Question 1

Money that has been or will be paid regardless of the decision as to whether or not to proceed with the project is

Accepted Answer

A)  cannibalization. 
B)  considered as part of the initial investment in the project. 
C)  an opportunity cost. 
D)  a sunk cost. 
A)  cannibalization. 
B)  considered as part of the initial investment in the project. 
C)  an opportunity cost. 
D)  a sunk cost.

Question 2

In Canada,firms deduct a fraction of the cost of capital investment each year for tax purposes.This is known as

Accepted Answer

A)  Capital Cost Allowance. 
B)  Capital Assets Depreciation. 
C)  Operating Assets Amortization. 
D)  Operating Cost Allocation. 
A)  Capital Cost Allowance. 
B)  Capital Assets Depreciation. 
C)  Operating Assets Amortization. 
D)  Operating Cost Allocation.

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 2,000 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 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)  $6,300 
B)  $5,200 
C)  $3,500 
D)  $2,800 
A)  $6,300 
B)  $5,200 
C)  $3,500 
D)  $2,800

Question 4

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 be wasted. 
C)  With straight-line depreciation the asset's cost is divided equally over its life. 
D)  A project's unlevered net income is equal to its incremental revenues less costs and depreciation, evaluated on a 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 be wasted. 
C)  With straight-line depreciation the asset's cost is divided equally over its life. 
D)  A project's unlevered net income is equal to its incremental revenues less costs and depreciation, evaluated on a pre-tax basis.

Question 5

Which of the following statements is false?

Accepted Answer

A)  Project externalities are direct effects of the project that may increase of decrease the profits of other business activities of the firm. 
B)  Incremental earnings are the amount by which the firm's earnings are expected to change as a result of the investment decision. 
C)  The average selling price of a product and its cost of production will generally change over time. 
D)  Any money that has already been spent is a sunk cost and is therefore irrelevant in the capital budgeting process. 
A)  Project externalities are direct effects of the project that may increase of decrease the profits of other business activities of the firm. 
B)  Incremental earnings are the amount by which the firm's earnings are expected to change as a result of the investment decision. 
C)  The average selling price of a product and its cost of production will generally change over time. 
D)  Any money that has already been spent is a sunk cost and is therefore irrelevant in the capital budgeting process.

Question 6

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

@#IMG-DLM& So the discount rat

Question 7

The result of Capital Cost Allowance (CCA)multiplied by marginal corporate tax rate is called

Accepted Answer

A)  total tax cost. 
B)  the CCA tax shield. 
C)  corporate income tax. 
D)  none of the above. 
A)  total tax cost. 
B)  the CCA tax shield. 
C)  corporate income tax. 
D)  none of the above.

Question 8

Which of the following statements is false?

Accepted Answer

A)  When evaluating a capital budgeting decision, the correct tax rate to use is the firm's average corporate tax rate. 
B)  To determine the capital budget, firms analyze alternative projects and decide which ones to accept through a process called capital budgeting. 
C)  A new product typically has lower sales initially, as customers gradually become aware of the product. 
D)  Sunk costs have been or will be paid regardless of the decision on whether or not to proceed with the project. 
A)  When evaluating a capital budgeting decision, the correct tax rate to use is the firm's average corporate tax rate. 
B)  To determine the capital budget, firms analyze alternative projects and decide which ones to accept through a process called capital budgeting. 
C)  A new product typically has lower sales initially, as customers gradually become aware of the product. 
D)  Sunk costs have been or will be paid regardless of the decision on whether or not to proceed with the project.

Question 9

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 2,000 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 first year for the Sisyphean Corporation's project is closest to:

Accepted Answer

A)  $3,600 
B)  $3,960 
C)  $2,880 
D)  $5,400 
A)  $3,600 
B)  $3,960 
C)  $2,880 
D)  $5,400

Question 10

Capital Cost Allowance (CCA)tax shield is the tax ________ that result(s)from the ability to deduct CCA from taxable income.

Accepted Answer

A)  payment 
B)  amount paid to the Canadian Revenue Agency (CR
A)  
C)  savings 
D)  cash flows that the firm has to borrow from its creditor 
A)  payment 
B)  amount paid to the Canadian Revenue Agency (CR
A)  
C)  savings 
D)  cash flows that the firm has to borrow from its creditor

Question 11

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 2,000 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 depreciation tax shield for the Sisyphean Corporation's project in the first year is closest to:

Accepted Answer

A)  $8,000 
B)  $3,500 
C)  $2,800 
D)  $5,200 
A)  $8,000 
B)  $3,500 
C)  $2,800 
D)  $5,200

Question 12

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 of dollars).
  
-The incremental EBIT for Shepard Industries in year two is closest to:

Accepted Answer

A)  $415 million 
B)  $875 million 
C)  $595 million 
D)  $510 million 
A)  $415 million 
B)  $875 million 
C)  $595 million 
D)  $510 million

Question 13

To calculate other non-cash items,a firm adds back any amortization of ________ to unlevered ________ when calculating free cash flow.

Accepted Answer

A)  intangible assets, net income 
B)  tangible assets, operating profit 
C)  intangible assets, operating profit 
D)  tangible assets, net income 
A)  intangible assets, net income 
B)  tangible assets, operating profit 
C)  intangible assets, operating profit 
D)  tangible assets, net income

Question 14

You are considering adding a microbrewery onto 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 micro brewery's depreciation tax shield in the first year of operation?

Accepted Answer

A)  $2,800 
B)  $14,000 
C)  $5,200 
D)  $26,000 
A)  $2,800 
B)  $14,000 
C)  $5,200 
D)  $26,000

Question 15

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 a project 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 a project should be based only on the incremental costs and benefits of the project going forward.

Question 16

In Canada,the only effect of Capital Cost Allowance is to reduce a firm's

Accepted Answer

A)  taxable income. 
B)  depreciation amount. 
C)  marginal revenue. 
D)  sales revenue. 
A)  taxable income. 
B)  depreciation amount. 
C)  marginal revenue. 
D)  sales revenue.

Question 17

Which of the following statements is false?

Accepted Answer

A)  Because only the tax consequences of depreciation are relevant for free cash flow, we should use the depreciation expense that the firm will use for tax purposes in our free cash flow forecasts. 
B)  A firm generally identifies its marginal tax rate by determining the tax bracket that it falls into based on its overall level of pre-tax income. 
C)  Free Cash Flow = (Revenues - Costs) × (1 - τc) - Capital Expenditures - ΔNWC + τc × Depreciation. 
D)  Net working capital is the difference between current liabilities and current assets. 
A)  Because only the tax consequences of depreciation are relevant for free cash flow, we should use the depreciation expense that the firm will use for tax purposes in our free cash flow forecasts. 
B)  A firm generally identifies its marginal tax rate by determining the tax bracket that it falls into based on its overall level of pre-tax income. 
C)  Free Cash Flow = (Revenues - Costs) × (1 - τc) - Capital Expenditures - ΔNWC + τc × Depreciation. 
D)  Net working capital is the difference between current liabilities and current assets.

Question 18

Which of the following statements is true?

Accepted Answer

A)  Capital Cost Allowance (CC
A)  has direct or indirect impact on a firm's financing cash flows. 
B)  Capital Cost Allowance (CC
A)  has direct or indirect impact on a firm's operating cash flows. 
C)  Capital Cost Allowance (CC
A)  has direct or indirect impact on a firm's investment cash flows. 
D)  All of the above. 
A)  Capital Cost Allowance (CC
A)  has direct or indirect impact on a firm's financing cash flows. 
B)  Capital Cost Allowance (CC
A)  has direct or indirect impact on a firm's operating cash flows. 
C)  Capital Cost Allowance (CC
A)  has direct or indirect impact on a firm's investment cash flows. 
D)  All of the above.

Question 19

Which of the following statements is false?

Accepted Answer

A)  Sensitivity analysis allows us to explore the effects of errors in estimated inputs in our NPV analysis for the project. 
B)  To compute the NPV for a project, you need to estimate the incremental cash flows and choose a discount rate. 
C)  Estimates of the cash flows and cost of capital are often subject to significant uncertainty. 
D)  When we are certain regarding the input to a capital budgeting decision, it is often useful to determine the break-even level of that input. 
A)  Sensitivity analysis allows us to explore the effects of errors in estimated inputs in our NPV analysis for the project. 
B)  To compute the NPV for a project, you need to estimate the incremental cash flows and choose a discount rate. 
C)  Estimates of the cash flows and cost of capital are often subject to significant uncertainty. 
D)  When we are certain regarding the input to a capital budgeting decision, it is often useful to determine the break-even level of that input.

Question 20

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 after-tax salvage value of this project?

Accepted Answer

The machine is depreciated straight line

Exam 9: Fundamentals of Capital Budgeting

Money that has been or will be paid regardless of the decision as to whether or not to proceed with the project is

In Canada,firms deduct a fraction of the cost of capital investment each year for tax purposes.This is known as

Which of the following statements is false?

Which of the following statements is false?

The result of Capital Cost Allowance (CCA)multiplied by marginal corporate tax rate is called

Which of the following statements is false?

Capital Cost Allowance (CCA)tax shield is the tax ________ that result(s)from the ability to deduct CCA from taxable income.

To calculate other non-cash items,a firm adds back any amortization of ________ to unlevered ________ when calculating free cash flow.

Which of the following statements is false?

In Canada,the only effect of Capital Cost Allowance is to reduce a firm's

Which of the following statements is false?

Which of the following statements is true?

Which of the following statements is false?

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

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 Modelling: a Case Study

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

To calculate other non-cash items,a firm adds back any amortization of to unlevered when calculating free cash flow.