Exam 9: Fundamentals of Capital Budgeting

Use the table for the question(s)below. -Visby Rides,a livery car company,is considering buying some new luxury cars.After extensive research,they come up with the above estimates of free cash flow from this project.By how much could the discount rate rise before the net present value (NPV)of this project is zero,given that it is currently 10%?

Use the table for the question(s)below. -Panjandrum Industries,a manufacturer of industrial piping,is evaluating whether it should expand into the sale of plastic fittings for home garden sprinkler systems.It has made the above estimates of free cash flows resulting from such a decision.There are concerns of the sensitivity of this project to changes in the cost of capital.For approximately what cost of capital does this project break even?

Why does the Canada Revenue Agency (CRA)have a half-year rule for capital cost allowance (CCA)calculations?

CathFoods will release a new range of candies which contain antioxidants.New equipment to manufacture the candy will cost $2 million.The new equipment falls under asset class 43 and has a capital cost allowance (CCA)rate of 30%.It is expected that the range of candies will bring in revenues of $4 million per year for five years with production and support costs of $1.5 million per year.If CathFoods' marginal tax rate is 35%,what are the incremental free cash flows in the first year of this project?

The ultimate goal of capital budgeting is to determine the effect of a project on the firm's cash flows and the consequences of accepting or rejecting a project for the firm's value.

What is the ultimate goal of capital budgeting?

Which of the following will cause the EBIT break-even for sales to increase?

Which of the following best describes why the predicted incremental earnings arising from a given decision are not sufficient in and of themselves to determine whether that decision is worthwhile?

How do we handle interest expense when making a capital budgeting decision?

Cromwell Industries is considering a new project which will have costs,revenues,etc.as shown by the data above.If the cost of capital is 8.5%,what is the net present value (NPV)of this project?

A textile company invests $12 million in an open-end spinning machine.The machine belongs to asset class 43 and has a capital cost allowance (CCA)rate of 30%.It is expected that the new machine will increase revenues by $9 million per year with production and support costs of $0.5 million per year.If the company sold it immediately after the end of year 3 for $8 million,what would be the net present value (NPV)of owning the asset,given a tax rate of 40%,and a cost of capital of 12%?

What are project externalities?

The required net working capital in the second year for the Sisyphean Corporation's project is closest to:

A firm reports that in a certain year it had unlevered net income of $4.5 million,a capital cost allowance (CCA)deduction of $2.8 million,capital expenditures of $2.3 million,and net working capital decreased by $1.5 million.What is the firm's free cash flow for that year?

A real option is the obligation to take a particular business action.

The cash flow effect from a change in Net Working Capital is always equal in size and opposite in sign to the changes in Net Working Capital.

A machine is purchased for $500,000 and is used through the end of Year 2.The machine falls under asset class 43 with a capital cost allowance (CCA)rate of 30%.At the end of Year 2,the machine is sold for $75,000.What is the present value of the overall CCA tax shields if the firm's marginal tax rate is 40% and its cost of capital is 5%?

To evaluate a capital budgeting decision,it is sufficient to determine its consequences for the firms earnings.

Use the table for the question(s)below. -Visby Rides,a livery car company,is considering buying some new luxury cars.After extensive research,they come up with the above estimates of free cash flow from this project.The cars belong to asset class 10 and have a capital cost allowance (CCA)rate of 30%.What is the net present value (NPV)of the project,given that the cost of capital is 10%,and the company faces a marginal tax rate of 25%?

What do you understand by break-even analysis?