Exam 8: Fundamentals of Capital Budgeting

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 first year of Epiphany's project is closest to:

Which of the following statements is FALSE?

The IRR of manufacturing the armatures in house is closest to:

Use the information for the question(s)below. Glucose Scan Incorporated (GSI)currently sells its latest glucose monitor,the Glucoscan 3000,to diabetic patients for $129.GSI plans on lowering their price next year to $99 per unit.The cost of goods sold for each Glucoscan unit is $50,and GSI expects to sell 100,000 units over the next year. -Suppose that if GSI drops the price on the Glucoscan 3000 immediately,it can increase sales over the next year by 30% to 130,000 units.Also suppose that for each Glucoscan monitor sold,GSI expects additional sales of $100 per year on glucose testing strips and these strips have a gross profit margin of 75%.Considering the increase in the sale of testing strips,the incremental impact of this price drop on the firms EBIT is closest to:

Epiphany would like to know how sensitive the project's NPV is to changes in the discount rate.How much can the discount rate vary before the NPV reaches zero?

You are considering adding a microbrewery on to one of your firm's existing restaurants.This will entail an investment of $40,000 in new equipment.This equipment will be depreciated straight line over five years.If your firm's marginal corporate tax rate is 35%,then what is the value of the microbrewery's depreciation tax shield in the first year of operation?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

The Sisyphean Company is considering a new project that will have an annual depreciation expense of $2.5 million.If Sisyphean's marginal corporate tax rate is 40% and their average corporate tax rate is 30%,then what is the value of the depreciation tax shield on their new project?

The value of currently unused warehouse space that will be used as part of a new capital budgeting project is:

You are considering investing $600,000 in a new automated inventory system that will provide after-tax cost savings of $50,000 next year.These cost savings are expected to grow at the same rate as sales.If sales are expected to grow at 5% per year and your cost of capital is 10%,then what is the NPV of the automated inventory system?

What is an opportunity cost? Should it be included in the incremental cash flows for a project? Why or why not?

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 pre-tax income from now on,Luther first pays taxes in:

Use the information for the question(s)below. Kinston Industries is considering investing in a machine that will cost $125,000 and will last for three years.The machine will generate revenues of $120,000 each year and the cost of goods sold will be 50% of sales.At the end of year three the machine will be sold for $15,000.The appropriate cost of capital is 10% and Kinston is in the 35% tax bracket. -Assume that Kinston's new machine will be depreciated using MACRS according to the following schedule: What is the NPV of this project?

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:

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

Use the following information to answer the question(s)below. (Include the MACRS Table from the Appendix. ) Casa Grande Farms is considering purchasing multiple tractors for a total purchase price of $540,000.These tractors are expected to generate EBITDA of $250,000 for each of the next three years.Casa Grande Farms has a 35% tax rate and has a cost of capital of 10%. -Assuming that Casa Grande Farms depreciates these tractors using MACRS depreciation method for three-year property starting immediately,then the NPV of buying the tractors is closest to:

What is a sunk cost? Should it be included in the incremental cash flows for a project? Why or why not?

A decrease in the sales of a current project because of the launching of a new project is:

Which of the following costs would you consider when making a capital budgeting decision?