Exam 9: Fundamentals of Capital Budgeting

Which of the following will cause the EBIT break-even for sales to increase?

Why does the option to abandon a project have value?

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 will be the CCA deduction for year 1?

Use the table for the question(s) below. -You are considering adding a microbrewery onto one of your firm's existing restaurants.This will entail an increase in inventory of $8000,an increase in accounts payable of $2500,and an increase in property,plant,and equipment of $40,000.All other accounts will remain unchanged.The change in net working capital resulting from the addition of the microbrewery is:

How does the capital budgeting process begin?

Use the table for the question(s) below. -You are considering adding a microbrewery onto one of your firm's existing restaurants.This will entail an investment of $40,000 in new equipment.The new equipment falls under asset class 43 and has a capital cost allowance (CCA)rate of 30%.If your firm's marginal corporate tax rate is 35%,then what is the value of the microbrewery's CCA tax shield in the first year of operation?

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%. -Bubba Ho-Tep Company reported net income of $300 million for the most recent fiscal year.The firm had a capital cost allowance (CCA)of $125 million and capital expenditures of $150 million.Although it 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 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:

A real option is the obligation to take a particular business action.

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 will be the incremental undepreciated capital cost (UCC)for year 2?

A small manufacturer that makes clothespins and other household products buys new injection moulding equipment for a cost of $500,000.This will allow the manufacturer to make more clothespins in the same amount of time with an estimated increase in sales of 15%.If the manufacturer currently makes 75 tons of clothespins per year,which sell at $18,000 per ton,what will be the increase in revenue next year from the new equipment?

Longbow Lumber is purchasing a new horizontal resaw at a cost of $390,000.There is an additional $20,000 delivery and installation cost.The machine has a capital cost allowance (CCA)rate of 15%.What will be the CCA deduction for year 1?

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.Visby learns that a competitor is thinking of offering similar services,thus reducing Visby's sales.By how much could sales fall before the net present value (NPV)was zero,given that the cost of capital is 10%,and that cost of goods sold is 35% of revenues?

Use the table for the question(s) below. -The balance sheet for a small firm is shown above.All amounts are in thousands of dollars.What is this firm's Net Working Capital?

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.By how much could the discount rate rise before the net present value (NPV)of this project is zero,given that it is currently 10%?

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 CCA tax shield for the Sisyphean Corporation's project in the second year is closest to:

Use the table for the question(s) below. - Cromwell Industries is considering a new project which will have costs,revenues,etc.as shown by the data above.If the cost of capital is 8.5%,what is the net present value (NPV)of this project?

Why does capital budgeting focus on incremental revenues and costs,instead of the projected total revenues and costs of the firm?

The net present value (NPV)for Epiphany's Project is closest to:

Use the figure for the question(s) below. -A consumer good company is developing a new brand of organic toothpaste.Above is the sensitivity analysis for this product.The assumptions regarding which parameter should be scrutinized most carefully in the estimation process?