Question 1

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 estimated inputs of 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 
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 estimated inputs of 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

Question 2

Capital budgeting decisions use the Net Present Value rule so that those decisions maximize net present value (NPV).

Accepted Answer

A) True 
 B)False

Question 3

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)  Yes, because he incurred no further costs by going to see the movie. 
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)  Yes, because he incurred no further costs by going to see the movie.

Question 4

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 8.0%, what is the net present value (NPV) of this project?

Accepted Answer

A)  -$56,662 
B)  -$59,810 
C)  $62,958 
D)  $69,254 
A)  -$56,662 
B)  -$59,810 
C)  $62,958 
D)  $69,254

Question 5

CathFoods will release a new range of candies which contain anti-oxidants. New equipment to manufacture the candy will cost   which will be depreciated by straight-line depreciation over six years. In addition, there will be  
Spent on promoting the new candy line. It is expected that the range of candies will bring in revenues of  
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 earnings in the second year of this project?

Accepted Answer

A)  $2.492 million 
B)  $2.100 million 
C)  $3.833 million 
D)  $1.342 million 
A)  $2.492 million 
B)  $2.100 million 
C)  $3.833 million 
D)  $1.342 million

Question 6

A firm is considering changing their credit terms. It is estimated that this change would result in sales increasing by $1,600,000. This in turn would cause inventory to increase by $125,000, accounts receivable to increase by $100,000, and accounts payable to increase by $90,000. What is the firm's expected change in net working capital?

Accepted Answer

A)  $1,735,000 
B)  $315,000 
C)  $225,000 
D)  $135,000 
A)  $1,735,000 
B)  $315,000 
C)  $225,000 
D)  $135,000

Question 7

What are the most difficult parts of capital budgeting?

Accepted Answer

The most difficult part of cap

Question 8

A fast-food company invests $2.2 million to buy machines for making slurpees. These can be depreciated using the MACRS schedule shown above. If the cost of capital is 10%, what is the increase in the net present value (NPV) of the product gained by using MACRS depreciation over straight-line depreciation for three years?

Accepted Answer

A)  $28,559 
B)  $47,599 
C)  $76,158 
D)  $190,321 
A)  $28,559 
B)  $47,599 
C)  $76,158 
D)  $190,321

Question 9

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 10

You are considering adding a microbrewery onto one of your firm's existing restaurants. This will entail an investment of $47,000 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 microbrewery's depreciation tax shield in the first year of operation?

Accepted Answer

A)  $3290 
B)  $16,450 
C)  $6110 
D)  $30,550 
A)  $3290 
B)  $16,450 
C)  $6110 
D)  $30,550

Question 11

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 depreciation tax shield for Shepard Industries project in year 1 is closest to ________.

Accepted Answer

A)  $84 million 
B)  $104 million 
C)  $83 million 
D)  $69 million 
A)  $84 million 
B)  $104 million 
C)  $83 million 
D)  $69 million

Question 12

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 $8 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-rate of 35% on its pretax income, what effect will the advertising for the new pen have on its taxes?

Accepted Answer

A)  It will increase taxes by $8 million. 
B)  It will increase taxes by $2.8 million. 
C)  It will have no effect on taxes. 
D)  It will reduce taxes by $2.8 million. 
A)  It will increase taxes by $8 million. 
B)  It will increase taxes by $2.8 million. 
C)  It will have no effect on taxes. 
D)  It will reduce taxes by $2.8 million.

Question 13

A bakery invests $40,000 in a light delivery truck. This was depreciated using the five-year MACRS schedule shown above. If the company sold it immediately after the end of year 2 for $21,000, what would be the after-tax cash flow from the sale of this asset, given a tax rate of 40%?

Accepted Answer

A)  $11,520 
B)  $9480 
C)  $3792 
D)  $17,208 
A)  $11,520 
B)  $9480 
C)  $3792 
D)  $17,208

Question 14

Which of the following statements is FALSE?

Accepted Answer

A)  Sensitivity analysis allows us to explore the effects of errors in our estimated inputs in our net present value (NPV) analysis for the project. 
B)  To compute the net present value (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 our estimated inputs in our net present value (NPV) analysis for the project. 
B)  To compute the net present value (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 15

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%?

Accepted Answer

A)  12% 
B)  17% 
C)  27% 
D)  22% 
A)  12% 
B)  17% 
C)  27% 
D)  22%

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $5,000,000 to buy the machine and $10,000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to raise gross profits by $4,500,000 per year, starting at the end of the first year, with associated costs of $1 million for each of those years. The machine is expected to have a working life of six years and will be depreciated over those six years. The marginal tax rate is 40%. What are the incremental free cash flows associated with the new machine in year 2?

Accepted Answer

A)  $835,000 
B)  $2,665,000 
C)  $2,434,000 
D)  $831,667 
A)  $835,000 
B)  $2,665,000 
C)  $2,434,000 
D)  $831,667

Question 18

Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $6 million to set up and will generate $22 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $11 million during this year and depreciation expense will be another $2 million. THSI will require no working capital for this investment. THSI's marginal tax rate is 35%.
Ignoring the original investment of $5 million, what is THSI's free cash flow for the first and only year of operation?

Accepted Answer

A)  $6.00 million 
B)  $3.85 million 
C)  $9.81 million 
D)  $7.85 million 
A)  $6.00 million 
B)  $3.85 million 
C)  $9.81 million 
D)  $7.85 million

Question 19

Which of the following would you NOT consider when making a capital budgeting decision?

Accepted Answer

A)  the additional taxes a firm would have to pay in the next year 
B)  the cost of a marketing study completed last year 
C)  the opportunity to lease out a warehouse instead of using it to house a new production line 
D)  the change in direct labor expense due to the purchase of a new machine 
A)  the additional taxes a firm would have to pay in the next year 
B)  the cost of a marketing study completed last year 
C)  the opportunity to lease out a warehouse instead of using it to house a new production line 
D)  the change in direct labor expense due to the purchase of a new machine

Question 20

Balance Sheet
 
The balance sheet for a small firm is shown above. All amounts are in thousands of dollars. What is this firm's Net Working Capital?

Accepted Answer

A)  $126 thousand 
B)  $7 thousand 
C)  $46 thousand 
D)  $86 thousand 
A)  $126 thousand 
B)  $7 thousand 
C)  $46 thousand 
D)  $86 thousand

The difference between scenario analysis and sensitivity analysis is ________.

Capital budgeting decisions use the Net Present Value rule so that those decisions maximize net present value (NPV).

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?

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 8.0%, what is the net present value (NPV) of this project?

What are the most difficult parts of capital budgeting?

Which of the following statements is FALSE?

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 depreciation tax shield for Shepard Industries project in year 1 is closest to ________.

A bakery invests $40,000 in a light delivery truck. This was depreciated using the five-year MACRS schedule shown above. If the company sold it immediately after the end of year 2 for $21,000, what would be the after-tax cash flow from the sale of this asset, given a tax rate of 40%?

Which of the following statements is FALSE?

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

Which of the following would you NOT consider when making a capital budgeting decision?

Balance Sheet The balance sheet for a small firm is shown above. All amounts are in thousands of dollars. What is this firm's Net Working Capital?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters

Exam 9: Fundamentals of Capital Budgeting

The difference between scenario analysis and sensitivity analysis is ________.

Capital budgeting decisions use the Net Present Value rule so that those decisions maximize net present value (NPV).

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?

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 8.0%, what is the net present value (NPV) of this project?

What are the most difficult parts of capital budgeting?

Which of the following statements is FALSE?

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 depreciation tax shield for Shepard Industries project in year 1 is closest to ________.

A bakery invests $40,000 in a light delivery truck. This was depreciated using the five-year MACRS schedule shown above. If the company sold it immediately after the end of year 2 for $21,000, what would be the after-tax cash flow from the sale of this asset, given a tax rate of 40%?

Which of the following statements is FALSE?

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

Which of the following would you NOT consider when making a capital budgeting decision?

Balance Sheet The balance sheet for a small firm is shown above. All amounts are in thousands of dollars. What is this firm's Net Working Capital?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters