Exam 10: Project Cash Flows and Risk

Stanton Inc. is considering the purchase of a new machine, which will reduce manufacturing costs by $5,000 annually and increase earnings before depreciation and taxes by $6,000 annually. Stanton will use the MACRS method to depreciate the machine, and it has estimated the depreciation expense for the first year as $8,000. Which of the following is the supplemental operating cash flow for the first year if Stanton's marginal tax rate is 40 percent?

Klott Company used scenario analysis and estimated its expected net present value (NPV) as $10,300 and expected standard deviation (σ) as $12,083. The coefficient of variation (CVNPV) of Klott's NPV is _____.

Ziker Golf Company evaluated a project as a risky project. Ziker generally evaluates projects that are riskier than average by adjusting its required rate of return by 4 percent. If Ziker expects 12% return on average risk projects, then it should expect a return of _____ for a risky project.

A project with more corporate risk than average will also have:

Which of the following is an incremental cash flow?

Which of the following statements is true regarding a replacement decision?

If the firm is being operated so as to maximize shareholder wealth, and if our basic assumptions concerning the relationship between risk and return are true, then which of the following should be true?

_____ is the risk of expropriation (seizure) of a foreign subsidiary's assets by the host country.

Which of the following statements is true while considering an expansion project?

One of the differences between capital budgeting for domestic and foreign operations is that the:

Topsider Inc. is considering the purchase of a new leather-cutting machine to replace an existing machine that has zero salvage value. The net salvage value of the new machine is $6,000 and the return of net working capital is $3,520. Which of the following is the terminal cash value of the new machine?

When evaluating a new project, a firm should consider _____, as an incremental cash flow occurs only at the start of a project's life.

Zinc Corp is planning to purchase new machinery. The initial cash outlay is expected to be $40,000 and the expected return on investment is 9%. The cash flows for the next 3 years are $9,800, $11,720 and $9,640. Based on net present value (NPV) analysis, Zinc Corp should:

Investing in foreign subsidiaries can be less risky when:

Which of the following statements is correct?

If the risk-free rate is 6 percent, the return on an average stock is 10 percent, and the beta of this project is 1.50, then the expected return from the project is _____.

Chovita Motors Corp. is considering a machine that costs $100,000 that will increase the net income of the company. The net income for the next 3 years is expected to be $30,000, $90,000, and $150,000. The depreciation expense for the next 3 years will be $5,000, $3,000, and $2,000. If the machine has no salvage value and then net present value (NPV) of the project is _____. The expected rate of return is 10%. (Round off the answer to nearest units place.)

A key difference between a replacement project analysis and an expansion project analysis is that only the expansion project uses the net present value (NPV) method for project evaluation.

Hill Top Lumber Company is considering building a sawmill in the state of Washington because the company doesn't have such a facility to service its growing customer base that is located on the west coast. Hill Top's executives believe that future growth in west coast customers will make the sawmill project a good investment. When evaluating the acceptability of the project, which of the following would be considered a relevant cash flow that should be included when determining its initial investment outlay?

Carolina Insurance Company, an all-equity life insurance firm, is considering the purchase of a fire insurance company. The fire insurance company is expected to generate a return of 20 percent with a beta of 2.5. If the risk-free rate is 8 percent and the market risk premium is 6 percent, the expected return from the insurance company is _____.