that is, it does not have a mortgage). The land has a current market value of $2,600,000. • The project has an initial cost of $20,000,000 (excluding land, hint: the land is not subject to depreciation). • If the project is undertaken, at t = 0 the company will need to increase its inventories by $3,500,000, accounts receivable by $1,500,000, and its accounts payable by $2,000,000. This net operating working capital will be recovered at the end of the project's life (t = 10). • If the project is undertaken, the company will realize an additional $8,000,000 in sales over each of the next ten years. (i.e. sales in each year are $8,000,000) • The company's operating cost (not including depreciation) will equal 50% of sales. • The company's tax rate is 35 percent. • Use a 10-year straight-line depreciation schedule. • At t = 10, the project is expected to cease being economically viable and the factory (including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase price). • The project's WACC = 10 percent • Assume the firm is profitable and able to use any tax credits (i.e. negative taxes). What are the after tax proceeds from the sale of the factory (i.e., ATSV)? Round to nearest whole dollar value.
ATSV = Salvage Value - Tax * (Salvage Value - Book Value) Combined Salvage Value = 4,500,000 Tax = 35% Book Value Factory = Initial Cost of Project - Accumulated Depreciation = 20,000,000 - (1,750,000*10) ATSV FINAL FORMULA = Salvage Value - Tax * (Salvage Value - Book Value) = 4,500,000 - 0.35 * (4,500,000 - 2,500,000 - 2,500,000 = 4,500,000 - 0.35 * (0) = 4,500,000 ^^^ THIS IS THE ANSWER https://www.studocu.com/en-us/document/the-university-of-texas-at-arlington/business-finance/fina-exam-3-study-guide-review-for-the-exam/15542347
The financing decision
Find the right kind of debt for your firm and the right mix of debt and equity to fund your operations
Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles (who wants to ride on a cloudy day anyway?) The proposed project has the following features; • The firm just spent $300,000 for a marketing study to determine consumer demand (@ t=0). • Aero Motorcycles purchased the land the factory will be built on 5 years ago for $2,000,000 and owns it outright (that is, it does not have a mortgage). The land has a current market value of $2,600,000. • The project has an initial cost of $20,000,000 (excluding land, hint: the land is not subject to depreciation). • If the project is undertaken, at t = 0 the company will need to increase its inventories by $3,500,000, accounts receivable by $1,500,000, and its accounts payable by $2,000,000. This net operating working capital will be recovered at the end of the project's life (t = 10). • If the project is undertaken, the company will realize an additional $8,000,000 in sales over each of the next ten years. (i.e. sales in each year are $8,000,000) • The company's operating cost (not including depreciation) will equal 50% of sales. • The company's tax rate is 35 percent. • Use a 10-year straight-line depreciation schedule. • At t = 10, the project is expected to cease being economically viable and the factory (including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase price). • The project's WACC = 10 percent • Assume the firm is profitable and able to use any tax credits (i.e. negative taxes). What is the total cash flow at t=10? Round to nearest whole dollar value.
Total Cash Flow at T10 = After Tax Salvage Value + Operating Cash Flow + Net Working Capital Total Cash Flow at T10 = 4,500,000 + 3,212,500 + 3,000,000 Total Cash Flow at T10 = 10,712,500 https://www.studocu.com/en-us/document/the-university-of-texas-at-arlington/business-finance/fina-exam-3-study-guide-review-for-the-exam/15542347
Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet the demand for a new line of solar-charged motorcycles (who wants to ride on a cloudy day anyway?) The proposed project has the following features; • The firm just spent $300,000 for a marketing study to determine consumer demand (@ t=0). • Aero Motorcycles purchased the land the factory will be built on 5 years ago for $2,000,000 and owns it outright (that is, it does not have a mortgage). The land has a current market value of $2,600,000. • The project has an initial cost of $20,000,000 (excluding land, hint: the land is not subject to depreciation). • If the project is undertaken, at t = 0 the company will need to increase its inventories by $3,500,000, accounts receivable by $1,500,000, and its accounts payable by $2,000,000. This net operating working capital will be recovered at the end of the project's life (t = 10). • If the project is undertaken, the company will realize an additional $8,000,000 in sales over each of the next ten years. (i.e. sales in each year are $8,000,000) • The company's operating cost (not including depreciation) will equal 50% of sales. • The company's tax rate is 35 percent. • Use a 10-year straight-line depreciation schedule. • At t = 10, the project is expected to cease being economically viable and the factory (including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase price). • The project's WACC = 10 percent • Assume the firm is profitable and able to use any tax credits (i.e. negative taxes). What is the operating cash flow @ t=1? Round to nearest whole dollar value. SAME AS T=2 !!!
USE EXCEL TO SOLVE cost of goods = revenue*operating cost =8,000,000*50% =4,000,000 Depreciation Expense Straight-Line Depreciation Method = (Initial Cost - Salvage Value)/Number of Years =(20,000,000-(4,500,000 - 2,000,000))/10 =(20,000,000 - 2,500,000)/10 Depreciation Expense = 1,750,000 Earnings Before Tax = 8,000,000 - 4,000,000 - 1,750,000 Earnings Before Tax = 2,250,000 Tax = 2,250,000*0.35 Tax = 787,500 Net Income = 2,250,000-787,500 = 1,462,500 FINAL FORMULA =Net Income+Depreciation Expense = 1,462,500+1,750,000 ^^^^^^^^^^^^^^^^ THIS IS THE ANSWER!!!