Exam 8: Fundamentals of Capital Budgeting

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 straight line over the three-year life,then the NPV of buying the tractors is closest to:

Use the following information to answer the question(s)below. Taggart Transcontinental is considering adding a trucking division to expand the coverage of its existing rail lines.The trucking division will cost $1,000,000 and is expected to generate free cash flows of $100,000 for each of the next five years.Taggart Transcontinental forecasts that future free cash flows after year 5 will grow at 2% per year,forever.Taggart Transcontinental's cost of capital is 10%. -The continuation value for the trucking division in year five 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%. -Calculate the total Free Cash Flows for each of the three years for the Sisyphean Corporation's new project.

Use the information for the question(s)below. Epiphany Industries is considering a new capital budgeting project that will last for three years.Epiphany plans on using a cost of capital of 12% to evaluate this project.Based on extensive research,it has prepared the following incremental cash flow projections: -The free cash flow for the last year of Epiphany's project is closest to:

What is sensitivity analysis?

Use the information for the question(s)below. Food For Less (FFL),a grocery store,is considering offering one hour photo developing in their store.The firm expects that sales from the new one-hour machine will be $150,000 per year.FFL currently offers overnight film processing with annual sales of $100,000.While many of the one-hour photo sales will be to new customers,FFL estimates that 60% of their current overnight photo customers will switch and use the one-hour service. -Suppose that of the 60% of FFL's current overnight photo customers,half would start taking their film to a competitor that offers one-hour photo processing if FFL fails to offer the one-hour service.The level of incremental sales in this case is closest to:

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 free cash flow from the Shepard Industries project in year two is closest to:

Money that has been or will be paid regardless of the decision whether or not to proceed with the project is:

Use the information for the question(s)below. Food For Less (FFL),a grocery store,is considering offering one hour photo developing in their store.The firm expects that sales from the new one-hour machine will be $150,000 per year.FFL currently offers overnight film processing with annual sales of $100,000.While many of the one-hour photo sales will be to new customers,FFL estimates that 60% of their current overnight photo customers will switch and use the one-hour service. -The level of incremental sales associated with introducing the new one-hour photo service is closest to:

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 EBIT for the Shepard Industries project in year two is closest to:

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%. -If Krusty Krab's opportunity cost of capital is 12%,then the IRR for upgrading to the new grill is closest to:

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%. -If Krusty Krab's opportunity cost of capital is 12%,then the NPV for upgrading to the new grill is closest to:

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 NPV of buying the tractors is closest to:

Which of the following statements is FALSE?

Use the information for the question(s)below. Glucose Scan Incorporated (GSI)currently sells its latest glucose monitor,the Glucoscan 3000,to diabetic patients for $129.GSI plans on lowering their price next year to $99 per unit.The cost of goods sold for each Glucoscan unit is $50,and GSI expects to sell 100,000 units over the next year. -Suppose that if GSI drops the price on the Glucoscan 3000 immediately,it can increase sales over the next year by 30% to 130,000 units.The incremental impact of this price drop on the firm's EBIT is closest to:

Use the following information to answer the question(s)below. Taggart Transcontinental is considering adding a trucking division to expand the coverage of its existing rail lines.The trucking division will cost $1,000,000 and is expected to generate free cash flows of $100,000 for each of the next five years.Taggart Transcontinental forecasts that future free cash flows after year 5 will grow at 2% per year,forever.Taggart Transcontinental's cost of capital is 10%. -The NPV for the trucking division is closest to:

The difference between scenario analysis and sensitivity analysis is that:

Which of the following statements is FALSE?

Use the following information to answer the question(s)below. Really Big Conglomerate (RBC)is considering acquiring POP,Inc. ,a smaller unsuccessful Internet firm.POP has outstanding tax loss carryforwards of $320 million from losses over the past six years.RBC has pre-tax income of $100 million per year,a cost of capital of 10%,and pays 21% in taxes.The Tax Cuts and Jobs Act of 2017 will limit RBC's ability to write off the carryforwards to 80% of RBC's annual pre-tax income. -If RBC acquires POP,then the NPV of POP tax loss carryforwards to RBC is closest to: