Exam 8: Fundamentals of Capital Budgeting

Use the information for the question(s)below. Ford Motor Company is considering launching a new line of Plug-in Electric SUVs.The heavy advertising expenses associated with the new SUV launch would generate operating losses of $35 million next year.Without the new SUV,Ford expects to earn pre-tax income of $80 million from operations next year.Ford pays a 21% tax rate on its pre-tax income. -The amount that Ford Motor Company will owe in taxes next year without the launch of the new SUV is closest to:

Use the information for the question(s)below. Kinston Industries is considering investing in a machine that will cost $125,000 and will last for three years.The machine will generate revenues of $120,000 each year and the cost of goods sold will be 50% of sales.At the end of year three the machine will be sold for $15,000.The appropriate cost of capital is 10% and Kinston is in the 21% tax bracket. -Assume that Kinston's new machine will be depreciated straight line to a salvage value of $5000 at the end of year three.What is the after-tax salvage value of this project?

Use the following information to answer the question(s)below. Galt Motors currently produces 500,000 electric motors a year and expects output levels to remain steady in the future.It buys armatures from an outside supplier at a price of $2.50 each.The plant manager believes that it would be cheaper to make these armatures rather than buy them.Direct in-house production costs are estimated to be only $1.80 per armature.The necessary machinery would cost $700,000 and would be obsolete in 10 years.This investment would be depreciated to zero for tax purposes using a 10-year straight line depreciation.The plant manager estimates that the operation would require additional working capital of $40,000 but argues that this sum can be ignored since it is recoverable at the end of the ten years.The expected proceeds from scrapping the machinery after 10 years are estimated to be $10,000.Galt Motors pays tax at a rate of 21% and has an opportunity cost of capital of 14%. -The incremental cash flow that Galt Motors will incur today (Year 0)if they elect to manufacture armatures in-house is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Use the following information to answer the question(s)below. Two years ago,Krusty Krab Restaurant purchased a grill for $50,000.The owner,Eugene Krabs,has learned that a new grill is available that will cook Krabby Patties twice as fast as the existing grill.This new grill can be purchased for $80,000 and would be depreciated straight line over 8 years,after which it would have no salvage value.Eugene Krab expects that the new grill will produce EBITDA of $50,000 per year for the next eight years while the existing grill produces EBITDA of only $35,000 per year.The current grill is being depreciated straight line over its useful life of 10 years after which it will have no salvage value.All other operating expenses are identical for both grills.The existing grill can be sold to another restaurant now for $30,000.Krusty Krab's tax rate is 21%. -The incremental cash flow that Krusty Krab will incur today (Year 0)if they elect to upgrade to the new grill is closest to:

Which of the following questions is FALSE?

Use the information for the question(s)below. Ford Motor Company is considering launching a new line of Plug-in Electric SUVs.The heavy advertising expenses associated with the new SUV launch would generate operating losses of $35 million next year.Without the new SUV,Ford expects to earn pre-tax income of $80 million from operations next year.Ford pays a 21% tax rate on its pre-tax income. -The amount that Ford Motor Company will owe in taxes next year with the launch of the new SUV is closest to:

Use the information for the question(s)below. The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years.The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2000 canes in year 1.Sales are estimated to grow by 10% per year each year through year three.The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant.The canes have a manufacturing cost of $9 each. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts.It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash,4% of its annual sales in accounts receivable,9% of its annual sales in inventory,and 6% of its annual sales in accounts payable.The firm is in the 21% tax bracket,and has a cost of capital of 10%. -The incremental EBIT in the first year for the Sisyphean Corporation's project is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

An analysis that breaks the NPV calculation into its component assumptions and shows how the NPV varies as one of the underlying assumptions is changed is called:

Use the following information to answer the question(s)below. (Include the MACRS Table from the Appendix. ) Casa Grande Farms is considering purchasing multiple tractors for a total purchase price of $540,000.These tractors are expected to generate EBITDA of $250,000 for each of the next three years.Casa Grande Farms has a 21% tax rate and has a cost of capital of 10%. -Assuming that Casa Grande Farms depreciates these tractors using MACRS depreciation method for three-year property starting immediately,then the annual depreciation tax shield in year 2 is closest to:

Your firm is considering building a new office complex.Your firm already owns land suitable for the new complex.The current book value of the land is $100,000.However a commercial real estate agent has informed you that an outside buyer is interested in purchasing this land and would be willing to pay $650,000 for it.When calculating the NPV of your new office complex,ignoring taxes,the appropriate incremental cash flow for the use of this land is:

Use the information for the question(s)below. Shepard Industries is evaluating a proposal to expand its current distribution facilities.Management has projected the project will produce the following cash flows for the first two years (in millions). -The incremental unlevered net income of the Shepard Industries project in year one is closest to:

Use the information for the question(s)below. Kinston Industries is considering investing in a machine that will cost $125,000 and will last for three years.The machine will generate revenues of $120,000 each year and the cost of goods sold will be 50% of sales.At the end of year three the machine will be sold for $15,000.The appropriate cost of capital is 10% and Kinston is in the 21% tax bracket. -Assume that Kinston's new machine will be depreciated using MACRS according to the following schedule: What is the NPV of this project?

Which of the following statements is FALSE?

Bubba Ho-Tep Company reported net income of $300 million for the most recent fiscal year.The firm had depreciation expenses of $125 million and capital expenditures of $150 million.Although they had no interest expense,the firm did have an increase in net working capital of $20 million.What is Bubba Ho-Tep's free cash flow?

Use the following information to answer the question(s)below. Two years ago,Krusty Krab Restaurant purchased a grill for $50,000.The owner,Eugene Krabs,has learned that a new grill is available that will cook Krabby Patties twice as fast as the existing grill.This new grill can be purchased for $80,000 and would be depreciated straight line over 8 years,after which it would have no salvage value.Eugene Krab expects that the new grill will produce EBITDA of $50,000 per year for the next eight years while the existing grill produces EBITDA of only $35,000 per year.The current grill is being depreciated straight line over its useful life of 10 years after which it will have no salvage value.All other operating expenses are identical for both grills.The existing grill can be sold to another restaurant now for $30,000.Krusty Krab's tax rate is 21%. -The incremental cash flow that Krusty Krab will incur in year 1 if they elect to upgrade to the new grill is closest to: