Question 1

The EBIT break even point can be calculated using which of the following formulas?

Accepted Answer

A) (Units Sold × Sale Price)- (Units Sold × Cost per unit)- SG&A - R&D - CCA = 0 
B) (Units Sold × Sale Price)+ (Units Sold × Cost per unit)- SG&A - R&D - CCA = 0 
C) (Units Sold × Sale Price)- (Units Sold × Cost per unit)+ SG&A + R&D - CCA = 0 
D) (Units Sold × Sale Price)+ (Units Sold × Cost per unit)+ SG&A - R&D - CCA = 0 
E) (Units Sold × Sale Price)- (Units Sold × Cost per unit)+ SG&A + R&D + CCA = 0 
A) (Units Sold × Sale Price)- (Units Sold × Cost per unit)- SG&A - R&D - CCA = 0 
B) (Units Sold × Sale Price)+ (Units Sold × Cost per unit)- SG&A - R&D - CCA = 0 
C) (Units Sold × Sale Price)- (Units Sold × Cost per unit)+ SG&A + R&D - CCA = 0 
D) (Units Sold × Sale Price)+ (Units Sold × Cost per unit)+ SG&A - R&D - CCA = 0 
E) (Units Sold × Sale Price)- (Units Sold × Cost per unit)+ SG&A + R&D + CCA = 0

Question 2

The most difficult part of the capital budgeting process is accurately estimating cash flows and cost of capital.

Accepted Answer

A) True 
 B)False

Question 3

A maker of computer games expects to sell 500,000 games at a price of $49 per game.These units cost $12 to produce.Selling,general,and administrative expenses are $1.2 million and the CCA deduction is $280,000.What is the EBIT break-even point for the number of games sold in this case?

Accepted Answer

A) 24,865 
B) 30,192 
C) 30,204 
D) 40,000 
E) 44,740 
A) 24,865 
B) 30,192 
C) 30,204 
D) 40,000 
E) 44,740

Question 4

Bubba Ho-Tep Company reported net income of $300 million for the most recent fiscal year.The firm had a capital cost allowance (CCA)of $125 million and capital expenditures of $150 million.Although it had no interest expense,the firm did have an increase in net working capital of $20 million.What is Bubba Ho-Tep's free cash flow?

Accepted Answer

A) $170 million 
B) $255 million 
C) $150 million 
D) $5 million 
E) $25 million 
A) $170 million 
B) $255 million 
C) $150 million 
D) $5 million 
E) $25 million

Question 5

What are sunk costs?

Accepted Answer

Sunk costs are payments alread

Question 6

Use the figure for the question(s)below.  
-The graph above shows the break-even analysis for the cost of making a certain good.Based on this chart,which of the following is TRUE?

Accepted Answer

A) The net present value (NPV)of the project increases with increased cost of goods sold. 
B) The project should not be undertaken if the predicted cost of goods sold is less than $110. 
C) The net present value (NPV)of the project will be positive if the cost of good sold is greater than $110. 
D) If the good costs $110 to make,the net present value (NPV)of the project will be zero. 
E) The cost of goods sold should not be a factor in deciding whether to undertake the project. 
A) The net present value (NPV)of the project increases with increased cost of goods sold. 
B) The project should not be undertaken if the predicted cost of goods sold is less than $110. 
C) The net present value (NPV)of the project will be positive if the cost of good sold is greater than $110. 
D) If the good costs $110 to make,the net present value (NPV)of the project will be zero. 
E) The cost of goods sold should not be a factor in deciding whether to undertake the project.

Question 7

Athabasca Ag is purchasing 1,000 grain bins at a cost of $40,000 each.Each bin also has a $5,000 delivery and installation cost,and the bins have a capital cost allowance (CCA)rate of 25%.What is the total incremental undepreciated capital cost (UCC)for year 1?

Accepted Answer

A) $40 million 
B) $45 million 
C) $22.5 million 
D) $20 million 
E) $15 million 
A) $40 million 
B) $45 million 
C) $22.5 million 
D) $20 million 
E) $15 million

Question 8

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 present value of the overall CCA tax shields,given that the cost of capital is 10%,and the company faces a marginal tax rate of 25%?

Accepted Answer

A) $32,562 
B) $53,693 
C) $93,465 
D) $150,000 
E) $162,452 
A) $32,562 
B) $53,693 
C) $93,465 
D) $150,000 
E) $162,452

Question 9

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 (all quantities in millions of dollars).There are some concerns that estimates of manufacturing expenses may be low,due to the rising cost of raw materials.What is the break-even point for manufacturing expenses,if all other estimates are correct and the cost of capital is 10%?

Accepted Answer

A) $0.78 million 
B) $0.88 million 
C) $0.97 million 
D) $1.22 million 
E) $1.36 million 
A) $0.78 million 
B) $0.88 million 
C) $0.97 million 
D) $1.22 million 
E) $1.36 million

Question 10

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%.If the company sold it immediately after the end of year 3 for $8 million,what would be the present value of the lost CCA tax shields from the sale of this asset,given a tax rate of 40%,and a cost of capital of 12%?

Accepted Answer

A) $654,336 
B) $928,910 
C) $1,452,613 
D) $1,626,926 
E) $2,285,714 
A) $654,336 
B) $928,910 
C) $1,452,613 
D) $1,626,926 
E) $2,285,714

Question 11

The capital cost allowance (CCA)is only used for financial reporting purposes,and usually not for tax purposes.

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A) $435,000 
B) -$650,000 
C) $1,960,000 
D) -$435,000 
E) $1,250,000 
A) $435,000 
B) -$650,000 
C) $1,960,000 
D) -$435,000 
E) $1,250,000

Question 13

A bakery invests $30,000 in a light delivery truck.The truck belongs to asset class 10 and has a capital cost allowance (CCA)rate of 30%.If the company sold it immediately after the end of year 2 for $22,000,what would be the present value of the overall CCA tax shields,given a tax rate of 40% and a cost of capital of 8%?

Accepted Answer

A) $5,184 
B) $8,122 
C) $9,123 
D) $3,167 
E) $6,947 
A) $5,184 
B) $8,122 
C) $9,123 
D) $3,167 
E) $6,947

Question 14

What are the most difficult parts of capital budgeting?

Accepted Answer

The most difficult part of cap

Question 15

The change in net working capital from year 1 to year 2 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 
E) an increase of $756 
A) a decrease of $360 
B) an increase of $360 
C) an increase of $396 
D) a decrease of $396 
E) an increase of $756

Question 16

What is the major difference between scenario analysis and sensitivity analysis?

Accepted Answer

Sensitivity analysis focuses on the impa

Question 17

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 projects:
  
-The free cash flow for the first year of Epiphany's project is closest to:

Accepted Answer

A) $43,000 
B) $25,000 
C) $32,225 
D) $45,000 
E) $35,532 
A) $43,000 
B) $25,000 
C) $32,225 
D) $45,000 
E) $35,532

Question 18

Athabasca Ag is purchasing 1,000 grain bins at a cost of $40,000 each.Each bin also has a $5,000 delivery and installation cost,and the bins have a capital cost allowance (CCA)rate of 25%.The bins are expected to increase gross profit by $12 million per year,starting at the end of the first year,with annual associated costs of $1.5 million per year.Athabasca has a marginal tax rate of 30%.What are the incremental free cash flows associated with the new bins in year 1?

Accepted Answer

A) -34.5 million 
B) -$32.8 million 
C) -$45 million 
D) -$43.3 million 
E) -$22.5 million 
A) -34.5 million 
B) -$32.8 million 
C) -$45 million 
D) -$43.3 million 
E) -$22.5 million

Question 19

A construction company spends $1.4 million to purchase a new crane.The crane will have a capital cost allowance (CCA)rate of 25%.If the opportunity cost of capital is 7%,and the company's marginal tax rate is 20%,what is the present value of the CCA tax shield?

Accepted Answer

A) $70,000 
B) $350,000 
C) $211,595 
D) $250,779 
E) $218,750 
A) $70,000 
B) $350,000 
C) $211,595 
D) $250,779 
E) $218,750

Question 20

The difference between scenario analysis and sensitivity analysis is:

Accepted Answer

A) Scenario analysis is based upon the internal rate of return (IRR)and sensitivity analysis is based upon net present value (NPV). 
B) Only sensitivity analysis allows us to change our estimated inputs of our net present value (NPV)analysis. 
C) Scenario analysis considers the effect on net present value (NPV)of changing multiple project parameters. 
D) Only scenario analysis breaks the net present value (NPV)calculation into its component assumptions. 
E) Sensitivity analysis allows for variations in many of the underlying assumptions simultaneously. 
A) Scenario analysis is based upon the internal rate of return (IRR)and sensitivity analysis is based upon net present value (NPV). 
B) Only sensitivity analysis allows us to change our estimated inputs of our net present value (NPV)analysis. 
C) Scenario analysis considers the effect on net present value (NPV)of changing multiple project parameters. 
D) Only scenario analysis breaks the net present value (NPV)calculation into its component assumptions. 
E) Sensitivity analysis allows for variations in many of the underlying assumptions simultaneously.

The EBIT break even point can be calculated using which of the following formulas?

The most difficult part of the capital budgeting process is accurately estimating cash flows and cost of capital.

A maker of computer games expects to sell 500,000 games at a price of $49 per game.These units cost $12 to produce.Selling,general,and administrative expenses are $1.2 million and the CCA deduction is $280,000.What is the EBIT break-even point for the number of games sold in this case?

What are sunk costs?

Use the figure for the question(s)below. -The graph above shows the break-even analysis for the cost of making a certain good.Based on this chart,which of the following is TRUE?

Athabasca Ag is purchasing 1,000 grain bins at a cost of $40,000 each.Each bin also has a $5,000 delivery and installation cost,and the bins have a capital cost allowance (CCA)rate of 25%.What is the total incremental undepreciated capital cost (UCC)for year 1?

The capital cost allowance (CCA)is only used for financial reporting purposes,and usually not for tax purposes.

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

What are the most difficult parts of capital budgeting?

The change in net working capital from year 1 to year 2 is closest to:

What is the major difference between scenario analysis and sensitivity analysis?

A construction company spends $1.4 million to purchase a new crane.The crane will have a capital cost allowance (CCA)rate of 25%.If the opportunity cost of capital is 7%,and the company's marginal tax rate is 20%,what is the present value of the CCA tax shield?

The difference between scenario analysis and sensitivity analysis is:

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters

Exam 9: Fundamentals of Capital Budgeting

The EBIT break even point can be calculated using which of the following formulas?

The most difficult part of the capital budgeting process is accurately estimating cash flows and cost of capital.

A maker of computer games expects to sell 500,000 games at a price of $49 per game.These units cost $12 to produce.Selling,general,and administrative expenses are $1.2 million and the CCA deduction is $280,000.What is the EBIT break-even point for the number of games sold in this case?

What are sunk costs?

Use the figure for the question(s)below. -The graph above shows the break-even analysis for the cost of making a certain good.Based on this chart,which of the following is TRUE?

Athabasca Ag is purchasing 1,000 grain bins at a cost of $40,000 each.Each bin also has a $5,000 delivery and installation cost,and the bins have a capital cost allowance (CCA)rate of 25%.What is the total incremental undepreciated capital cost (UCC)for year 1?

The capital cost allowance (CCA)is only used for financial reporting purposes,and usually not for tax purposes.

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

What are the most difficult parts of capital budgeting?

The change in net working capital from year 1 to year 2 is closest to:

What is the major difference between scenario analysis and sensitivity analysis?

A construction company spends $1.4 million to purchase a new crane.The crane will have a capital cost allowance (CCA)rate of 25%.If the opportunity cost of capital is 7%,and the company's marginal tax rate is 20%,what is the present value of the CCA tax shield?

The difference between scenario analysis and sensitivity analysis is:

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters