Question 1

Which of the following statements is FALSE?

Accepted Answer

A) The terminal or continuation value of the project represents the market value (as of the last forecast period)of the free cash flow from the project at all future dates. 
B) The incremental effect of a project on the firm's available cash is the project's free cash flow. 
C) (1 - τc)× Depreciation is called the depreciation tax shield. 
D) To evaluate a capital budgeting decision,we must determine its consequences for the firm's available cash. 
A) The terminal or continuation value of the project represents the market value (as of the last forecast period)of the free cash flow from the project at all future dates. 
B) The incremental effect of a project on the firm's available cash is the project's free cash flow. 
C) (1 - τc)× Depreciation is called the depreciation tax shield. 
D) To evaluate a capital budgeting decision,we must determine its consequences for the firm's available cash.

Question 2

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:  
-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?

Accepted Answer

A) 7.14% 
B) 19.14% 
C) 12.0% 
D) 0% 
A) 7.14% 
B) 19.14% 
C) 12.0% 
D) 0%

Question 3

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 straight line to a salvage value of $5000 at the end of year three.What is the after-tax salvage value of this project?

Accepted Answer

If the machine is depreciated straight l

Question 4

If the Krusty Krab's opportunity cost of capital is 12%,what decision should the Krusty Krab take regarding the new grill?

Accepted Answer

A) Do not install the new grill since NPV is approximately = - $10,630 
B) Install the new grill since NPV is approximately = + $10,630 
C) Install the new grill since IRR is approximately = 15% 
D) Don't install the new grill since IRR is less than 12% 
A) Do not install the new grill since NPV is approximately = - $10,630 
B) Install the new grill since NPV is approximately = + $10,630 
C) Install the new grill since IRR is approximately = 15% 
D) Don't install the new grill since IRR is less than 12%

Question 5

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 5% of its annual sales in accounts payable.The firm is in the 35% tax bracket,and has a cost of capital of 10%.
-The required net working capital in the second year for the Sisyphean Corporation's project is closest to:

Accepted Answer

A) $3960 
B) $4360 
C) $3190 
D) $5940 
A) $3960 
B) $4360 
C) $3190 
D) $5940

Question 6

Which of the following statements is FALSE?

Accepted Answer

A) The simplest method used to calculate depreciation is the straight-line method. 
B) A sunk cost is any unrecoverable cost for which the firm is already liable. 
C) Unlevered Net Income = EBIT × τc. 
D) The decision to continue or abandon should be based only on the incremental costs and benefits of the project going forward. 
A) The simplest method used to calculate depreciation is the straight-line method. 
B) A sunk cost is any unrecoverable cost for which the firm is already liable. 
C) Unlevered Net Income = EBIT × τc. 
D) The decision to continue or abandon should be based only on the incremental costs and benefits of the project going forward.

Question 7

Which of the following statements is FALSE?

Accepted Answer

A) We can use scenario analysis to evaluate alternative pricing strategies for our project. 
B) Scenario analysis considers the effect on NPV of changing multiple project parameters. 
C) The difference between the IRR of a project and the cost of capital tells you how much error in the cost of capital it would take to change the investment decision. 
D) Scenario analysis breaks the NPV calculation into its component assumptions and show how the NPV varies as each one of the underlying assumptions change. 
A) We can use scenario analysis to evaluate alternative pricing strategies for our project. 
B) Scenario analysis considers the effect on NPV of changing multiple project parameters. 
C) The difference between the IRR of a project and the cost of capital tells you how much error in the cost of capital it would take to change the investment decision. 
D) Scenario analysis breaks the NPV calculation into its component assumptions and show how the NPV varies as each one of the underlying assumptions change.

Question 8

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 unlevered net income of the Shepard Industries project in year one is closest to:

Accepted Answer

A) $510 
B) $415 
C) $600 
D) $355 
A) $510 
B) $415 
C) $600 
D) $355

Question 9

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

Accepted Answer

A) -22,875 
B) -15,025 
C) 7130 
D) 10,630 
A) -22,875 
B) -15,025 
C) 7130 
D) 10,630

Question 10

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 without the launch of the new SUV is closest to:

Accepted Answer

A) $24.0 million 
B) $56.0 million 
C) $31.5 million 
D) $13.5 million 
A) $24.0 million 
B) $56.0 million 
C) $31.5 million 
D) $13.5 million

Question 11

Use the following information to answer the question(s)below.
Really Big Conglomerate (RBC)is considering acquiring POP,Inc.a smaller unsuccessful Internet firm.POP has outstanding tax loss carry forwards of $320 million from losses over the past six years.RBC has pre-tax income of $100 million per year,a cost of capital of 10%,and pays 35% in taxes.
-If RBC acquires POP,in what year will RBC be required to pay corporate taxes again?

Accepted Answer

A) 2 years 
B) 3 years 
C) 4 years 
D) 5 years 
A) 2 years 
B) 3 years 
C) 4 years 
D) 5 years

Question 12

What is sensitivity analysis?

Accepted Answer

Sensitivity analysis breaks the NPV calc

Question 13

Assume that THSI's cost of capital for this project is 15%.The NPV of this temporary housing project is closest to:

Accepted Answer

A) $435,000 
B) -$650,000 
C) $1,960,000 
D) -$435,000 
A) $435,000 
B) -$650,000 
C) $1,960,000 
D) -$435,000

Question 14

An exploration of the effect on NPV of changing multiple project parameters is called:

Accepted Answer

A) scenario analysis. 
B) IRR analysis. 
C) accounting break-even analysis. 
D) sensitivity analysis. 
A) scenario analysis. 
B) IRR analysis. 
C) accounting break-even analysis. 
D) sensitivity analysis.

Question 15

The difference between scenario analysis and sensitivity analysis is that:

Accepted Answer

A) scenario analysis is based upon the IRR and sensitivity analysis is based upon NPV. 
B) only sensitivity analysis allows us to change our estimated inputs of our NPV analysis. 
C) only scenario analysis considers the effect on NPV of changing multiple project parameters. 
D) only scenario analysis breaks the NPV calculation into its component assumptions. 
A) scenario analysis is based upon the IRR and sensitivity analysis is based upon NPV. 
B) only sensitivity analysis allows us to change our estimated inputs of our NPV analysis. 
C) only scenario analysis considers the effect on NPV of changing multiple project parameters. 
D) only scenario analysis breaks the NPV calculation into its component assumptions.

Question 16

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%.
-Assume that Casa Grande Farms is planning to sell the tractors after two years,when its book value is $119,988,for a total price of $180,000.What is the effect on free cash flow in the year it is sold?

Accepted Answer

A) A cash inflow of $60,012 
B) A cash outflow of $60,012 
C) A cash inflow of $39,008 
D) A cash outflow of $39,008 
A) A cash inflow of $60,012 
B) A cash outflow of $60,012 
C) A cash inflow of $39,008 
D) A cash outflow of $39,008

Question 17

Which of the following cash flows are relevant incremental cash flows for a project that you are currently considering investing in?

Accepted Answer

A) The tax savings brought about by the project's depreciation expense 
B) The cost of a marketing survey you conducted to determine demand for the proposed project 
C) Interest payments on debt used to finance the project 
D) Research and Development expenditures you have made 
A) The tax savings brought about by the project's depreciation expense 
B) The cost of a marketing survey you conducted to determine demand for the proposed project 
C) Interest payments on debt used to finance the project 
D) Research and Development expenditures you have made

Question 18

Use the following information to answer the question(s)below.
Galt Motors currently produces 500,000 electric motors a year and expects output levels to remain steady in the future.It buys armatures from an outside supplier at a price of $2.50 each.The plant manager believes that it would be cheaper to make these armatures rather than buy them.Direct in-house production costs are estimated to be only $1.80 per armature.The necessary machinery would cost $700,000 and would be obsolete in 10 years.This investment would be depreciated to zero for tax purposes using a 10-year straight line depreciation.The plant manager estimates that the operation would require additional working capital of $40,000 but argues that this sum can be ignored since it is recoverable at the end of the ten years.The expected proceeds from scrapping the machinery after 10 years are estimated to be $10,000.Galt Motors pays tax at a rate of 35% and has an opportunity cost of capital of 14%.
-The incremental cash flow that Galt Motors will incur today (Year 0)if they elect to manufacture armatures in house is closest to:

Accepted Answer

A) -740,000 
B) -700,000 
C) -660,000 
D) 740,000 
A) -740,000 
B) -700,000 
C) -660,000 
D) 740,000

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.
-Suppose that of the 60% of FFL's current overnight photo customers,half would start taking their film to a competitor that offers one hour photo processing if FFL fails to offer the one hour service.The level of incremental sales in this case is closest to:

Accepted Answer

A) $60,000 
B) $150,000 
C) $90,000 
D) $120,000 
A) $60,000 
B) $150,000 
C) $90,000 
D) $120,000

Question 20

Which of the following statements is FALSE?

Accepted Answer

A) Sales will ultimately decline as the product nears obsolescence or faces increased competition. 
B) Managers sometimes continue to invest in a project that has a negative NPV because they have already invested a large amount in the project and feel that by not continuing it,the prior investment will wasted. 
C) With straight-line depreciation the asset's cost is divided equally over its life. 
D) A projects unlevered net income is equal to its incremental revenues less costs and depreciation,evaluated on an pre-tax basis. 
A) Sales will ultimately decline as the product nears obsolescence or faces increased competition. 
B) Managers sometimes continue to invest in a project that has a negative NPV because they have already invested a large amount in the project and feel that by not continuing it,the prior investment will wasted. 
C) With straight-line depreciation the asset's cost is divided equally over its life. 
D) A projects unlevered net income is equal to its incremental revenues less costs and depreciation,evaluated on an pre-tax basis.

Exam 8: Fundamentals of Capital Budgeting

Which of the following statements is FALSE?

If the Krusty Krab's opportunity cost of capital is 12%,what decision should the Krusty Krab take regarding the new grill?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

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

What is sensitivity analysis?

Assume that THSI's cost of capital for this project is 15%.The NPV of this temporary housing project is closest to:

An exploration of the effect on NPV of changing multiple project parameters is called:

The difference between scenario analysis and sensitivity analysis is that:

Which of the following cash flows are relevant incremental cash flows for a project that you are currently considering investing in?

Which of the following statements is FALSE?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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