Exam 7: Making Capital Investment Decisions: Further Issues

Currently 90-day Treasury bills are trading at 7% per annum and inflation is running at 4.5%. A company is issuing bonds with a face value of $1,000 and an annual interest rate of 8% and maturity in 25 years. What can be concluded about the market's view of the company's level of riskiness?

The Oakley-Brown, a frozen food processor, requires an additional refrigeration unit. The company is considering a premium model at a cost of $52,000. Expected life for the unit is five years with a residual value of $18,500. The incremental income before depreciation is expected to be $14,500 a year. The company's cost of capital is 14%. Using 14% and 25% as trial values, what increase in the cost of capital will eliminate the unit from consideration?

The current general purchasing power of cash flows is determined by

If the coefficient of correlation between two projects is 0, it would indicate that

Sensitivity analysis provides a manager with

Two or more investment opportunities score the same ENPV. What should the company do with respect to the projected cash flows on which the analysis is based?

Li'l Lucy's Fried Chicken would like to invest $2 million to buy land and build a a restaurant in an area that has been rezoned from agricultural to residential. The company expects a 9% return. The company believes there is a 15% probability that the neighbouring land will be fully developed into family homes resulting in income before depreciation of $800,000 a year. It also believes in a 60% chance that the neighbouring land will be gradually developed resulting in Year 1 income of $150,000, Year 2 income of $200,000, Years 3, 4 and 5 income of $500,000 and Years 6 and 7 income of $800,000. There exists a 25% chance that there will be no development resulting in an income of $150,000 a year from an alternative use of the land. Based on ENPV, should Li'l Lucy's Fried Chicken build the restaurant?

Martin Rose Associates have included the cost of theft of their intangible assets in calculating the NPV of several biometric security scanning systems for the company's research facilities. A new generation of biometrics is likely to be unveiled within 12 to 18 months that could double the benefits that the current biometric system would deliver. The company should

The Oakley-Brown, a frozen food processor, is considering buying a curly-fry extruder with potato preparation attachments for $90,000. It expects to sell 2,500 cases the first year and 4,500 cases for four years after that while the craze lasts. Price per case will be $30. Cost of goods, selling and administration expenses equal $62,500 in the first year and $100,500 in the subsequent years. What price drop will bring NPV to near zero if the company's hurdle rate is 14%?

Mountain Water Inc. has $20 million to invest and is looking at three projects. The company's hurdle rate is 14%. Project A's initial investment is $13 million and the cash flow over four years is $1 million, $2 million, $8 million, and $10 million, respectively. Project B's initial investment is $17 million and cash flow over the same period is $10 million, $7 million, $4 million and $4 million. Project C's initial investment is $18 million and its cash flow is $2 million, $10 million, $9 million, and $7 million, respectively. The projects are indivisible and the internal rate of returns of the three projects are 15.99%, 19.83%, and 17.91%. Idle cash earns no return. Because La Verendrye cannot undertake all three projects, what is their best investment decision?

When measuring satisfaction on a 20 point scale, an individual receives $500 and registers a satisfaction rating of 3. An additional $500 rates a 7 in satisfaction and yet another $500, increases the individual's satisfaction rating to 12. A reduction in wealth of $1000 would bring about a dissatisfaction rating of 5. It could be concluded that the individual is

Granular Sugar Company is considering buying a new fork lift truck that will improve warehousing efficiency. the cost is $100,000 and it will last two years producing additional cash inflows of $61,500 each year. Granular's cost of capital is 10%. What is the net present value, internal rate of return, percentage margin of safety on the cost and margin of safety on the additional cash inflow?

Perminder Ltd. buys raw (green) coffee beans, roasts, packages and distributes premium coffee nationally. Green bean prices, like oil, currency and gold, are set on international markets. Which of the following does Perminder Ltd. face?

A company is facing a .45 probability that a competitive product may enter the market at the same time as their own product launch. This would cut their projected demand in half. The company estimates a .35 high market acceptance for that type of product, .45 for medium acceptance. What is the probability of the company's worst possible outcome?

Etienne Electronics is appraising three projects. Project 1 has a NPV of $64,000 with a 40% probability of occurrence; $78,000 with a 40% probability; and $95,000 with a 20% probability. Project 2 has an NPV of $55,000 and probability of 30%; $105,000 with a probability of 60% and $110,000 with a probability of 10%. Project 3 has an NPV of $75,000 and probability of 20%; $90,000 and probability of 50%, and $105,000 with a probability of occurrence of 30%. Which project should Etienne Electronics undertake?

A company uses the Profitability Index to assess investment opportunities when:

Alternative A and Alternative B have the same ENPV. When graphing possible results from the alternative projects, Alternative A has fewer values clustered around the ENPV and has a greater number of lower and higher possible values than Alternative B. What can be concluded when comparing Alternative A to Alternative B?

Smith Inc. of Montreal sells 75% of two million dollars of sales in the United States. Smith expects the Canadian dollar to strengthen vis-a-vis the U.S. dollar over the next year. Which of the following represents Smith's best course of action to limit its risk of currency losses.

The City of Edmonton is trying to decide whether to build a base facility or an Olympic swimming pool at a new park. For budget reasons, the city cannot afford to build both. Each project is expected to result in a public facility that can be used for twenty years. which of the following best describes the two projects.

The validity of the data on which objective probabilities are based always suffers from the situation that