FINANCE EXAM 3 (FINAL)

What are advantages of payback period? - Does not require discount rate - Does not require complex calculations - Does not require all CFs, Does not fully adjust for TVM - Measures Liquidity, Easy to communicate (9.9)

- Does not require discount rate - Does not require complex calculations - Measures Liquidity, Easy to communicate

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%? (Hint: Watch Video #9 - I. Capital Budgeting and Cash Flows - Annualized NPV and EAC @ (10.9)

25,773.54

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.

Step 1: Salvage Value Salvage Value = (asset sale - BV asset) Factory Sale = 4,500,000 BV of Land = 2,000,000 Salvage Value = (4,500,000 - 2,00,000) = 2,500,000 Step 2: Find After Tax Proceeds (sale price - (sale price - salvage value- book value))(Tax) Factory sale (including land) = 4,500,000 Land Book value = 2,00,000 Salvage Value = 2,500,000 After Tax Proceeds = (4,500,000 - (4,500,000 - 2,500,000 - 2,000,000) (35%) = (4,500,000 - 0) = 4,500,000

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. (10.9)

Step 1: Salvage Value Salvage Value = (asset sale - BV asset) Factory Sale = 4,500,000 BV of Land = 2,000,000 Salvage Value = (4,500,000 - 2,00,000) = 2,500,000 Step 2: Find Depreciation (Initial cost - salvage value) / time Initial Cost of Project = 20,000,000 Salvage Value = 2,500,000 Number of Years = 10 Depreciation = (20,000,000 - 2,500,000) / 10 = 1,750,000 Step 3 Find OCF: Sales = 8,000,000 Less Costs Operating Cost = 4,000,000 (half of operating) Depreciation: 1,750,000 EBIT = (8,000,000 - 4,000,000 - 1,750,000) 2,250,000 Taxes = (2,250,000 * 35%) = 787,500 Net Income = (2,250,000 - 787,500) = 1,462,500 Add Depreciation = 1,750,000 OCF @ t =1 ; $3,212,500

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=2? Round to nearest whole dollar value. (10.9)

Step 1: Salvage Value Salvage Value = (asset sale - BV asset) Factory Sale = 4,500,000 BV of Land = 2,000,000 Salvage Value = (4,500,000 - 2,00,000) = 2,500,000 Step 2: Find Depreciation (Initial cost - salvage value) / time Initial Cost of Project = 20,000,000 Salvage Value = 2,500,000 Number of Years = 10 Depreciation = (20,000,000 - 2,500,000) / 10 = 1,750,000 Step 3 Find OCF: Sales = 8,000,000 Less Costs Operating Cost = 4,000,000 (half of operating) Depreciation: 1,750,000 EBIT = (8,000,000 - 4,000,000 - 1,750,000) 2,250,000 Taxes = (2,250,000 * 35%) = 787,500 Net Income = (2,250,000 - 787,500) = 1,462,500 Add Depreciation = 1,750,000 OCF @ t =2 ; $3,212,500

The degree of operating leverage has which of the following characteristics? - The closer the firm is operating to breakeven quantity, the smaller the DOL. - A change in quantity demanded will produce the same percentage change in EBIT as an identical change in price per unit of output, other things held constant. - The DOL is not a fixed number for a given firm, but will depend upon the time zero values of the economic variables Q (Quantity), P (Price), and V (Volume). - The DOL relates the change in sales to the change in net operating income. (11.2)

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 discount rate exceeds the cost of capital. - Accepting the project has an indeterminate effect on shareholders. - The cost of capital exceeds the IRR - IRR exceeds the cost of capital. (9.4)

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. - The degree of total leverage (DTL) is equal to the DOL plus the degree of financial leverage (DFL). - Arithmetically, financial leverage and operating leverage offset one another so as to keep the degree of total leverage constant. Therefore, the formula shows that the greater the degree of financial leverage, the smaller the degree of operating leverage. - For a given change in sales, the corresponding percentage change in net income could be more or less than the percentage change in operating income. - The degree of total leverage (DTL) is equal to the DFL divided by the degree of operating leverage (DOL). (11.4)

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.

The Internal Rate of Return (IRR) is the discount rate that equates the NPV of an investment opportunity with $0 T/F (9.9)

True

The multiple IRR problem occurs when the signs of a project's cash flows change more than once. T/F (9.5)

True

Compute the payback period for a project that requires an initial outlay of $138,098 that is expected to generate $40,000 per year for 9 years. (9.7)

Yr CF Net CF 0 (-138,098) (-138,098) 1 40,000 (-98,098) 2 40,000 (-58,098) 3 40,000 (-18,098) 4 40,000 21,902 # years + (CF to breakeven) / (total CF next year) 3 yrs + (18,098/40,000) = 3.45

Jon Stevens, BNSF Vice President and Controller describes the capital spending process primarily as - a means to ensure regulatory compliance - necessary to maintain volume capacity - a balancing act that requires careful evaluation of the costs and benefits of each project (10.8)

a means to ensure regulatory compliance, a balancing act that requires careful evaluation of the costs and benefits of each project

What types of projects does the BNSF strategic studies team evaluate? - mandatory - critical - discretionary - regulated (10.8)

discretionary

The financing decision (9.9)

find the right kind of debt for your form and the right mix of debt and equity to fund your operations

The dividend decision (9.9)

if you can't find investments that make your minimum acceptable rate, return the cash to owners of your business

According to the article, "Sunk cost fallacy: Throwing good money after bad," how can banks limit losses from bad loans? - reduce provisions for non-perfomring loans - make fewer loans to businesses - increase bank executive turnover - No answer text provided. (10.2)

increase bank executive turnover

Generally, increases in leverage result in______________ return and _____________________ risk. - decreased; decreased - increased; increased - increased; decreased - decreased; increased (11.1)

increased; increased

The investment decision (9.9)

invest in assets that earn a return greater than the minimum acceptable hurdle rate

The primary purpose of capital budgeting is to: - minimize the firm's costs. - maximize the firm's profit. - maximize the shareholders' wealth. - maximize the budget. (9.1)

maximize the shareholders' wealth.

In theory, a firm should maintain financial leverage consistent with a capital structure that - maximizes dividends - meets the industry standards - maximizes the owner's wealth - meets the investor expectations (11.1)

maximizes the owner's wealth

What is the amount of the operating cash flow for a firm with $310,900 profit before tax, $100,000 depreciation expense, and a 35% marginal tax rate? (10.5)

profit = 310,900 depreciation = 100,00 tax rate = 35% EBIT $310,900 Less Tax (108815) Earnings $202,085 Add Depreciation: 100,000 OCF = $302,085

The "gold standard" of investment criteria refers to: - IRR - EVA - Profitabilty Index - NPV - Payback Period (9.2)

NPV

What types of analyses do the BNSF strategic studies team conduct? (all that apply) - experimental - operational - discounted cash flow - sensitivity (10.8)

discounted cash flow, sensitivity

Capital rationing may be beneficial to a firm if it: - increases funds to be used for other purposes - reduces a firm's interest expense - weeds out proposals with weaker or biased NPVs. - allows managers to select their favorite projects. (9.8)

weeds out proposals with weaker or biased NPVs

Gillstrap Promotions has projected the following values for the next three months: January February March Sales: $352,000; $379,000; $447,285 Purchases on Trade Credit: $218,000; $240,000; $260,000 Cash Expenses: $88,000; $91,000; $94,000 Taxes, interest, and dividends:$18,000; $20,000; $41,000 Capital Expenditures:0; $50,0000; $25,000 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. (12.5.3)

$3,614.00

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​ $25,963,956 (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. (10.3)

* don't include marketing study, sunk cost Land opportunity cost = $2,600,600 Project Initial Cost = $25,963,956 Total = 28,563,956

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 estimated annual sales - An increase in the discount rate - An increase in the initial investment - A decrease in the fixed costs (10.7)

- A decrease in the fixed costs

A corporation is contemplating an expansion project. The CFO plans to calculate the project's NPV by discounting the relevant cash flows (which include the initial up-front costs, the operating cash flows, and the terminal cash flows) at the corporation's cost of capital (WACC). Which of the following factors should the CFO include when estimating the relevant cash flows? - Any sunk costs associated with the project. - Any interest expenses associated with the project. - Any opportunity costs associated with the project. - All past costs associated with the oringinal project. (10.1)

- Any opportunity costs associated with the project.

The disadvantages of the IRR period method is that it - Only works for normal cash flows - Does not require a discount rate (for calculation) - Requires complex calculations - Adjusts for TVM and therefore risk (in comparing to hurdle rate that adjusts for risk) - Requires a lot of data (estimates of all CFs) (9.9)

- Only works for normal cash flows - Requires complex calculations - Requires a lot of data (estimates of all CFs)

If a 20% reduction in forecast sales would not extinguish a project's profitability, then sensitivity analysis would suggest: - that the initial sales forecasts were inflated. - deemphasizing that variable as a critical factor. - requiring a more detailed sales forecast. - reallocating fixed costs to this product. (10.7)

- deemphasizing that variable as a critical factor.

Identify which of these are the relevant cash flows when considering a capital budgeting project. - test marketing costs - fraction of CEO salary - lost rent from retail facility - remodeling expenses for new store - increase in inventory - expected salvage value of manufacturing equipment (10.1)

- lost rent from retail facility - remodeling expenses for new store - increase in inventory - expected salvage value of manufacturing equipment

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 Download herefor the spreadsheet and open the "Capital Rationing" worksheet. (10.9)

45,000

Carlisle Transport had $4,212 cash at the beginning of the period. During the period, the firm collected $1,530 in receivables, paid $2,180 to supplier, had credit sales of $5,785, and incurred cash expenses of $500. What was the cash balance at the end of the period? (12.5.3)

Beginning Cash = 4,212.00 A/R collected = 1,530.00 A/P paid = (2,180.00) Credit Sales = 5,785.00 Expenses = (500.00) Cash Balance =(add everything) $3,062.00

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? (9.3)

CO0 = -10,000 CO1 = 2,000 FO1= 6 CPT IRR = 5.47

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 9.5%? (9.2)

COo = -100,000 CO1 = 50,000 F01 = 3 I/Y = 9.5% CPT NPV = 25,445.34

A company just paid $10 million for a feasibility study. If the company goes ahead with the project, it must immediately spend another $79,399,897 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? (10.6)

Co0 = - 79,399,897 Co1 = - 20,000,000 Fo1 = 1 Co2 = 80,000,000 Fo2 = 1 Co3 = 90,000,000 Fo3 = 1 I/Y = 11% CPT NPV = 33,319,103.96

What is the profitability index for Project A with a cost of capital of 8%? Year Project A Project B 0 42,000 45,000 1 14,000 28,000 2 14,000 12,000 3 14,000 10,000 4 14,000 10,000 5 14,000 10,000 (9.8)

Co0 = -42,000 Co1 = 14,000 Fo1 = 1 Co2 = 14,000 Fo2 = 1 Co3 = 14,000 Fo3 = 1 Co4 = 14,000 Fo4 = 1 Co5 = 14,000 Fo5 = 1 I/Y = 8% CPT NPV = 13,897.94052 PI = (NPV + CFo) / CFo = (13,897.94052 + 42,000) / 42,000 = 1.33

Your firm has a potential project that will cost $5,000 now to begin. The project will then generate after-tax cash flows of $444 at the end of the next three years and then $1,926 per year for the three years after that. If the discount rate is 6.66% then what is the NPV? (9.9)

Co0 = -5,000 Co1 = 444 Fo1 = 3 Co2 = 1,926 Fo2 = 3 I/Y = 6.66% CPT NPV = 363.99

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. (10.6)

Co0 = 100,000,000 Co1 = -20,000,000 Fo1 = 1 Co2 = 80,000,000 Fo2 = 1 Co3 = 90,000,000 Fo3 = 1 CPT IRR = 15.96

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 T/F (9.9)

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 T/F (9.9)

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. T/F (9.9)

False

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 $97. What is the economic order quantity (EOQ)? (Round to the nearest whole number.) (12.9)

Inventory = 2000 Cost/unit = 150 Fixed order costs = 97 = 50.85928299

Libscomb Technologies' annual sales are $5,342,478 and all sales are made on credit, it purchases $3,952,754 of materials each year (and this is its cost of goods sold). Libscomb also has $532,649 of inventory, $530,348 of accounts receivable, and $484,518 of accounts payable. Assume a 365 day year. What is Libscomb's Inventory Turnover? (12.2)

Inventory Turnover = (COGS / inventory) = (3,952,754 / 532,649) = 7.42

____________________ results from the use of fixed - cost assets or funds to magnify returns to a firm's owners. - Long - term debt - Leverage - Equity - Capital structure (11.1)

Leverage

Projects that compete with one another so that the acceptance of one eliminates from further consideration all other projects that serve a similar function. - Indepedent - Mutually Inclusive - Mutually Exclusive - Dependent (9.1)

Mutually Exclusive

What is the net effect on a firm's working capital if a new project requires: $41,375 increase in inventory, $35,370 increase in accounts receivable, $35,000.00 increase in machinery, and a $44,016 increase in accounts payable? Round to nearest dollar amount. (10.4)

Net Working Capital = change in current assets - change in current liabilities - Current Assets Inventory 41,375 A/R 35,370 Total $76,745 - Current Liabilities A/P $44016 - Net Working Capital ($76,745 - $44016) = 32729 ** don't include machinery bc not current assets, is long-term

Mahrouq Technologies buys $16,115,771 of materials (net of discounts) on terms of 7/30, 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). (12.8)

Product Bought = $16,115,771.00 Discount (7/30) = 0.07Discount Period= 30.00 Nominal Rate = 91.58

Mavericks Cosmetics buys $4,338,956 of product (net of discounts) on terms of 2/10, 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. (12.8)

Product Bought= $4,338,956.00 Discount (2/10) = 0.02 Discount Period= 10.00 Effective Rate = ( 109.05

Libscomb Technologies' annual sales are $5,097,054 and all sales are made on credit, it purchases $3,328,689 of materials each year (and this is its cost of goods sold). Libscomb also has $517,645 of inventory, $476,161 of accounts receivable, and $478,419 of accounts payable. Assume a 365 day year. What is Libscomb's Receivables Turnover? (12.2)

Receivables Turnover = (Sales / Receivables) = 5,097,054 / 476,161 = 10.7

Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $45,744 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. (10.5)

Sales $45744 Less: Costs (22892) Depreciation (8,000) = (cost of asset - salvage value) / lifetime = (40,000 - 0) / 5 EBIT $14872 Less Taxes (2974.4) = (14872 * 20%) Earnings $1187.6 Add: Depreciation 8000 OCF $19,898 ** ignore working capital required, investment, and study expense

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 (9.9)

Step 1 Find NPV Co0 = -5,000 Co1 = 900 Fo1 = 3 Co2 = 1,400 Fo2 = 3 I/Y = 8% CPT NPV = 183.483036 Step 2 Find PI PI = (NPV + CFo) / CFo = (183.483036 + 5,000) / 5,000 = 1.03669 * 100% = 103.67

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​ $2,972,148. ​• 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​ project's NPV? Round to nearest whole dollar value. (10.9)

Step 1 Find Net Working Capital (current assets - current liabilities) Inventory (asset) = 3,500,000 A/R (asset) = 1,500,000 A/P (liability) = 2,000,000 Net working capital = (3,500,000 + 1,500,000 - 2,000,000) = 3,000,000 Step 2: Find Cash flow at t = 0 Net Working Capital = 3,000,000 Project Cost = 20,000,000 Land MV = 2,600,000 Total Cash Flow @ t = 0; = -(3,000 + 20,000,000+ 2,600,000) = - 25,600,000 Step 3: Find Cash flow at the end of project (t = 10) = 3,212,500 (same as other problems) Step 3: Calculate NPV CFo = (25,600,000) Co1 = 3,212,500 Fo1 = 9 Co2 = 10,712,500 I/Y = 10% CPT NPV = -2,969,003.5

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? (10.9)

Step 1: Find Depreciation (initial cost x depreciation rate) Initial Cost = 53,000 Depreciation Rate = 14.81% Depreciation = 7,849.30 Step 2: Find OCF @ Yr 3 Revenue Less: Depreciation = 7,489.30 EBIT = (23,500,000 - 7,489.30) = 15,650,70 Taxes = (15,650.70 * 40%) = 6,260.28 Net income = (15,650,70 - 6,260.28) = 9,390.42 Add Depreciation = 7,849.30 OCF @ t =3 = 17,239.72 Step 3: Find Book Value (initial cost - accumulated depreciation) Initial Cost = 53,000 Accumulated Depreciation: Depreciation Year 1 = (53,000 * 33.33%) = 17,664.90 Depreciation Year 2 = (53,000 * 44.45%) = 23,558.50 Depreciation Year 3 = (53,000 * 14.81%) = 7,849.30 Accumulated Depreciation = (17,664.90 + 23,558.50 + 7,849.30) = 49,072.70 Book value = 53,000 - 49,072.70 = 3,927.30 Step 4: Find After Tax Salvage Value (sale of asset - tax(sale of asset - BV) Salvage Value = 11,750 Tax = 40% Book Value = 3,927.30 After-Tax Salvage Value = (11,750 - (11,750 - 3,927.30)(40%) = 8,620.92 Find 5: Find Total Cashflow Total Cashflow = (OCF yr 3 + ATSV) OCF @ t=3; 17,239.72 ATSV = 8,620.92 = 25,860.64

Libscomb Technologies' annual sales are $5,656,422 and all sales are made on credit, it purchases $3,247,942 of materials each year (and this is its cost of goods sold). Libscomb also has $526,940 of inventory, $510,864 of accounts receivable, and beginning and ending of year $414,214 and $487,897 accounts payables (respectively). Assume a 365 day year. What is Libscomb's Cash Cycle (in days)? (12.3)

Step 1: Find Inventory Turnover (COGS/ inventory) = (3,247,942/526,940) =6.1638 Step 2: Find Inventory Period (365 / Inv. Turnover) = 365 / 6.1638 = 59.2169 Step 3: Find A/R Turnover (Sales / A/R) = (5,656,422/510,864) = 11.0723 Step 4: Find A/R Period (365/ A/R Turnover) = 365 / 11.0723 = 32.9652 Step 5: Find Operating Cycle (Inv Period + A/R Period) = 59.2169 + 32.9652 = 92.1822 Step 6: Find Average A/P (beg + end) / 2 = (414,214 + 487,897) /2 = 451,055.5 Step 7: Find A/P Turnover (purchases / A.P) = 7.2008 Step 8: Find A/P Period (365 / A/P turnover) = 365/ 7.2008 = 50.6891 Step 8: Find Cash Cycle (operating cycle - A/P period) = 92.1822 - 50.6891 = 41.4931

Libscomb Technologies' annual sales are $6,428,277 and all sales are made on credit, it purchases $3,335,973 of materials each year (and this is its cost of goods sold). Libscomb also has $535,810 of inventory, $573,240 of accounts receivable, and $449,751 of accounts payable. Assume a 365 day year. What is Libscomb's Operating Cycle (in days)? (12.2)

Step 1: Find Inventory Turnover (COGS/ inventory) = 6,428,277 / 3,35,973 = 6.2260 Step 2: Find Inventory Period (365 / Inv. Turnover) = 365 / 6.2260 = 58.6248 Step 3: Find A/R Turnover (Sales / A/R) = 6,428,277 / 573,240) = 11.2139 Step 4: Find A/R Period (365/ A/R Turnover) = 365 / 11.2139 =32.5488 Step 5: Find Operating Cycle (Inv Period + A/R Period) = 58.6248+32.5488 = 91.17

Libscomb Technologies' annual sales are $6,341,042 and all sales are made on credit, it purchases $3,503,740 of materials each year (and this is its cost of goods sold). Libscomb also has $504,034 of inventory, $568,534 of accounts receivable, and $461,790 of accounts payable. Assume a 365 day year. What is Libscomb's Inventory Period (in days)? (12.2)

Step 1: Find Inventory Turnover (COGS/inventory) = 6,341,042/ 504,034 = 6.9514 Step 2: Find Inventory Period (365 / Inventory Turnover) = 365 / 6.9514 = 52.51

You are considering the following three mutually exclusive projects. The required rate of return for all three projects is 14%. Year A $ (1,000) $ 300 $300 $ 600 $300 B $(5,000) $ 1,700 $ 1,700 $1,700 $1,700 C $(50,000) $ 0 $15,000 $ 28,500 $ 33,000 What is the IRR of the best project? % terms to 2 decimal places w/o % sign (9.6)

Step 1: Find NPV of all three projects A Co0= -1,000 Co1 = 300 Fo1 = 1 Co2 = 300 Fo2 = 1 Co3 = 600 Fo3 = 1 Co4 = 300 Fo4 = 1 I/Y = 14% CPT NPV = 76.605 B Co0 = -5,000 Co1 = 1,700 Fo1 = 1 Co2 = 1,700 Fo2 = 1 Co3 = 1,700 Fo3 = 1 Co4 = 1,700 Fo4 = 1 I/Y = 14% CPT NPV = -46.689 C Co0 = -50,000 Co1 = 0 Fo1 = 1 Co2 = 15,000 Fo2 = 1 Co3 = 28,500 Fo3 = 1 Co4 = 33,000 Fo4 = 1 I/Y = 14% CPT NPV = 317.35 Step 2: project with highest NPV, is then selected to calculate the IRR C (enter same cash flows) CPT IRR = 14.27

Libscomb Technologies' annual sales are $6,270,543 and all sales are made on credit, it purchases $4,217,655 of materials each year (and this is its cost of goods sold). Libscomb also has $570,818 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)? (12.2)

Step 1: Find Receivables Turnover (COGS / receivables) = 6,270,543/1,475,000 =4.2512 Step 2: Find Receivables Period (365 / Rec. Turnover) = (365 / 4.2512) = 85.86

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. (10.9)

Step 1: Find Salvage Value Salvage Value = (asset sale - BV asset) Factory Sale = 4,500,000 BV of Land = 2,000,000 Salvage Value = (4,500,000 - 2,00,000) = 2,500,000 Step 2: Find Net Working Capital (current assets - current liabilities) Inventory (asset) = 3,500,000 A/R (asset) = 1,500,000 A/P (liability) = 2,000,000 Net working capital = (3,500,000 + 1,500,000 - 2,000,000) = 3,000,000 Step 3: Find After Tax Proceeds (sale price - (sale price - salvage value- book value))(Tax) Factory sale (including land) = 4,500,000 Land Book value = 2,00,000 Salvage Value = 2,500,000 After Tax Proceeds = (4,500,000 - (4,500,000 - 2,500,000 - 2,000,000) (35%) = (4,500,000 - 0) = 4,500,000 Step 4: Find Operating Cash flow @ t=10 (from above questions) = 312,250 Step 5: Find total cash flow @ t=10 Total Cash flow = After-tax proceeds + working capital decrease + OCF = $4,500,000 + 3,000,000 + 3,212,500) = $10,712,500

List steps of the capital budgeting process (9.9)

Step 1: Proposal generation Step 2: Review and analysis Step 3: Decision making Step 4: Implementation Step 5: Follow-up