Exam 8: Fundamentals of Capital Budgeting

Which of the following statements is FALSE?

Which of the following statements is FALSE?

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 NPV for Epiphany's Project 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 5% of its annual sales in accounts payable.The firm is in the 21% tax bracket,and has a cost of capital of 10%. -The required net working capital in the second year for the Sisyphean Corporation's project is closest to:

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 first year of Epiphany's project 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 unlevered net income of the Shepard Industries project in year two is closest to:

Which of the following statements is FALSE?

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: -What is the NPV of the Epiphany's project?

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%,what decision should Krusty Krab take regarding the new grill?

What is an opportunity cost? Should it be included in the incremental cash flows for a project? Why or why not?

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 after-tax cash flow that Krusty Krab will receive from selling the existing grill is closest to:

The value of currently unused warehouse space that will be used as part of a new capital budgeting project is:

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,in what year will RBC completely use up the tax loss carryforward?

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 depreciation tax shield for the Shepard Industries project in year one is closest to:

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%. -What decision should Galt Motors take regarding manufacturing the armatures in house?

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 unlevered net income in the first year for the Sisyphean Corporation's project 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 $5,000 at the end of year three.What is the NPV for this project?

What is a sunk cost? Should it be included in the incremental cash flows for a project? Why or why not?

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.Also suppose that for each Glucoscan monitor sold,GSI expects additional sales of $100 per year on glucose testing strips and these strips have a gross profit margin of 75%.Considering the increase in the sale of testing strips,the incremental impact of this price drop on the firm's EBIT is closest to: