Question 1

What is the major difference between scenario analysis and sensitivity analysis?

Accepted Answer

Sensitivity analysis focuses on the impa

Question 2

Use the table for the question(s) below.
  
-The Sisyphean Company is considering a new project that will have a CCA deduction of $2.5 million in the first year.If Sisyphean's marginal corporate tax rate is 40% and its average corporate tax rate is 30%,then what is the value of the CCA tax shield on the company's new project in year 1?

Accepted Answer

A)  $750,000 
B)  $1,000,000 
C)  $1,500,000 
D)  $1,750,000 
E)  $2,500,000 
A)  $750,000 
B)  $1,000,000 
C)  $1,500,000 
D)  $1,750,000 
E)  $2,500,000

Question 3

An analysis that breaks the net present value (NPV)calculation into its component assumptions and shows how the net present value (NPV)varies as one of the underlying assumptions changes is called

Accepted Answer

A)  scenario analysis. 
B)  internal rate of return (IRR) analysis. 
C)  accounting break-even analysis. 
D)  sensitivity analysis. 
E)  EBIT break-even analysis. 
A)  scenario analysis. 
B)  internal rate of return (IRR) analysis. 
C)  accounting break-even analysis. 
D)  sensitivity analysis. 
E)  EBIT break-even analysis.

Question 4

When evaluating the effectiveness of an improved manufacturing process we should evaluate the total sales and costs generated by this process.

Accepted Answer

A) True 
 B)False

Question 5

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 CCA tax shield for Shepard Industries project in year 1 is closest to:

Accepted Answer

A)  $84 
B)  $168 
C)  $96 
D)  $72 
E)  $100 
A)  $84 
B)  $168 
C)  $96 
D)  $72 
E)  $100

Question 6

Why does the Canada Revenue Agency (CRA)have a half-year rule for capital cost allowance (CCA)calculations?

Accepted Answer

The half-year rule is meant to

Question 7

The difference between scenario analysis and sensitivity analysis is:

Accepted Answer

A)  Scenario analysis is based upon the internal rate of return (IRR) and sensitivity analysis is based upon net present value (NPV). 
B)  Only sensitivity analysis allows us to change our estimated inputs of our net present value (NPV) analysis. 
C)  Scenario analysis considers the effect on net present value (NPV) of changing multiple project parameters. 
D)  Only scenario analysis breaks the net present value (NPV) calculation into its component assumptions. 
E)  Sensitivity analysis allows for variations in many of the underlying assumptions simultaneously. 
A)  Scenario analysis is based upon the internal rate of return (IRR) and sensitivity analysis is based upon net present value (NPV). 
B)  Only sensitivity analysis allows us to change our estimated inputs of our net present value (NPV) analysis. 
C)  Scenario analysis considers the effect on net present value (NPV) of changing multiple project parameters. 
D)  Only scenario analysis breaks the net present value (NPV) calculation into its component assumptions. 
E)  Sensitivity analysis allows for variations in many of the underlying assumptions simultaneously.

Question 8

Jim owns a farm that he wants to sell.He learns that a highway will be built near the farm in the future,giving access to the farmland from a nearby city and thus making the land attractive to housing developers.Expecting the net present value (NPV)of the sale to be greater after the highway is built,he decides not to sell at this time.What real option is Jim taking?

Accepted Answer

A)  option to delay 
B)  option to expand 
C)  option to abandon 
D)  option to switch 
E)  option to sell 
A)  option to delay 
B)  option to expand 
C)  option to abandon 
D)  option to switch 
E)  option to sell

Question 9

Which of the following costs would you consider when making a capital budgeting decision?

Accepted Answer

A)  sunk cost 
B)  opportunity cost 
C)  interest expense 
D)  fixed overhead cost 
E)  past research and development expenditures 
A)  sunk cost 
B)  opportunity cost 
C)  interest expense 
D)  fixed overhead cost 
E)  past research and development expenditures

Question 10

Athabasca Ag is purchasing 1,000 grain bins at a cost of $40,000 each.Each bin also has a $5,000 delivery and installation cost,and the bins have a capital cost allowance (CCA)rate of 25%.What is the total incremental undepreciated capital cost (UCC)for year 1?

Accepted Answer

A)  $40 million 
B)  $45 million 
C)  $22.5 million 
D)  $20 million 
E)  $15 million 
A)  $40 million 
B)  $45 million 
C)  $22.5 million 
D)  $20 million 
E)  $15 million

Question 11

What are project externalities?

Accepted Answer

Project externalities are indi

Question 12

Use the table for the question(s) below.
  
-Visby Rides,a livery car company,is considering buying some new luxury cars.After extensive research,they come up with the above estimates of free cash flow from this project.The cars belong to asset class 10 and have a capital cost allowance (CCA)rate of 30%.The cars will be sold at the end of 3 years for $150,000.What is the present value of the lost CCA tax shields of the project,given that the cost of capital is 10%,and the company faces a marginal tax rate of 25%?

Accepted Answer

A)  $8342 
B)  $21,131 
C)  $10,112 
D)  $25,912 
E)  $28,125 
A)  $8342 
B)  $21,131 
C)  $10,112 
D)  $25,912 
E)  $28,125

Question 13

What is the ultimate goal of capital budgeting?

Accepted Answer

The ultimate goal of capital budgeting i

Question 14

A firm is considering changing their credit terms.It is estimated that this change would result in sales increasing by $1,000,000.This in turn would cause inventory to increase by $150,000,accounts receivable to increase by $100,000,and accounts payable to increase by $75,000.What is the firm's expected change in net working capital?

Accepted Answer

A)  $1,175,000 
B)  $325,000 
C)  $250,000 
D)  $175,000 
E)  $150,000 
A)  $1,175,000 
B)  $325,000 
C)  $250,000 
D)  $175,000 
E)  $150,000

Question 15

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.
-A textile company invests $12 million in an open-end spinning machine.The machine belongs to asset class 43 and has a capital cost allowance (CCA)rate of 30%.If the company sold it immediately after the end of year 3 for $8 million,what would be the overall present value of the CCA tax shields from this asset,given a tax rate of 40%,and a cost of capital of 12%?

Accepted Answer

A)  $912,310 
B)  $1,076,346 
C)  $1,617,972 
D)  $2,432,211 
E)  $3,244,898 
A)  $912,310 
B)  $1,076,346 
C)  $1,617,972 
D)  $2,432,211 
E)  $3,244,898

Question 16

Athabasca Ag is purchasing 1,000 grain bins at a cost of $40,000 each.Each bin also has a $5,000 delivery and installation cost,and the bins have a capital cost allowance (CCA)rate of 25%.The bins are expected to increase gross profit by $12 million per year,starting at the end of the first year,with annual associated costs of $1.5 million per year.Athabasca has a marginal tax rate of 30%.What are the incremental free cash flows associated with the new bins in year 2?

Accepted Answer

A)  $7.35 million 
B)  $10.3 million 
C)  $9.04 million 
D)  $12 million 
E)  $9.5 million 
A)  $7.35 million 
B)  $10.3 million 
C)  $9.04 million 
D)  $12 million 
E)  $9.5 million

Question 17

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 falls under asset class 43 and has a capital cost allowance (CCA) rate of 30%.
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 3. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture 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 35% tax bracket and has a cost of capital of 10%.
-The change in net working capital from year 1 to year 2 is closest to:

Accepted Answer

A)  a decrease of $360 
B)  an increase of $360 
C)  an increase of $396 
D)  a decrease of $396 
E)  an increase of $756 
A)  a decrease of $360 
B)  an increase of $360 
C)  an increase of $396 
D)  a decrease of $396 
E)  an increase of $756

Question 18

Use the table for the question(s) below.
  
-Visby Rides,a livery car company,is considering buying some new luxury cars.After extensive research,they come up with the above estimates of free cash flow from this project.The cars belong to asset class 10 and have a capital cost allowance (CCA)rate of 30%.What is the present value of the overall CCA tax shields,given that the cost of capital is 10%,and the company faces a marginal tax rate of 25%?

Accepted Answer

A)  $32,562 
B)  $53,693 
C)  $93,465 
D)  $150,000 
E)  $162,452 
A)  $32,562 
B)  $53,693 
C)  $93,465 
D)  $150,000 
E)  $162,452

Question 19

Longbow Lumber is purchasing a new horizontal resaw at a cost of $375,000.There is an additional $10,000 delivery and installation cost.The machine has a capital cost allowance (CCA)rate of 20%.What is the incremental undepreciated capital cost (UCC)for year 2?

Accepted Answer

A)  $375,000 
B)  $337,500 
C)  $385,000 
D)  $346,500 
E)  $192,500 
A)  $375,000 
B)  $337,500 
C)  $385,000 
D)  $346,500 
E)  $192,500

Question 20

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.
-A textile company invests $12 million in an open-end spinning machine.The machine belongs to asset class 43 and has a capital cost allowance (CCA)rate of 30%.If the company sold it immediately after the end of year 3 for $8 million,what would be the present value of the lost CCA tax shields from the sale of this asset,given a tax rate of 40%,and a cost of capital of 12%?

Accepted Answer

A)  $654,336 
B)  $928,910 
C)  $1,452,613 
D)  $1,626,926 
E)  $2,285,714 
A)  $654,336 
B)  $928,910 
C)  $1,452,613 
D)  $1,626,926 
E)  $2,285,714

What is the major difference between scenario analysis and sensitivity analysis?

An analysis that breaks the net present value (NPV)calculation into its component assumptions and shows how the net present value (NPV)varies as one of the underlying assumptions changes is called

When evaluating the effectiveness of an improved manufacturing process we should evaluate the total sales and costs generated by this process.

Why does the Canada Revenue Agency (CRA)have a half-year rule for capital cost allowance (CCA)calculations?

The difference between scenario analysis and sensitivity analysis is:

Which of the following costs would you consider when making a capital budgeting decision?

Athabasca Ag is purchasing 1,000 grain bins at a cost of $40,000 each.Each bin also has a $5,000 delivery and installation cost,and the bins have a capital cost allowance (CCA)rate of 25%.What is the total incremental undepreciated capital cost (UCC)for year 1?

What are project externalities?

What is the ultimate goal of capital budgeting?

Longbow Lumber is purchasing a new horizontal resaw at a cost of $375,000.There is an additional $10,000 delivery and installation cost.The machine has a capital cost allowance (CCA)rate of 20%.What is the incremental undepreciated capital cost (UCC)for year 2?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters

Exam 9: Fundamentals of Capital Budgeting

What is the major difference between scenario analysis and sensitivity analysis?

An analysis that breaks the net present value (NPV)calculation into its component assumptions and shows how the net present value (NPV)varies as one of the underlying assumptions changes is called

When evaluating the effectiveness of an improved manufacturing process we should evaluate the total sales and costs generated by this process.

Why does the Canada Revenue Agency (CRA)have a half-year rule for capital cost allowance (CCA)calculations?

The difference between scenario analysis and sensitivity analysis is:

Which of the following costs would you consider when making a capital budgeting decision?

Athabasca Ag is purchasing 1,000 grain bins at a cost of $40,000 each.Each bin also has a $5,000 delivery and installation cost,and the bins have a capital cost allowance (CCA)rate of 25%.What is the total incremental undepreciated capital cost (UCC)for year 1?

What are project externalities?

What is the ultimate goal of capital budgeting?

Longbow Lumber is purchasing a new horizontal resaw at a cost of $375,000.There is an additional $10,000 delivery and installation cost.The machine has a capital cost allowance (CCA)rate of 20%.What is the incremental undepreciated capital cost (UCC)for year 2?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters