Question 1

Capital budgeting is the process of allocating funds to the firm's investment projects.

Accepted Answer

A) True 
 B)False

Question 2

Use the information for the question(s)below.
Ford Motor Company is considering launching a new line of hybrid diesel-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 pretax income of $80 million from operations next year.Ford pays a 30% tax rate on its pretax income.
-The amount that Ford Motor Company owes in taxes next year with the launch of the new SUV is closest to:

Accepted Answer

A) $13.5 million 
B) $31.5 million 
C) $56.0 million 
D) $24.0 million 
E) $10.5 million 
A) $13.5 million 
B) $31.5 million 
C) $56.0 million 
D) $24.0 million 
E) $10.5 million

Question 3

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%.The cars will be sold at the end of 3 years for $150,000.What is the present value of the lost CCA tax shields of the project,given that the cost of capital is 10%,and the company faces a marginal tax rate of 25%?

Accepted Answer

A) $8342 
B) $21,131 
C) $10,112 
D) $25,912 
E) $28,125 
A) $8342 
B) $21,131 
C) $10,112 
D) $25,912 
E) $28,125

Question 4

Use the figure for the question(s)below.  
-A consumer good company is developing a new brand of organic toothpaste.Above is the sensitivity analysis for this product.If the best-case assumptions for Net Working Capital are met,what will the net present value (NPV)of this project be?

Accepted Answer

A) $0.65 million 
B) $1.7 million 
C) $2 million 
D) $3 million 
E) -$0.2 million 
A) $0.65 million 
B) $1.7 million 
C) $2 million 
D) $3 million 
E) -$0.2 million

Question 5

Joe pre-orders a non-refundable movie ticket.He then reads a number of reviews of the movie in question that make him realize that he will not enjoy it.He goes to see it anyway,rationalizing that otherwise his money will have been wasted.Is Joe succumbing to the Sunk Cost Fallacy,and why?

Accepted Answer

A) Yes,since he invested a valuable asset,his time,in a project based on its previous costs. 
B) No,because the cost of the movie was not recoverable and would have been lost whatever action he took. 
C) No,because going to see the movie means that the product of his initial investment was realized as originally planned. 
D) No,because he incurred no further costs by going to see the movie. 
E) No,because he won't know for sure if he enjoys the movie until he sees it. 
A) Yes,since he invested a valuable asset,his time,in a project based on its previous costs. 
B) No,because the cost of the movie was not recoverable and would have been lost whatever action he took. 
C) No,because going to see the movie means that the product of his initial investment was realized as originally planned. 
D) No,because he incurred no further costs by going to see the movie. 
E) No,because he won't know for sure if he enjoys the movie until he sees it.

Question 6

A stationery company plans to launch a new type of indelible ink pen.Advertising for the new product will be heavy and will cost the company $10 million,although the company expects general revenues of $280 million next year from sources other than sales of the new pen.If the company has a corporate tax of 40% on its pretax income,what effect will the advertising for the new pen have on its taxes?

Accepted Answer

A) increase taxes by $10 million 
B) increase taxes by $4 million 
C) It will have no effect on taxes. 
D) reduce taxes by $4 million 
E) reduce taxes by $10 million 
A) increase taxes by $10 million 
B) increase taxes by $4 million 
C) It will have no effect on taxes. 
D) reduce taxes by $4 million 
E) reduce taxes by $10 million

Question 7

A restaurant invests $240,000 in a new food truck for mobile lunch sales.The truck will have a capital cost allowance (CCA)rate of 20%.If the opportunity cost of capital is 8.5%,and the restaurant's marginal tax rate is 30%,what is the present value of the CCA tax shield?

Accepted Answer

A) $48,547 
B) $48,000 
C) $50,526 
D) $35,938 
E) $14,400 
A) $48,547 
B) $48,000 
C) $50,526 
D) $35,938 
E) $14,400

Question 8

Jim owns a farm that he wants to sell.He learns that a highway will be built near the farm in the future,giving access to the farmland from a nearby city and thus making the land attractive to housing developers.Expecting the net present value (NPV)of the sale to be greater after the highway is built,he decides not to sell at this time.What real option is Jim taking?

Accepted Answer

A) option to delay 
B) option to expand 
C) option to abandon 
D) option to switch 
E) option to sell 
A) option to delay 
B) option to expand 
C) option to abandon 
D) option to switch 
E) option to sell

Capital budgeting is the process of allocating funds to the firm's investment projects.

Use the figure for the question(s)below. -A consumer good company is developing a new brand of organic toothpaste.Above is the sensitivity analysis for this product.If the best-case assumptions for Net Working Capital are met,what will the net present value (NPV)of this project be?

Joe pre-orders a non-refundable movie ticket.He then reads a number of reviews of the movie in question that make him realize that he will not enjoy it.He goes to see it anyway,rationalizing that otherwise his money will have been wasted.Is Joe succumbing to the Sunk Cost Fallacy,and why?

A restaurant invests $240,000 in a new food truck for mobile lunch sales.The truck will have a capital cost allowance (CCA)rate of 20%.If the opportunity cost of capital is 8.5%,and the restaurant's marginal tax rate is 30%,what is the present value of the CCA tax shield?

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

Capital budgeting is the process of allocating funds to the firm's investment projects.

Use the figure for the question(s)below. -A consumer good company is developing a new brand of organic toothpaste.Above is the sensitivity analysis for this product.If the best-case assumptions for Net Working Capital are met,what will the net present value (NPV)of this project be?

Joe pre-orders a non-refundable movie ticket.He then reads a number of reviews of the movie in question that make him realize that he will not enjoy it.He goes to see it anyway,rationalizing that otherwise his money will have been wasted.Is Joe succumbing to the Sunk Cost Fallacy,and why?

A restaurant invests $240,000 in a new food truck for mobile lunch sales.The truck will have a capital cost allowance (CCA)rate of 20%.If the opportunity cost of capital is 8.5%,and the restaurant's marginal tax rate is 30%,what is the present value of the CCA tax shield?

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