Exam 9: Fundamentals of Capital Budgeting

Use the information for the question(s) below. Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $5 million to set up and will generate $20 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $12 million during this year and the capital cost allowance will be another $3 million. THSI will require no working capital for this investment. THSI's marginal tax rate is 35%. -Ignoring the original investment of $5 million,what is THSI's free cash flow for the first and only year of operation?

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 projects: -The free cash flow for the last year of Epiphany's project is closest to:

How do we handle interest expense when making a capital budgeting decision?

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 projects: -The free cash flow for the first year of Epiphany's project is closest to:

What are the most difficult parts of capital budgeting?

The most difficult part of the capital budgeting process is accurately estimating cash flows and cost of capital.

Capital budgeting is the process of allocating funds to the firm's investment projects.