Question 1

A decrease in the sales of a current project because of the launching of a new project is:

Accepted Answer

A) cannibalization. 
B) a sunk cost. 
C) an overhead expense. 
D) a past research and development expenditure. 
E) an opportunity cost.

Question 2

A garage is installing a new "bubble-wash" car wash.It will promote the car wash as a fun activity for the family,and it is expected that the novelty of this approach will boost sales in the medium term.If the cost of capital is 10%,what is the net present value (NPV)of this project?

Accepted Answer

A) -$214,525 
B) -$145,283 
C) $76,607 
D) $108,306 
E) $86,167

Question 3

An exploration of the effect of changing multiple project parameters on net present value (NPV)is called:

Accepted Answer

A) scenario analysis. 
B) internal rate of return (IRR)analysis. 
C) accounting break-even analysis. 
D) sensitivity analysis. 
E) EBIT break-even analysis

Question 4

A maker of kitchenware is planning on selling a new chef-quality kitchen knife.The manufacturer expects to sell 1.6 million knives at a price of $120 each.These knives cost $80 each to produce.Selling,general,and administrative expenses are $500,000.The machinery required to produce the knives cost $1.4 million,depreciated by straight-line depreciation over five years.The maker determines that the EBIT break-even point for units sold and sale price is less than these estimates and that the EBIT break-even point for costs per unit,SG&A,and depreciation are greater than these estimates,so decides to go ahead with manufacturing the knife.Was this the correct decision?

Accepted Answer

A) No,since the cost per unit should be greater than the EBIT-break even point for cost of goods if the project is to have a positive EBIT. 
B) Yes,since if the estimates for each parameter are correct,the EBIT will be positive. 
C) Yes,since a positive EBIT ensures that the project will have a positive net present value (NPV). 
D) No,since NPV will be negative. 
E) It cannot be determined whether the decision was correct,since other factors contributing to the project's net present value (NPV),such as the upfront investment,have not been included in the analysis.

Question 5

How does the capital budgeting process begin?

Accepted Answer

A) by analyzing alternate projects 
B) by evaluating the net present value (NPV)of each project's cash flows 
C) by compiling a list of potential projects 
D) by forecasting the future consequences for the firm of each potential project 
E) by calculating the incremental earnings of a project

Question 6

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

Accepted Answer

A) $3600 
B) $3960 
C) $2880 
D) $5400 
E) $2160

Question 7

The manufacturer of a brand of kitchen knives is investigating the likely effects that an increase in the cost of the raw materials required to make these knives will have on the the cost of manufacturing the knives,the selling price of the knives,the number of knives that will then be sold,and the project's net present value (NPV).Which of the following best describes what type of analysis the manager is performing?

Accepted Answer

A) scenario analysis 
B) sensitivity analysis 
C) break-even analysis 
D) EBIT-break even analysis 
E) EPS analysis

Question 8

A firm is considering investing in a new machine that will cost $600,000 and will be be under asset class 43 with a CCA rate of 30%.If the firm's marginal tax rate is 39%,what is the CCA tax shield in the first year?

Accepted Answer

A) $120,000 
B) $35,100 
C) $300,000 
D) $234,000 
E) $90,000

Question 9

A firm reports that in a certain year it had revenues of $4.5 million,costs of $1.2 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.If the firm's marginal corporate tax rate is 30%,what is the firm's free cash flow for that year?

Accepted Answer

A) $5.3 million 
B) -$0.65 million 
C) $1.75 million 
D) $2.15 million 
E) $2.35 million

Question 10

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.The new equipment falls under asset class 43 and has a capital cost allowance (CCA)rate of 30%.If your firm's marginal corporate tax rate is 35%,then what is the value of the microbrewery's CCA tax shield in the first year of operation?

Accepted Answer

A) $2100 
B) $14,000 
C) $5200 
D) $26,000 
E) $6000

Question 11

A firm is considering a new project that will generate cash revenue of $1,000,000 and cash expenses of $700,000 per year for five years.The equipment necessary for the project will cost $200,000 and will fall under asset class 43 with a CCA rate of 30%.What is the expected free cash flow in the second year of the project if the firm's marginal tax rate is 35%?

Accepted Answer

A) $195,000 
B) $162,500 
C) $212,850 
D) $245,000 
E) $161,850

Question 12

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%.The opportunity cost of capital is 8.5%,and the restaurant's marginal tax rate is 30%.If the company sells the truck at the end of 5 years for $120,000,what is the present value of the lost CCA tax shields from the sale of the asset?

Accepted Answer

A) $12,437 
B) $16,801 
C) $33,602 
D) $35,938 
E) $24,874

Question 13

Which of the following is an example of cannibalization?

Accepted Answer

A) A toothpaste manufacturer adds a new line of toothpaste (that contains baking soda)to its product line. 
B) A grocery store begins selling T-shirts featuring the local university's mascot. 
C) A basketball manufacturer adds basketball hoops to its product line. 
D) A convenience store begins selling pre-paid cell phones. 
E) A gas station starts selling diesel fuel.

Question 14

A company buys tracking software for its warehouse which,along with the computer system and ancillaries to run it,will cost $1.8 million.The new equipment and software falls under asset class 50 and has a capital cost allowance (CCA)rate of 55%.It is expected that the software will reduce inventory by $10.5 million at the end of the first year after it is installed,though there will be an annual cost of $120,000 per year to run the system.If the company's marginal tax rate is 40%,how will the purchase of this item change the company's free cash flows in the first year?

Accepted Answer

A) $10,020,000 
B) $10,278,000 
C) $10,422,000 
D) $10,566,000 
E) $10,578,000

Question 15

Luther Industries has outstanding tax loss carryforwards of $70 million from losses over the past four years.If Luther earns $15 million per year in pretax income from now on,in how many years will Luther first pay taxes?

Accepted Answer

A) 7 years 
B) 2 years 
C) 4 years 
D) 5 years 
E) 6 years

Question 16

The net present value (NPV)for Epiphany's Project is closest to:

Accepted Answer

A) $4825 
B) $28,772 
C) $1351 
D) -$4825 
E) $0

Question 17

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 without the launch of the new SUV is closest to:

Accepted Answer

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

Question 18

The Sisyphean Company is considering a new project that will have a CCA deduction of $2.5 million in the first year.If Sisyphean's marginal corporate tax rate is 40% and its average corporate tax rate is 30%,then what is the value of the CCA tax shield on the company's new project in year 1?

Accepted Answer

A) $750,000 
B) $1,000,000 
C) $1,500,000 
D) $1,750,000 
E) $2,500,000

Question 19

Longbow Lumber is purchasing a new horizontal resaw at a cost of $450,000.There is an additional $15,000 delivery and installation cost.The machine has a capital cost allowance (CCA)rate of 25%.What is the incremental undepreciated capital cost (UCC)for year 1?

Accepted Answer

A) $232,500 
B) $450,000 
C) $225,000 
D) $465,000 
E) $435,000

Question 20

A firm is considering changing their credit terms.It is estimated that this change would result in sales increasing by $1,000,000.This in turn would cause inventory to increase by $150,000,accounts receivable to increase by $100,000,and accounts payable to increase by $75,000.What is the firm's expected change in net working capital?

Accepted Answer

A) $1,175,000 
B) $325,000 
C) $250,000 
D) $175,000 
E) $150,000

Exam 9: Fundamentals of Capital Budgeting

A decrease in the sales of a current project because of the launching of a new project is:

A garage is installing a new "bubble-wash" car wash.It will promote the car wash as a fun activity for the family,and it is expected that the novelty of this approach will boost sales in the medium term.If the cost of capital is 10%,what is the net present value (NPV) of this project?

An exploration of the effect of changing multiple project parameters on net present value (NPV) is called: