Question 1

An exploration of the effect of changing multiple project parameters on net present value (NPV)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 2

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 2 is closest to:

Accepted Answer

A)  $84 
B)  $196 
C)  $72 
D)  $96 
E)  $100 
A)  $84 
B)  $196 
C)  $72 
D)  $96 
E)  $100

Question 3

Which of the following best describes why the predicted incremental earnings arising from a given decision are not sufficient in and of themselves to determine whether that decision is worthwhile?

Accepted Answer

A)  They do not tell how the decision affects the firm's reported profits from an accounting perspective. 
B)  They are not easily predicted from historical financial statements of a firm and its competitors. 
C)  These earnings are not actual cash flows. 
D)  They do not show how the firm's earnings are expected to change as the result of a particular decision. 
E)  They do not tell us how profits change from an accounting perspective. 
A)  They do not tell how the decision affects the firm's reported profits from an accounting perspective. 
B)  They are not easily predicted from historical financial statements of a firm and its competitors. 
C)  These earnings are not actual cash flows. 
D)  They do not show how the firm's earnings are expected to change as the result of a particular decision. 
E)  They do not tell us how profits change from an accounting perspective.

Question 4

A maker of computer games expects to sell 500,000 games at a price of $49 per game.These units cost $12 to produce.Selling,general,and administrative expenses are $1.2 million and the CCA deduction is $280,000.What is the EBIT break-even point for the number of games sold in this case?

Accepted Answer

A)  24,865 
B)  30,192 
C)  30,204 
D)  40,000 
E)  44,740 
A)  24,865 
B)  30,192 
C)  30,204 
D)  40,000 
E)  44,740

Question 5

A maker of kitchenware is planning on selling a new chef-quality kitchen knife.The manufacturer expects to sell 1.6 million knives at a price of $120 each.These knives cost $80 each to produce.Selling,general,and administrative expenses are $500,000.The machinery required to produce the knives cost $1.4 million,depreciated by straight-line depreciation over five years.The maker determines that the EBIT break-even point for units sold and sale price is less than these estimates and that the EBIT break-even point for costs per unit,SG&A,and depreciation are greater than these estimates,so decides to go ahead with manufacturing the knife.Was this the correct decision?

Accepted Answer

A)  No, since the cost per unit should be greater than the EBIT-break even point for cost of goods if the project is to have a positive EBIT. 
B)  Yes, since if the estimates for each parameter are correct , the EBIT will be positive. 
C)  Yes, since a positive EBIT ensures that the project will have a positive net present value (NPV). 
D)  No, since NPV will be negative. 
E)  It cannot be determined whether the decision was correct, since other factors contributing to the project's net present value (NPV), such as the upfront investment, have not been included in the analysis. 
A)  No, since the cost per unit should be greater than the EBIT-break even point for cost of goods if the project is to have a positive EBIT. 
B)  Yes, since if the estimates for each parameter are correct , the EBIT will be positive. 
C)  Yes, since a positive EBIT ensures that the project will have a positive net present value (NPV). 
D)  No, since NPV will be negative. 
E)  It cannot be determined whether the decision was correct, since other factors contributing to the project's net present value (NPV), such as the upfront investment, have not been included in the analysis.

Question 6

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 restaurant invests $240,000 in a new food truck for mobile lunch sales.The truck will have a capital cost allowance (CCA)rate of 20%.The opportunity cost of capital is 8.5%,and the restaurant's marginal tax rate is 30%.If the company sells the truck at the end of 5 years for $120,000,what is the present value of the lost CCA tax shields from the sale of the asset?

Accepted Answer

A)  $12,437 
B)  $16,801 
C)  $33,602 
D)  $35,938 
E)  $24,874 
A)  $12,437 
B)  $16,801 
C)  $33,602 
D)  $35,938 
E)  $24,874

Question 7

A manufacturer of peripheral devices for PCs decides to try and capture some of the PC gaming market by creating gaming versions of its traditional peripheral devices.It decides to start with a gaming version of its standard keyboard,increasing the number of macro keys,adding a small LCD screen to display game data,and giving the user the ability to backlight keys in different colors.If this device is a success,the manufacturer plans to release gaming versions of its trackballs and other peripherals.What option is the manufacturer gaining by the release of the new keyboard?

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 8

CathFoods will release a new range of candies which contain antioxidants.New equipment to manufacture the candy will cost $2 million.The new equipment falls under asset class 43 and has a capital cost allowance (CCA)rate of 30%.It is expected that the range of candies will bring in revenues of $4 million per year for five years with production and support costs of $1.5 million per year.If CathFood's marginal tax rate is 35%,what are the incremental free cash flows in the first year of this project?

Accepted Answer

A)  -$0.27 million 
B)  $1.43 million 
C)  $1.46 million 
D)  $2.50 million 
E)  $4.0 million 
A)  -$0.27 million 
B)  $1.43 million 
C)  $1.46 million 
D)  $2.50 million 
E)  $4.0 million

Question 9

A stationery company plans to launch a new type of indelible ink pen.Advertising for the new product will be heavy and will cost the company $10 million,although the company expects general revenues of $280 million next year from sources other than sales of the new pen.If the company has a corporate tax of 40% on its pretax income,what effect will the advertising for the new pen have on its taxes?

Accepted Answer

A)  increase taxes by $10 million 
B)  increase taxes by $4 million 
C)  It will have no effect on taxes. 
D)  reduce taxes by $4 million 
E)  reduce taxes by $10 million 
A)  increase taxes by $10 million 
B)  increase taxes by $4 million 
C)  It will have no effect on taxes. 
D)  reduce taxes by $4 million 
E)  reduce taxes by $10 million

Question 10

What do you understand by break-even analysis?

Accepted Answer

Break-even analysis is an exte

Question 11

A machine is purchased for $500,000 and is used through the end of Year 2.The machine falls under asset class 43 with a capital cost allowance (CCA)rate of 30%.At the end of Year 2,the machine is sold for $75,000.What is the present value of the lost CCA tax shields if the firm's marginal tax rate is 40% and its cost of capital is 5%?

Accepted Answer

A)  $37,050 
B)  $15,180 
C)  $37,950 
D)  $23,324 
E)  $25,714 
A)  $37,050 
B)  $15,180 
C)  $37,950 
D)  $23,324 
E)  $25,714

Question 12

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.
-Luther Industries has outstanding tax loss carryforwards of $70 million from losses over the past four years.If Luther earns $15 million per year in pretax income from now on,in how many years will Luther first pay taxes?

Accepted Answer

A)  7 years 
B)  2 years 
C)  4 years 
D)  5 years 
E)  6 years 
A)  7 years 
B)  2 years 
C)  4 years 
D)  5 years 
E)  6 years

Question 13

Use the table for the question(s) below.
  
- 
A garage is installing a new "bubble-wash" car wash.It will promote the car wash as a fun activity for the family,and it is expected that the novelty of this approach will boost sales in the medium term.If the cost of capital is 10%,what is the net present value (NPV)of this project?

Accepted Answer

A)  -$214,525 
B)  -$145,283 
C)  $76,607 
D)  $108,306 
E)  $86,167 
A)  -$214,525 
B)  -$145,283 
C)  $76,607 
D)  $108,306 
E)  $86,167

Question 14

A company spends $20 million researching whether it is possible to create a durable plastic from the process waste from feedstock preparation.How should the $20 million best be considered?

Accepted Answer

A)  as a sunk cost 
B)  as an opportunity cost 
C)  as a fixed overhead expense 
D)  as a capital cost 
E)  as a project externality 
A)  as a sunk cost 
B)  as an opportunity cost 
C)  as a fixed overhead expense 
D)  as a capital cost 
E)  as a project externality

Question 15

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.If the best-case assumptions for Net Working Capital are met,what will the net present value (NPV)of this project be?

Accepted Answer

A)  $0.65 million 
B)  $1.7 million 
C)  $2 million 
D)  $3 million 
E)  -$0.2 million 
A)  $0.65 million 
B)  $1.7 million 
C)  $2 million 
D)  $3 million 
E)  -$0.2 million

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 1?

Accepted Answer

A)  -34.5 million 
B)  -$32.8 million 
C)  -$45 million 
D)  -$43.3 million 
E)  -$22.5 million 
A)  -34.5 million 
B)  -$32.8 million 
C)  -$45 million 
D)  -$43.3 million 
E)  -$22.5 million

Question 17

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 restaurant invests $240,000 in a new food truck for mobile lunch sales.The truck will have a capital cost allowance (CCA)rate of 20%.If the opportunity cost of capital is 8.5%,and the restaurant's marginal tax rate is 30%,what is the present value of the CCA tax shield?

Accepted Answer

A)  $48,547 
B)  $48,000 
C)  $50,526 
D)  $35,938 
E)  $14,400 
A)  $48,547 
B)  $48,000 
C)  $50,526 
D)  $35,938 
E)  $14,400

Question 18

A firm is considering a new project that will generate cash revenue of $1,000,000 and cash expenses of $700,000 per year for five years.The equipment necessary for the project will cost $200,000 and will fall under asset class 43 with a CCA rate of 30%.What is the expected free cash flow in the second year of the project if the firm's marginal tax rate is 35%?

Accepted Answer

A)  $195,000 
B)  $162,500 
C)  $212,850 
D)  $245,000 
E)  $161,850 
A)  $195,000 
B)  $162,500 
C)  $212,850 
D)  $245,000 
E)  $161,850

Question 19

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 construction company spends $1.4 million to purchase a new crane.The crane will have a capital cost allowance (CCA)rate of 25%.If the opportunity cost of capital is 7%,and the company's marginal tax rate is 20%,what is the present value of the CCA tax shield?

Accepted Answer

A)  $70,000 
B)  $350,000 
C)  $211,595 
D)  $250,779 
E)  $218,750 
A)  $70,000 
B)  $350,000 
C)  $211,595 
D)  $250,779 
E)  $218,750

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 bakery invests $30,000 in a light delivery truck.The truck belongs to asset class 10 and has a capital cost allowance (CCA)rate of 30%.If the company sold it immediately after the end of year 2 for $22,000,what would be the present value of the overall CCA tax shields,given a tax rate of 40% and a cost of capital of 8%?

Accepted Answer

A)  $5,184 
B)  $8,122 
C)  $9,123 
D)  $3,167 
E)  $6,947 
A)  $5,184 
B)  $8,122 
C)  $9,123 
D)  $3,167 
E)  $6,947

An exploration of the effect of changing multiple project parameters on net present value (NPV)is called

Which of the following best describes why the predicted incremental earnings arising from a given decision are not sufficient in and of themselves to determine whether that decision is worthwhile?

A maker of computer games expects to sell 500,000 games at a price of $49 per game.These units cost $12 to produce.Selling,general,and administrative expenses are $1.2 million and the CCA deduction is $280,000.What is the EBIT break-even point for the number of games sold in this case?

What do you understand by break-even analysis?

A company spends $20 million researching whether it is possible to create a durable plastic from the process waste from feedstock preparation.How should the $20 million best be considered?

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.If the best-case assumptions for Net Working Capital are met,what will the net present value (NPV)of this project be?

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

An exploration of the effect of changing multiple project parameters on net present value (NPV)is called

Which of the following best describes why the predicted incremental earnings arising from a given decision are not sufficient in and of themselves to determine whether that decision is worthwhile?

A maker of computer games expects to sell 500,000 games at a price of $49 per game.These units cost $12 to produce.Selling,general,and administrative expenses are $1.2 million and the CCA deduction is $280,000.What is the EBIT break-even point for the number of games sold in this case?

What do you understand by break-even analysis?

A company spends $20 million researching whether it is possible to create a durable plastic from the process waste from feedstock preparation.How should the $20 million best be considered?

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.If the best-case assumptions for Net Working Capital are met,what will the net present value (NPV)of this project be?

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