Finance

Q: Since stockholders are able to reduce their exposure to risk by efficiently diversifying their holdings of securities, there is no reason for individual firms to seek diversification of their holdings of assets.

Q: A small, family-owned corporation would be more likely to use the contribution-to-firm risk criteria rather than the systematic risk to evaluate capital budgeting projects.

Q: Give an example of an option to abandon a project. Why might this be of value?

Q: Give an example of an option to expand a project. Why might this be of value?

Q: Give an example of an option to delay a project. Why might this be of value?

Q: A major corporation is considering a capital budgeting project that involves the development of a new technology. The controller estimates the net present value to be negative, yet argues that the company should invest in the project. Which of the following statements is MOST correct? A) The controller should be fired for making such a poor decision. B) The controller may be considering the option to expand or modify the project in the future. C) The profitability index may be greater than one, giving an accept decision. D) Capital rationing may exist for the current year.

Q: Three of the most common options that can add value to a capital budgeting project are the option to delay the project, the option to expand the project, and the option to abandon the project.

Q: In general, a project's cash flows will fall into one of three categories. What are these categories?

Q: J.B. Corporation is considering the purchase of equipment that has an invoice price of $450,000. The equipment was recommended by a consulting firm that did an analysis for J.B. Corporation. J.B. paid the consulting firm $12,000 for its report. The cost of shipping and installation is $50,000. The equipment will be depreciated on a straight-line basis over its useful life of 10 years, assuming no salvage value. The equipment will replace existing assets that have a current book value of $100,000 and which could be sold for $150,000. Additional net working capital of $15,000 will be required to maintain the equipment and to support higher sales. J.B.'s marginal tax rate is 40%. Calculate the initial outlay required to fund this project.

Q: LEE Corporation intends to purchase equipment for $1,500,000. The equipment has a 5-year useful life and will be depreciated on a straight-line basis. Addition of the equipment requires additional working capital of $20,000. The $20,000 is expected to be recaptured at the end of the project. LEE's marginal tax rate is 40%. Use of the equipment is expected to change the company's reported EBIT by $600,000 in year one, $700,000 in year two, $550,000 in year three, $200,000 in year four, and $100,000 in year five. Due to changing market conditions, the equipment did have a salvage value of $100,000 at the end of year five.a. Calculate the initial outlay and the incremental free cash flows over the life of the project.b. If the risk-adjusted discount rate for this project is 20%, calculate the project's net present value and internal rate of return and comment on the acceptability of the project.

Q: P.D. Corporation is considering the purchase of a high-speed lathe that has an invoice price of $250,000. The cost to ship the lathe to P.D.'s factory is $10,000, and the existing facilities will require modifications that are expected to cost $20,000. The machine will be depreciated on a straight-line basis over its useful life of 10 years, assuming no salvage value. P.D. Corporation is planning on paying for the lathe using a line of credit at the bank that has an interest rate of 6 percent per year. The lathe is expected to increase production and sales. Sales are expected to increase by $100,000 per year. Inventory and accounts receivable balances are expected to increase by $10,000 and $20,000 respectively. Expenses to operate the lathe are $25,000 per year. P.D.'s marginal tax rate is 40%. a. Calculate the initial outlay required to fund this project. b. Calculate the incremental after-tax cash flow in year one of the project.

Q: Dave Company, Inc. is considering purchasing a new grinding machine with a useful life of five years. The initial outlay for the machine is $165,000. The expected cash inflows are as follows:YearAfter-tax Expected Cash Flow115,000235,000370,000490,000570,000Given that the firm has a 10% required rate of return, what is the NPV?

Q: Kelly Corporation is considering an investment proposal that requires an initial investment of $150,000 in equipment. Fully depreciated existing equipment may be disposed of for $40,000 pre-tax. The proposed project will have a five-year life, and is expected to produce additional revenue of $65,000 per year. Expenses other than depreciation will be $15,000 per year. The new equipment will be depreciated to zero over the five-year useful life, but it is expected to actually be sold for $20,000. Kelly has a 35% tax rate. a. What is the net initial outlay for the proposed project? b. What is the operating cash flow for years 1-4? c. What is the total cash flow at the end of year five (operating cash flow for year 5 plus terminal cash flow)?

Q: Calculate the internal rate of return on the following projects: a. Initial outlay of $60,500 with an after-tax cash flow of $11,897 per year for eight years. b. Initial outlay of $647,000 with an after-tax cash flow of $118,000 per year for ten years. c. Initial outlay of $25,400 with an after-tax cash flow $11,788 per year for three years.

Q: Agri-Industries purchased some agricultural land at the edge of a large metropolitan area for $250,000 five years ago. In order to have the land classified as agricultural for property tax purposes, the company has been leasing the property to neighboring farmers. The before-tax return from leasing the property is $12,000 per year. This company's corporate tax rate is 35 percent. If the company sells the land for $400,000 today, what is the internal rate of return on this investment?

Q: Premium Pie Company needs to purchase a new baking oven to replace an older oven that requires too much energy to run. The industrial size oven will cost $1,200,000. The oven will be depreciated on a straight-line basis over its six-year useful life. The old oven cost the company $800,000 just four years ago. The old oven is being depreciated on a straight-line basis over its expected ten-year useful life. (That is, the old oven is expected to last six more years if it is not replaced now.) Due to changes in fuel costs, the old oven may only be sold today for $100,000. The new oven will allow the company to expand, increasing sales by $300,000 per year. Expenses will also decrease by $50,000 per year due to the more energy efficient design of the new oven. Premium Pie Company is in the 40% marginal tax bracket and has a required rate of return of 10%.a. Calculate the net present value and internal rate of return of replacing the existing machineb. Explain the impact on NPV of the following:i. Required rate of return increasesii. Operating costs of new machine are increasediii. Existing machine sold for less

Q: Your company is considering the replacement of an old delivery van with a new one that is more efficient. The old van cost $40,000 when it was purchased 5 years ago. The old van is being depreciated using the simplified straight-line method over a useful life of 8 years. The old van could be sold today for $7,000. The new van has an invoice price of $80,000, and it will cost $6,000 to modify the van to carry the company's products. Cost savings from use of the new van are expected to be $28,000 per year for 5 years, at which time the van will be sold for its estimated salvage value of $18,000. The new van will be depreciated using the simplified straight-line method over its 5-year useful life. The company's tax rate is 35%. Working capital is expected to increase by $5,000 at the inception of the project, but this amount will be recaptured at the end of year five. What is the initial outlay required to fund this replacement project? A) $81,200 B) $78,600 C) $74,500 D) $73,580

Q: Your company is considering the replacement of an old delivery van with a new one that is more efficient. The old van cost $40,000 when it was purchased 5 years ago. The old van is being depreciated using the simplified straight-line method over a useful life of 8 years. The old van could be sold today for $7,000. The new van has an invoice price of $80,000, and it will cost $6,000 to modify the van to carry the company's products. Cost savings from use of the new van are expected to be $28,000 per year for 5 years, at which time the van will be sold for its estimated salvage value of $18,000. The new van will be depreciated using the simplified straight-line method over its 5-year useful life. The company's tax rate is 35%. Working capital is expected to increase by $5,000 at the inception of the project, but this amount will be recaptured at the end of year five. What is the tax effect of selling the old machine? A) a savings of $2,800 B) a savings of $2,450 C) additional taxes paid of $2,450 D) a tax savings of $1,400

Q: Bellington, Inc. is considering the purchase of new, sophisticated machinery for a special three-year project. The machinery requires a special lubricating oil that probably will never be used, but must be available at all times should the machine break down. Bellington purchases $2,000 of lubricating oil to keep on hand just in case it is needed. At the end of the three-year project, it is expected the lubricating oil can be sold back to the distributor for $2,000. Which of the following statements is MOST correct? A) The lubricating oil is a sunk cost that should be excluded from the analysis. B) The $2,000 for the lubricating oil should be excluded from the analysis because it is recovered at the end of three years, so the final cost is zero. C) The $2,000 represents an additional investment in working capital that should be included in the capital budgeting analysis. D) The $2,000 for lubricating oil is simply an accounting entry and does not represent a real cash flow.

Q: Mountain Recreation, Inc. is considering a new product line. The company currently manufactures several lines of snow skiing apparel. The new products, insulated ski bikinis, are expected to generate sales of $1.2 million per year for the next five years. They expect that during this five-year period, they will lose about $150,000 each year in sales on their existing lines of longer ski pants. The new line will require no additional equipment or space in the plant and can be produced in the same manner as the apparel products. The new project will, however, require that the company spend an additional $50,000 per year on insurance in case customers sue for frostbite. Also, a new marketing director would be hired to oversee the line at $75,000 per year in salary and benefits. Because of the different construction of the bikinis, an increase in inventory of $9,000 would be required initially. If the marginal tax rate is 35%, compute the incremental after-tax cash flows for years 1-5. A) $634,500 per year B) $625,000 per year C) $601,250 per year D) $537,500 per year

Q: AFB Corp. needs to replace an old lathe with a new, more efficient model. The old lathe was purchased for $50,000 nine years ago and has a current book value of $5,000. (The old machine is being depreciated on a straight-line basis over a ten-year useful life.) The new lathe costs $100,000. It will cost the company $10,000 to get the new lathe to the factory and get it installed. The old machine will be sold as scrap metal for $2,000. The new machine is also being depreciated on a straight-line basis over ten years. Sales are expected to increase by $8,000 per year while operating expenses are expected to decrease by $12,000 per year. AFB's marginal tax rate is 40%. Additional working capital of $3,000 is required to maintain the new machine and higher sales level. The new lathe is expected to be sold for $5,000 at the end of the project's ten-year life. What is the project's terminal cash flow? A) $3,000 B) $5,000 C) $6,000 D) $8,000

Q: AFB Corp. needs to replace an old lathe with a new, more efficient model. The old lathe was purchased for $50,000 nine years ago and has a current book value of $5,000. (The old machine is being depreciated on a straight-line basis over a ten-year useful life.) The new lathe costs $100,000. It will cost the company $10,000 to get the new lathe to the factory and get it installed. The old machine will be sold as scrap metal for $2,000. The new machine is also being depreciated on a straight-line basis over ten years. Sales are expected to increase by $8,000 per year while operating expenses are expected to decrease by $12,000 per year. AFB's marginal tax rate is 40%. Additional working capital of $3,000 is required to maintain the new machine and higher sales level. The new lathe is expected to be sold for $5,000 at the end of the project's ten-year life. What is the incremental free cash flow during years 2 through 10 of the project? A) $13,600 B) $14,400 C) $15,800 D) $16,400

Q: An asset with an original cost of $100,000 and a current book value of $20,000 is sold for $50,000 as part of a capital budgeting project. The company has a tax rate of 30%. This transaction will have what impact on the project's initial outlay? A) reduce it by $20,000 B) reduce it by $50,000 C) reduce it by $6,000 D) reduce it by $15,000

Q: LaSalle Industries is considering the purchase of a new strapping machine, which will cost $150,000, plus an additional $10,500 to ship and install. The new machine will have a 5-year useful life and will be depreciated to zero using the straight-line method. The machine is expected to generate new sales of $45,000 per year and is expected to save $16,000 in labor and electrical expenses over the next 5-years. The machine is expected to have a salvage value of $20,000. LaSalle's income tax rate is 35%. What is the machine's IRR? A) 15.75% B) 18.86% C) 19.15% D) 20.03%

Q: Lasalle Industries is considering the purchase of a new machine that will cost $250,000, plus an additional $10,000 to ship and install. The new machine will have a 5-year useful life and will be depreciated to zero using the straight-line method. The machine is expected to have a salvage value of $30,000 at the end of year five. LaSalle's income tax rate is 40%. The additional net working capital from this project of $50,000 is expected to return to its pre-project level upon termination. What is the non-operating terminal cash flow of the machine? A) -$32,000 B) $48,000 C) $68,000 D) $80,000

Q: Propell Inc. is considering the purchase of a new machine that will cost $178,000, plus an additional $12,000 to ship and install. The new machine will have a 5-year useful life and will be depreciated using the straight-line method. The machine is expected to generate new sales of $85,000 per year and is expected to increase operating costs by $10,000 annually. Propell's income tax rate is 40%. What is the projected incremental cash flow of the machine for year 1? A) $54,800 B) $60,200 C) $66,350 D) $68,200

Q: Alloy Corp. is considering the acquisition of a new processing line. The processor can be purchased for $3,750,000; it will have a 10-year useful life. It will cost $165,000 to ship and $85,250 to install the processor. A recently completed feasibility study that was performed at a cost of $65,000 indicated that the processor would produce a positive NPV. The processor will be depreciated using the straight-line method to zero expected salvage value. Studies have shown that employee-training expenses will be $125,000. What will be the annual depreciation expense of the processing line for capital budgeting purposes? A) $375,000 B) $419,025 C) $390,000 D) $400,025

Q: Waterford Industries is considering the purchase of a new machine. It will replace an existing but obsolete machine that will be sold for $50,000. The existing machine is 8 years old, cost $200,000, had a 10-year useful life, and is being depreciated to zero using the straight-line method. Waterford's income tax rate is 35%. What is the after-tax salvage value of the old machine? A) $42,000 B) $46,500 C) $50,000 D) $53,500

Q: A new machine can be purchased for $1,800,000. It will cost $35,000 to ship and $15,000 to fine-tune the machine. The new machine will replace an older version that is fully depreciated and will be sold for $200,000. The firm's income tax rate is 35%. What is the initial outlay for capital budgeting purposes? A) $1,580,000 B) $1,630,000 C) $1,650,000 D) $1,720,000

Q: Which of the following should NOT be included as investment costs in evaluating a capital asset? A) interest payments and other financing cash flows that result from raising funds to finance a project B) employee training expenses C) shipping expenses D) installation expenses

Q: Alloy Corp. is considering the acquisition of a new processing line. The processor can be purchased for $4,550,000. It will cost $65,000 to ship and $190,500 to install the processor. A recently completed feasibility study that was performed at a cost of $45,000 indicated that the processor would produce a positive NPV. Studies have shown that employee-training expenses will be $150,000. What is the total investment in the processing line for capital budgeting purposes? A) $4,550,000 B) $4,700,000 C) $4,955,500 D) $5,000,500

Q: A new machine can be purchased for $1,200,000. It will cost $35,000 to ship and $15,000 to modify the machine. A $12,000 recently completed feasibility study indicated that the firm can employ an existing factory owned by the firm, which would have otherwise been sold for $180,000. The firm will borrow $750,000 to finance the acquisition. Total interest expense for 5-years is expected to approximate $350,000. What is the investment cost of the machine for capital budgeting purposes? A) $2,180,000 B) $1,780,000 C) $1,442,000 D) $1,430,000

Q: Which of the following should be excluded in an analysis of a new project's cash flows? A) additional investment in fixed assets B) additional investment in accounts receivable C) additional investment in inventory D) additional interest expenses on debt financing

Q: QRW Corp. needs to replace an old lathe with a new, more efficient model. The old lathe was purchased for $50,000 nine years ago and has a current book value of $5,000. (The old machine is being depreciated on a straight-line basis over a ten-year useful life.) The new lathe costs $100,000. It will cost the company $10,000 to get the new lathe to the factory and get it installed. The old machine will be sold as scrap metal for $2,000. The new machine is also being depreciated on a straight-line basis over ten years. Sales are expected to increase by $8,000 per year while operating expenses are expected to decrease by $12,000 per year. QRW's marginal tax rate is 40%. Additional working capital of $3,000 is required to maintain the new machine and higher sales level. The new lathe is expected to be sold for $5,000 at the end of the project's ten-year life. What is the incremental free cash flow during year 1 of the project? A) $12,800 B) $14,400 C) $11,400 D) $15,200

Q: QRW Corp. needs to replace an old lathe with a new, more efficient model. The old lathe was purchased for $50,000 nine years ago and has a current book value of $5,000. (The old machine is being depreciated on a straight-line basis over a ten-year useful life.) The new lathe costs $100,000. It will cost the company $10,000 to get the new lathe to the factory and get it installed. The old machine will be sold as scrap metal for $2,000. The new machine is also being depreciated on a straight-line basis over ten years. Sales are expected to increase by $8,000 per year while operating expenses are expected to decrease by $12,000 per year. QRW's marginal tax rate is 40%. Additional working capital of $3,000 is required to maintain the new machine and higher sales level. The initial outlay for the new machine is A) $113,000. B) $112,200. C) $111,000. D) $109,800.

Q: AFB, Inc. is considering replacing an old machine with a new one. Two months ago their chief engineer completed a training seminar on the new machine's operation and efficiency. The $3,000 cost for this training session has already been paid. If the new machine is purchased, it would require $7,000 in installation and modification costs to make it suitable for operation in the factory. The old machine originally cost $80,000 five years ago and is being depreciated by $10,000 per year. The new machine will cost $100,000 before installation and modification. It will be depreciated by $12,000 per year. The old machine can be sold today for $12,000. The marginal tax rate for the firm is 40%. Compute the relevant initial outlay in this capital budgeting decision. A) $79,500 B) $97,800 C) $90,800 D) $87,800

Q: J.B. Enterprises purchased a new molding machine for $85,000. The company paid $8,000 for shipping and another $7,000 to get the machine integrated with the company's existing assets. J.B. must maintain a supply of special lubricating oil just in case the machine breaks down. The company purchased a supply of oil for $4,000. The machine is to be depreciated on a straight-line basis over its expected useful life of 8 years. Which of the following statements concerning the change in working capital is MOST accurate? A) The $4,000 paid for oil is added to the initial outlay, offset by the tax savings $1600. B) The $4,000 may be expensed each year over the life of the project as part of the incremental free cash flows. C) The $4,000 is added to the initial outlay and recaptured during the terminal year, hence having no impact on the projects NPV or IRR. D) Even if the $4,000 is fully recovered at the end of the project, the project's NPV and IRR will be lower if the change in working capital is included in the analysis.

Q: When terminating a project for capital budgeting purposes, the working capital outlay required at the initiation of the project will A) not affect the terminal cash flow. B) decrease the terminal cash flow because it is a historical cost. C) increase the terminal cash flow because it is recaptured. D) decrease the terminal cash flow because it is an outlay.

Q: Trinitron, Inc. purchased a new molding machine for $85,000. The company paid $8,000 for shipping and another $7,000 to get the machine integrated with the company's existing assets. Trinitron, Inc. must maintain a supply of special lubricating oil just in case the machine breaks down. The company purchased a supply of oil for $4,000. The machine is to be depreciated on a straight-line basis over its expected useful life of 8 years. Trinitron is replacing an old machine that was purchased 6 years ago for $50,000. The old machine was being depreciated on a straight-line basis over a ten year expected useful life. The machine was sold for $15,000. Trinitron's marginal tax rate is 40%. What is the amount of the initial outlay? A) $89,000 B) $87,000 C) $91,000 D) $85,000

Q: Which of the following are included in the terminal cash flow? A) the expected salvage value of the asset B) any tax payments or receipts associated with the salvage value of the asset C) recapture of any working capital increase included in the initial outlay D) all of the above

Q: Increased depreciation expenses affect tax-related cash flows by A) increasing taxable income, thus increasing taxes. B) decreasing taxable income, thus reducing taxes. C) decreasing taxable income, with no effect on cash flow since depreciation is a non-cash expense. D) pushing a corporation into a higher tax bracket.

Q: Which of the following should be included in the initial outlay? A) taxable gain on the sale of old equipment being replaced B) first year depreciation expense on any new equipment purchased C) preexisting firm overhead reallocated to the new project D) increased investment in inventory and accounts receivable

Q: A six-year project for Little Egypt, Inc. results in additional accounts receivable of $150,000, additional inventory of $50,000, and additional accounts payable of $80,000 today. What is the change in the NPV of a project solely due to the additional net working capital (NWC) needs? Assume a 14% discount rate, and the recovery of net working capital at the end of the project. A) a decrease of $34,606 B) a decrease of $42,670 C) a decrease of $120,000 D) a decrease of $58,689

Q: AFB, Inc. requires an investment in equipment of $600,000 to replace existing equipment. The existing equipment will produce after-tax salvage value of $70,000. Net working capital requirements are increased by $50,000. What is the total cash outflow at time zero? A) $720,000 B) $650,000 C) $530,000 D) $580,000

Q: XYZ, Inc. has developed a project which results in additional accounts receivable of $400,000, additional inventory of $180,000, and additional accounts payable of $70,000. What is the additional investment in net working capital? A) $580,000 B) $510,000 C) $270,000 D) $150,000

Q: Which of the following is NOT considered in the calculation of incremental cash flows? A) tax saving due to increased depreciation expense B) interest payments if new debt is issued C) increased dividend payments if additional preferred stock is issued D) B and C

Q: Which of the following cash flows are NOT considered in the calculation of the initial outlay for a capital investment proposal? A) increase in accounts receivable B) cost of issuing new bonds if the project is financed by a new bond issue C) installation costs D) None of the aboveall are considered.

Q: Salvage value would most likely NOT be considered by A) net present value. B) internal rate of return. C) payback. D) A and B.

Q: If depreciation expense in year one of a project increases for a highly profitable company, A) net income decreases and incremental free cash flow decreases. B) net income increases and incremental free cash flow increases. C) the book value of the depreciating asset increases at the end of year one. D) net income decreases and incremental free cash flow increases.

Q: The recapture of net working capital at the end of a project will A) increase terminal year free cash flow. B) decrease terminal year free cash flow by the change in net working capital times the corporate tax rate. C) increase terminal year free cash flow by the change in net working capital times the corporate tax rate. D) have no effect on the terminal year free cash flow because the net working capital change has already been included in a prior year.

Q: Your company is considering the replacement of an old delivery van with a new one that is more efficient. The old van cost $40,000 when it was purchased 5 years ago. The old van is being depreciated using the simplified straight-line method over a useful life of 8 years. The old van could be sold today for $7,000. The new van has an invoice price of $80,000, and it will cost $6,000 to modify the van to carry the company's products. Cost savings from use of the new van are expected to be $28,000 per year for 5 years, at which time the van will be sold for its estimated salvage value of $18,000. The new van will be depreciated using the simplified straight-line method over its 5-year useful life. The company's tax rate is 35%. Working capital is expected to increase by $5,000 at the inception of the project, but this amount will be recaptured at the end of year five. What is the terminal cash flow? A) $23,000 B) $18,000 C) $17,250 D) $16,700

Q: Your company is considering the replacement of an old delivery van with a new one that is more efficient. The old van cost $40,000 when it was purchased 5 years ago. The old van is being depreciated using the simplified straight-line method over a useful life of 8 years. The old van could be sold today for $7,000. The new van has an invoice price of $80,000, and it will cost $6,000 to modify the van to carry the company's products. Cost savings from use of the new van are expected to be $28,000 per year for 5 years, at which time the van will be sold for its estimated salvage value of $18,000. The new van will be depreciated using the simplified straight-line method over its 5-year useful life. The company's tax rate is 35%. Working capital is expected to increase by $5,000 at the inception of the project, but this amount will be recaptured at the end of year five. What is the incremental free cash flow for year one? A) $18,875 B) $19,985 C) $22,305 D) $24,220

Q: Smith Manufacturing Inc. expects the following results in year one of a new project:Revenue$400,000Cash Expenses150,000Depreciation90,000EBIT$160,000Taxes48,000Net Income$112,000The annual change in operating cash flow is equal toA) $298,000.B) $202,000.C) $160,000.D) $250,000.

Q: A new project is expected to generate $800,000 in revenues, $250,000 in cash operating expenses, and depreciation expense of $150,000 in each year of its 10-year life. The corporation's tax rate is 35%. The project will require an increase in net working capital of $85,000 in year one and a decrease in net working capital of $75,000 in year ten. What is the free cash flow from the project in year one? A) $298,000 B) $375,000 C) $380,000 D) $410,000

Q: You are analyzing the purchase of new equipment. Since you are not an expert on this type of equipment, you hire a consulting firm to make recommendations. The consultant charged you $1,500 and recommended the purchase of the latest model from ACME Corp. of America. The equipment costs $80,000, and it will cost another $10,000 to modify it for special use by your firm. The equipment will be depreciated on a straight-line basis over six years with no salvage value. You expect the equipment will be sold after three years for $28,000. Use of the equipment will require an increase in your company's net working capital of $4,000, but this $4,000 will be recovered at the end of year three. The use of the equipment will have no effect on revenues, but it is expected to save the firm $50,000 per year in before-tax operating costs. Your company's marginal tax rate is 35%. What is the terminal cash flow for this project? A) ($17,000) B) $24,500 C) $33,950 D) $37,950

Q: You are analyzing the purchase of new equipment. Since you are not an expert on this type of equipment, you hire a consulting firm to make recommendations. The consultant charged you $1,500 and recommended the purchase of the latest model from ACME Corp. of America. The equipment costs $80,000, and it will cost another $10,000 to modify it for special use by your firm. The equipment will be depreciated on a straight-line basis over six years with no salvage value. You expect the equipment will be sold after three years for $28,000. Use of the equipment will require an increase in your company's net working capital of $4,000, but this $4,000 will be recovered at the end of year three. The use of the equipment will have no effect on revenues, but it is expected to save the firm $50,000 per year in before-tax operating costs. Your company's marginal tax rate is 35%. What is the incremental free cash flow for the first year of the project? A) $23,800 B) $29,850 C) $32,440 D) $37,750

Q: You are analyzing the purchase of new equipment. Since you are not an expert on this type of equipment, you hire a consulting firm to make recommendations. The consultant charged you $1,500 and recommended the purchase of the latest model from ACME Corp. of America. The equipment costs $80,000, and it will cost another $10,000 to modify it for special use by your firm. The equipment will be depreciated on a straight-line basis over six years with no salvage value. You expect the equipment will be sold after three years for $28,000. Use of the equipment will require an increase in your company's net working capital of $4,000, but this $4,000 will be recovered at the end of year three. The use of the equipment will have no effect on revenues, but it is expected to save the firm $50,000 per year in before-tax operating costs. Your company's marginal tax rate is 35%. What is the initial outlay required to fund this project? A) $80,000 B) $84,000 C) $90,000 D) $94,000

Q: Blackjack Inc. wants to replace a 9-year-old machine with a new machine that is more efficient. The old machine cost $70,000 when new and has a current book value of $15,000. Blackjack can sell the machine to a foreign buyer for $14,000. Blackjack's tax rate is 35%. The effect of the sale of the old machine on the initial outlay for the new machine is A) ($14,350). B) ($13,650). C) ($9,100). D) $1,000.

Q: Interest expenses are not included as incremental free cash flows because the cost of funds is recognized when cash flows are discounted back to present value.

Q: What are mutually exclusive projects? How might they complicate the capital-budgeting process?

Q: Company K is considering two mutually exclusive projects. The cash flows of the projects are as follows:YearProject AProject B0-$2,000,000-$2,000,0001500,0002500,0003500,0004500,0005500,0006500,0007500,0005,650,000a. Compute the NPV and IRR for the above two projects, assuming a 13% required rate of return.b. Discuss the ranking conflict.c. What decision should be made regarding these two projects?

Q: The Dickerson PR Firm is considering two mutually exclusive projects with useful lives of 3 and 6 years. The after-tax cash flows for projects S and L are listed below.YearCash Flow SCash Flow L0-$60,000-$51,500140,00013,000220,00019,000317,00011,000420,000510,00068,000Calculate the equivalent annual annuity for each project assuming a required return of 15%. What decision should be made?

Q: The Meacham Tire Company is considering two mutually exclusive projects with useful lives of 3 and 6 years. The after-tax cash flows for projects S and L are listed below.YearCash Flow SCash Flow L0-$60,000-$115,000138,00028,500225,00049,500335,00026,850422,600518,750623,500The required rate of return on these projects is 14 percent. What decision should be made? As part of your answer, calculate the NPV assuming a replacement chain for Project S, and also calculate the equivalent annual annuity for each project.

Q: Consider the following two projects:Net Cash Flow Each PeriodInitial Outlay1234Project A $4,000,000$2,003,000$2,003,000$2,003,000$2,003,000Project B $4,000,000000$11,000,000a. Calculate the net present value of each of the above projects, assuming a 14 percent discount rate.b. What is the internal rate of return for each of the above projects?c. Compare and explain the conflicting rankings of the NPVs and IRRs obtained in parts a and b above.d. If 14 percent is the required rate of return, and these projects are independent, what decision should be made?e. If 14 percent is the required rate of return, and the projects are mutually exclusive, what decision should be made?

Q: What is the net present value's assumption about how cash flows are reinvested? A) They are reinvested at the IRR. B) They are reinvested at the APR. C) They are reinvested at the firm's discount rate. D) They are reinvested only at the end of the project.

Q: The Net Present Value (or NPV) criteria for capital budgeting decisions assumes that expected future cash flows are reinvested at ________, and the Internal Rate of Return (or IRR) criteria assumes that expected future cash flows are reinvested at ________. A) the firm's discount rate; the internal rate of return B) the internal rate of return; the internal rate of return C) the internal rate of return; the firm's discount rate D) Neither criteria assumes reinvestment of future cash flows.

Q: Different discounted cash flow evaluation methods may provide conflicting rankings of investment projects when A) the size of investment outlays differ. B) the projects are mutually exclusive. C) the accounting policies differ. D) the internal rate of return equals the cost of capital.

Q: Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year three, and $45,000 in year four. Lithium, Inc.'s required rate of return for these projects is 10%. Which project would you recommend using the replacement chain method to evaluate the projects with different lives? A) Project B because its NPV is higher than Project A's replacement chain NPV of $47,623 B) Project A because its replacement chain NPV is $76,652, which exceeds the NPV for Project B C) Project A because its replacement chain NPV is $45,642, which is less than the NPV for Project B D) Both projects will be valued the same since they are now both four year projects.

Q: Your firm is considering an investment that will cost $920,000 today. The investment will produce cash flows of $450,000 in year 1, $270,000 in years 2 through 4, and $200,000 in year 5. The discount rate that your firm uses for projects of this type is 11.25%. What is the investment's equivalent annual annuity? A) $52,377 B) $42,923 C) $41,387 D) $40,399

Q: Which of the following methods of evaluating investment projects can properly evaluate projects of unequal lives? A) the net present value B) the payback C) the internal rate of return D) the equivalent annual annuity

Q: Mutually exclusive projects occur when A) projects have uneven cash flows. B) more than one firm can use the projects. C) a set of investment proposals perform essentially the same task. D) projects are independent.

Q: Which of the following statements about the net present value is true? A) It produces a percentage result that is easy to describe. B) It has an inadequate reinvestment assumption. C) It is likely that there will be more than one NPV for a project. D) It may be used to select among projects of different sizes.

1 2 3 … 2,046 Next »

Subjects