Question 1

Which of the following statements is FALSE?

Accepted Answer

A) A capital budget lists the projects and investments that a company plans to undertake during the coming year. 
B) Income Tax = EBIT × (1 - τc). 
C) When sales of a new product displace sales of an existing product,the situation is often referred to as cannibalization. 
D) Overhead expenses are often allocated to the different business activities for accounting purposes. 
A) A capital budget lists the projects and investments that a company plans to undertake during the coming year. 
B) Income Tax = EBIT × (1 - τc). 
C) When sales of a new product displace sales of an existing product,the situation is often referred to as cannibalization. 
D) Overhead expenses are often allocated to the different business activities for accounting purposes.

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:  
-What is the NPV of the Epiphany's project?

Accepted Answer

The answer of Use the information for the question(s)below.
Epiphany Industries...

Question 3

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 amount of incremental income taxes that the Sisyphean Company will pay in the first year on this new project is closest to:

Accepted Answer

A) $6300 
B) $5200 
C) $3500 
D) $2800 
A) $6300 
B) $5200 
C) $3500 
D) $2800

Question 4

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

Accepted Answer

A) 1,095,000 
B) 1,215,000 
C) 1,225,000 
D) 1,250,000 
A) 1,095,000 
B) 1,215,000 
C) 1,225,000 
D) 1,250,000

Question 5

Which of the following statements is FALSE?

Accepted Answer

A) Many projects use a resource that the company already owns. 
B) When evaluating a capital budgeting decision,we generally include interest expense. 
C) Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project. 
D) As a practical matter,to derive the forecasted cash flows of a project,financial managers often begin by forecasting earnings. 
A) Many projects use a resource that the company already owns. 
B) When evaluating a capital budgeting decision,we generally include interest expense. 
C) Only include as incremental expenses in your capital budgeting analysis the additional overhead expenses that arise because of the decision to take on the project. 
D) As a practical matter,to derive the forecasted cash flows of a project,financial managers often begin by forecasting earnings.

Question 6

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 two is closest to:

Accepted Answer

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

Question 7

Your firm is considering building a new office complex.Your firm already owns land suitable for the new complex.The current book value of the land is $100,000,however a commercial real estate agent has informed you that an outside buyer is interested in purchasing this land and would be willing to pay $650,000 for it.When calculating the NPV of your new office complex,ignoring taxes,the appropriate incremental cash flow for the use of this land is:

Accepted Answer

A) $650,000 
B) $0 
C) $100,000 
D) $750,000 
A) $650,000 
B) $0 
C) $100,000 
D) $750,000

Question 8

The NPV for the trucking division is closest to:

Accepted Answer

A) 170,750 
B) 200,000 
C) 212,550 
D) 250,000 
E) 312,500 
A) 170,750 
B) 200,000 
C) 212,550 
D) 250,000 
E) 312,500

Question 9

What decision should Galt Motors take regarding manufacturing the armatures in house?

Accepted Answer

A) Proceed with in house manufacture since NPV is negative 
B) Proceed with in house manufacture since NPV is positive 
C) Reject in-house manufacture since NPV is negative 
D) Reject in-house manufacture since IRR is greater than 14% 
A) Proceed with in house manufacture since NPV is negative 
B) Proceed with in house manufacture since NPV is positive 
C) Reject in-house manufacture since NPV is negative 
D) Reject in-house manufacture since IRR is greater than 14%

Question 10

The incremental cash flow that the Krusty Krab will incur in year 1 if they elect to upgrade to the new grill is closest to:

Accepted Answer

A) 6500 
B) 7800 
C) 10,800 
D) 11,500 
A) 6500 
B) 7800 
C) 10,800 
D) 11,500

Question 11

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 $5,000 at the end of year three.What is the NPV for this project?

Accepted Answer

@#IMG-DLM& 
Liquidation/Salvage Value Calculation:

Question 12

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 annual depreciation tax shield in year 2 is closest to:

Accepted Answer

A) 20,785 
B) 27,991 
C) 84,000 
D) 180,000 
A) 20,785 
B) 27,991 
C) 84,000 
D) 180,000

Question 13

The change in Net working capital from year one to year two is closest to:

Accepted Answer

A) A decrease of $360 
B) An increase of $360 
C) An increase of $396 
D) A decrease of $396 
A) A decrease of $360 
B) An increase of $360 
C) An increase of $396 
D) A decrease of $396

Question 14

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%.
-Calculate the total Free Cash Flows for each of the three years for the Sisyphean Corporation's new project.

Accepted Answer

The answer of Use the information for the question(s)below.
The Sisyphean...

Question 15

Which of the following statements is FALSE?

Accepted Answer

A) The firm deducts a fraction of the investments in plant,property,and equipment each year as depreciation. 
B) If securities are fairly priced,the net present value of a fixed set of cash flows is independent of how those cash flows are financed. 
C) Sunk cost fallacy is a term used to describe the tendency of people to ignore sunk costs in capital budgeting analysis. 
D) A good rule to remember is that if our decision does not affect a cash flow then the cash flow should not affect our decision. 
A) The firm deducts a fraction of the investments in plant,property,and equipment each year as depreciation. 
B) If securities are fairly priced,the net present value of a fixed set of cash flows is independent of how those cash flows are financed. 
C) Sunk cost fallacy is a term used to describe the tendency of people to ignore sunk costs in capital budgeting analysis. 
D) A good rule to remember is that if our decision does not affect a cash flow then the cash flow should not affect our decision.

Which of the following statements is FALSE?

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

Which of the following statements is FALSE?

The NPV for the trucking division is closest to:

What decision should Galt Motors take regarding manufacturing the armatures in house?

The incremental cash flow that the Krusty Krab will incur in year 1 if they elect to upgrade to the new grill is closest to:

The change in Net working capital from year one to year two is closest to:

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

Filters

Exam 8: Fundamentals of Capital Budgeting

Which of the following statements is FALSE?

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

Which of the following statements is FALSE?

The NPV for the trucking division is closest to:

What decision should Galt Motors take regarding manufacturing the armatures in house?

The incremental cash flow that the Krusty Krab will incur in year 1 if they elect to upgrade to the new grill is closest to:

The change in Net working capital from year one to year two is closest to:

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

Filters