Exam 8: Fundamentals of Capital Budgeting

Which of the following statements is FALSE?

Use the following information to answer the question(s)below. Taggart Transcontinental is considering adding a trucking division to expand the coverage of its existing rail lines.The trucking division will cost $1,000,000 and is expected to generate free cash flows of $100,000 for each of the next five years.Taggart Transcontinental forecasts that future free cash flows after year 5 will grow at 2% per year,forever.Taggart Transcontinental's cost of capital is 10%. -The continuation value for the trucking division in year five is closest to:

Use the information for the question(s)below. Ford Motor Company is considering launching a new line of Plug-in Electric SUVs.The heavy advertising expenses associated with the new SUV launch would generate operating losses of $35 million next year.Without the new SUV,Ford expects to earn pre-tax income of $80 million from operations next year.Ford pays a 30% tax rate on its pre-tax income. -The amount that Ford Motor Company will owe in taxes next year with the launch of the new SUV is closest to:

The free cash flow from the Shepard Industries project in year one is closest to:

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

The depreciation tax shield for the Shepard Industries project in year one is closest to:

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 will be depreciated straight line over its three-year life to a residual value of $0. 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 three.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 6% of its annual sales in accounts payable.The firm is in the 35% tax bracket,and has a cost of capital of 10%. -The incremental EBIT in the first year for the Sisyphean Corporation's project is closest to:

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 incremental EBIT for the Shepard Industries project in year one is closest to:

How does scenario analysis differ from sensitivity analysis?

Which of the following statements is FALSE?

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 depreciation expense 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?

The incremental cash flow that Galt Motors will incur in year 10 if they elect to manufacture armatures in house is closest to:

Which of the following statements is FALSE?

Use the following information to answer the question(s)below. Two years ago the Krusty Krab Restaurant purchased a grill for $50,000.The owner,Eugene Krabs,has learned that a new grill is available that will cook Krabby Patties twice as fast as the existing grill.This new grill can be purchased for $80,000 and would be depreciated straight line over 8 years,after which it would have no salvage value.Eugene Krab expects that the new grill will produce EBITDA of $50,000 per year for the next eight years while the existing grill produces EBITDA of only $35,000 per year.The current grill is being depreciated straight line over its useful life of 10 years after which it will have no salvage value.All other operating expenses are identical for both grills.The existing grill can be sold to another restaurant now for $30,000.The Krusty Krab's tax rate is 35%. -The incremental cash flow that the Krusty Krab will incur today (Year 0)if they elect to upgrade to the new grill is closest to:

The incremental cash flow that Galt Motors will incur in year 4 if they elect to manufacture armatures in house is closest to:

If the Krusty Krab's opportunity cost of capital is 12%,then the IRR for upgrading to the new grill is closest to:

The incremental after tax cash flow that the Krusty Krab will receive from selling the existing grill is closest to:

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 will be depreciated straight line over its three-year life to a residual value of $0. 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 three.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 6% of its annual sales in accounts payable.The firm is in the 35% tax bracket,and has a cost of capital of 10%. -The incremental unlevered net income in the first year for the Sisyphean Corporation's project is closest to:

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 will be depreciated straight line over its three-year life to a residual value of $0. 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 three.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 6% of its annual sales in accounts payable.The firm is in the 35% tax bracket,and has a cost of capital of 10%. -The depreciation tax shield for the Sisyphean Corporation's project in the first year is closest to:

If RBC acquires POP,then the NPV of POP tax loss carry forwards to RBC is closest to: