IFM10 Ch 13 Test Bank
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IFM10 Ch 13 Test Bank

Course Number: BA 462, Spring 2010

College/University: Humboldt State University

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CHAPTER 13 CAPITAL BUDGETING: ESTIMATING CASH FLOWS AND ANALYZING RISK (Difficulty: E = Easy, M = Medium, and T = Tough) True-False Easy: (13.1) Relevant cash flows Answer: a Diff: E 1 . Any cash flow that can be classified as incremental is relevant in a capital budgeting project analysis. a. True b. False (13.1) Cash flow estimation Answer: b Diff: E 2 . With the current techniques available, estimating cash...

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13 CHAPTER CAPITAL BUDGETING: ESTIMATING CASH FLOWS AND ANALYZING RISK (Difficulty: E = Easy, M = Medium, and T = Tough) True-False Easy: (13.1) Relevant cash flows Register to View AnswerDiff: E 1 . Any cash flow that can be classified as incremental is relevant in a capital budgeting project analysis. a. True b. False (13.1) Cash flow estimation Register to View AnswerDiff: E 2 . With the current techniques available, estimating cash flows has become the easiest step in the analysis of a capital budgeting project. a. True b. False (13.1) Cash flow estimation Register to View AnswerDiff: E 3 . Estimating project cash flows is considered the most important and the most difficult step in the capital budgeting process. Both the number of variables and the interdepartmental nature of the process contribute to the difficulty of estimating cash flows. a. True b. False (13.1) Cash flow estimation Register to View AnswerDiff: E 4 . Although it is difficult to make accurate forecasts, the initial outlays and subsequent costs of large projects are forecast with great accuracy, but revenues are more uncertain and large errors are not uncommon. a. True b. False (13.1) Incremental cash flows Register to View AnswerDiff: E 5 . Net incremental cash flow is calculated by adding back the change in depreciation to the change in net income. a. True b. False Chapter 13: Capital Budgeting: Cash Flows and Risk Page 1 (13.3) Externalities Register to View AnswerDiff: E 6 . In cash flow estimation, the presence of externalities has no direct cash flow effects. a. True b. False (13.3) Externalities Register to View AnswerDiff: E 7 . Externalities present in projects being considered in capital budgeting are very difficult to quantify and as a result of this, they should be excluded from the financial analyses. a. True b. False 8 (13.4) Relevant cash flows Register to View AnswerDiff: E . Since the focus of capital budgeting is on cash flows rather than on net income, changes in noncash balance sheet accounts such as inventory are not relevant in the analysis. a. True b. False (13.4) Relevant cash flows Register to View AnswerDiff: E 9 . If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land. a. True b. False (13.4) Relevant cash flows 10 . When calculating the interest payments. a. True b. False (13.4) Net operating working capital Register to View AnswerDiff: E 11 . Changes in net operating working capital do not need to be considered in capital budgeting cash flow analysis as long as the nominal (undiscounted) values of the changes are identical in each time period. a. True b. False cash flows for a project, Register to View Answeryou should Diff: E include Page 2 Chapter 13: Capital Budgeting: Cash Flows and Risk (13.4) Depreciation cash flows Register to View AnswerDiff: E 12 . The primary advantage of accelerated depreciation over straight-line depreciation is that the total, undiscounted, depreciation tax savings over the life of the project are greater when an accelerated depreciation method is used. a. True b. False (13.4) Depreciation cash flows Register to View AnswerDiff: E 13 . A firm which bases its capital budgeting decisions on either NPV or IRR will be more likely to accept a given project if it uses MACRS accelerated depreciation than if it uses the optional straight-line alternative, other things being equal. a. True b. False (13.6) Market risk Register to View AnswerDiff: E 14 . A project's market risk rises if the correlation of its cash flows with the economy decreases. a. True b. False (13.6) Market risk Register to View AnswerDiff: E 15 . If an asset being considered for acquisition has beta of zero, its purchase will have no effect on the firm's market risk. a. True b. False (13.6) Project risk Register to View AnswerDiff: E 16 . A particular project might have very uncertain cash flows, hence a highly uncertain NPV and IRR, yet it may not have high market risk. a. True b. False (13.6) Accepting risky projects Register to View AnswerDiff: E 17 . When risk is explicitly accounted for in capital budgeting, a project will be acceptable to a firm if its IRR (or modified IRR) is greater than the firm's weighted average cost of capital. a. True b. False (13.6) Quantification of risk Register to View AnswerDiff: E 18 . Quantification of risk is the easiest part of incorporating risk into capital budgeting. a. True b. False Chapter 13: Capital Budgeting: Cash Flows and Risk Page 3 (13.6) Effects of diversification Register to View AnswerDiff: E 19 . The lower the correlation of a project's cash flows with those of the rest of the firm, the greater will be the benefits of the project with regard to reducing within-firm risk. a. True b. False (13.8) Risk-adjusted discount rate 20 . Risky projects can be evaluated by using a risk-adjusted discount rate. a. True b. False (13.8) Risk-adjusted discount rate Register to View AnswerDiff: E 21 . Using the same risk-adjusted discount rate to discount all cash flows ignores the fact that the more distant cash flows are more risky. a. True b. False discounting Register to View AnswerDiff: E expected cash flows Medium: (13.1) Relevant cash flows Register to View AnswerDiff: M 22 . The two cardinal rules which financial analysts follow to avoid capital budgeting errors are: (1) capital budgeting decisions must be based on accounting income, and (2) only incremental cash flows are relevant to accept/reject decisions. a. True b. False (13.3) Opportunity costs Register to View AnswerDiff: M 23 . Opportunity costs include those cash inflows that could be generated from assets the firm already owns, if those assets are not used for the project being evaluated. a. True b. False (13.3) Sunk costs Register to View AnswerDiff: M 24 . Suppose a firm is considering production of a new product whose projected sales include sales that will be taken away from another product the firm also produces. The lost sales on the existing product are a sunk cost and are not a relevant cost to the new product. a. True b. False Page 4 Chapter 13: Capital Budgeting: Cash Flows and Risk (13.3) Cash flow estimation Register to View AnswerDiff: M 25 . It is extremely difficult to estimate the revenues and costs associated with large complex projects that take several years to develop. This is why subjective judgement is recommended for such projects instead of cash flow analysis. a. True b. False (13.3) Net operating working capital Register to View AnswerDiff: M 26 . The change in net operating working capital is always positive, meaning more working capital is required for projects considered in capital budgeting because all projects are either expansion projects or replacement projects which have expansion effects. a. True b. False (13.5) Cash flow estimation Register to View AnswerDiff: M 27 . Superior analytical techniques, such as NPV, used in combination with cost of capital adjustments, can overcome the problem of poor cash flow estimation in decision making. a. True b. False (13.4) Depreciation cash flows Register to View AnswerDiff: M 28 . The use of accelerated versus straight-line depreciation causes net income reported to stockholders to be lower, and cash flows higher, for the duration of a project's life, other things held constant. a. True b. False (13.6) Sensitivity analysis Register to View AnswerDiff: M 29 . Sensitivity analysis measures the stand-alone risk of a project by showing how much the project's NPV is affected by a small change in one of the input variables, such as sales. Other things held constant, with the independent variable graphed on the horizontal axis, the steeper the graph of the relationship line, the less risky the project. a. True b. False (13.6) Project risk Register to View AnswerDiff: M 30 . If a project is small relative to the total firm, and if its returns are not highly correlated with the returns on the firm's other assets, then the project may not be very risky in either the within-firm (corporate) or the market risk sense, even if the returns on the project are highly uncertain and thus the project has a high degree of stand-alone risk. a. True b. False Chapter 13: Capital Budgeting: Cash Flows and Risk Page 5 Multiple Choice: Conceptual Easy: (13.3) Relevant cash flows Register to View AnswerDiff: E 31 . When evaluating a new project, the firm should consider all of the following factors except: a. Changes in working capital attributable to the project. b. Previous expenditures associated with a market test to determine the feasibility of the project, if the expenditures have been expensed for tax purposes. c. The current market value of any equipment to be replaced. d. The resulting difference in depreciation expense if the project involves replacement. e. All of the statements above should be considered. (13.3) Relevant cash flows 32 . Which of the following statements is most correct? Register to View AnswerDiff: E a. The rate of depreciation will often affect operating cash flows, even though depreciation is not a cash expense. b. Corporations should fully account for sunk costs when making investment decisions. c. Corporations should fully account for opportunity costs when making investment decisions. d. All of the answers above are correct. e. Answers a and c are correct. (13.3) Relevant cash flows 33 . Which of the following statements is most correct? Register to View AnswerDiff: E a. Sunk costs should be incorporated into capital budgeting decisions. b. Opportunity costs should be incorporated into capital budgeting decisions. c. Relevant externalities should be incorporated into capital budgeting decisions. d. Answers b and c are correct. e. Answers a, b, and c are correct. (13.3) Relevant cash flows Register to View AnswerDiff: E 34 . A company is considering an expansion project. The companys CFO plans to calculate the projects NPV by discounting the relevant cash flows (which include the initial up-front costs, the operating cash flows, and the terminal cash flows) at the companys cost of capital (WACC). Which of the following factors should the CFO include when estimating the relevant cash flows? a. b. c. d. e. Any sunk costs associated with the project. Any interest expenses associated with the project. Any opportunity costs associated with the project. Answers b and c are correct. All of the answers above are correct. Page 6 Chapter 13: Capital Budgeting: Cash Flows and Risk (13.3) Relevant cash flows Register to View AnswerDiff: E 35 . Adams Audio is considering whether to make an investment in a new type of technology. Which of the following factors should the company consider when it decides whether to undertake the investment? a. The company has already spent $3 million researching the technology. b. The new technology will affect the cash flows produced by its other operations. c. If the investment is not made, then the company will be able to sell one of its laboratories for $2 million. d. All of the factors above should be considered. e. Factors b and c should be considered. (13.3) Incremental cash flows 36 . Which of the following is not decision to accept a project? a. b. c. d. e. a cash flow that Register to View AnswerDiff: E results from the Changes in working capital. Shipping and installation costs. Sunk costs. Opportunity costs. Externalities. (13.3) Relevant and incremental cash flows Register to View AnswerDiff: E 37 . Twin Hills Inc. is considering a proposed project. Given available information, it is currently estimated that the proposed project is risky but has a positive net present value. Which of the following factors would make the company less likely to adopt the current project? a. It is revealed that if the company proceeds with the proposed project, the company will lose two other accounts, both of which have positive NPVs. b. It is revealed that the company has an option to back out of the project 2 years from now, if it is discovered to be unprofitable. c. It is revealed that if the company proceeds with the project, it will have an option to repeat the project 4 years from now. d. Answers a and b are correct. e. Answers b and c are correct. Chapter 13: Capital Budgeting: Cash Flows and Risk Page 7 (13.3) Expansion project cash flows Register to View AnswerDiff: E 38 . A company is considering a proposed expansion to its facilities. Which of the following statements is most correct? a. In calculating the project's operating cash flows, the firm should not subtract out financing costs such as interest expense, since these costs are already included in the WACC, which is used to discount the projects net cash flows. b. Since depreciation is a non-cash expense, the firm does not need to know the depreciation rate when calculating the operating cash flows. c. When estimating the projects operating cash flows, it is important to include any opportunity costs and sunk costs, but the firm should ignore cash flows from externalities since they are accounted for elsewhere. d. Statements a and c are correct. e. None of the statements above is correct. (13.4) NPV and depreciation Register to View AnswerDiff: E 39 . Other things held constant, which of the following would increase the NPV of a project being considered? a. A shift from MACRS to straight-line depreciation. b. Making the initial investment in the first year rather than spreading it over the first 3 years. c. A decrease in the discount rate associated with the project. d. The sale of the old machine in a replacement decision at a capital loss rather than at book value. e. An increase in required working capital. (13.6) Corporate risk 40 . Which of the following statements is correct? Register to View AnswerDiff: E when small risk. stock a. Well diversified stockholders do not consider corporate risk determining required rates of return. b. Undiversified stockholders, including the owners of businesses, are more concerned about corporate risk than market c. Managers care only about market risk. d. Market risk is important but does not have a direct effect on price because it only affects beta. e. All of the statements above are false. (13.6) Accepting risky projects Register to View AnswerDiff: E 41 . A firm is considering the purchase of an asset whose risk is greater than the current risk of the firm, based on any method for assessing risk. In evaluating this asset, the decision maker should a. Increase the IRR of the asset to reflect the greater risk. b. Increase the NPV of the asset to reflect the greater risk. c. Reject the asset, since its acceptance would increase the risk of the firm. d. Ignore the risk differential if the asset to be accepted would comprise only a small fraction of the total assets of the firm. e. Increase the cost of capital used to evaluate the project to reflect the higher risk of the project. Page 8 Chapter 13: Capital Budgeting: Cash Flows and Risk (13.8) Risk adjustment Register to View Answer42 . Risk in a revenue-producing project can best be adjusted for by a. b. c. d. e. Ignoring it. Adjusting the discount rate upward for increasing risk. Adjusting the discount rate downward for increasing risk. Picking a risk factor equal to the average discount rate. Reducing the NPV by 10 percent for risky projects. Diff: E (13.8) Risk and project selection Register to View AnswerDiff: E 43 . A company estimates that an average-risk project has a WACC of 10 percent, a below-average-risk project has a WACC of 8 percent, and an above-average-risk project has a WACC of 12 percent. Which of the following independent projects should the company accept? a. b. c. d. e. Project A has average risk and an IRR = 9 percent. Project B has below-average risk and an IRR = 8.5 percent. Project C has above-average risk and an IRR = 11 percent. All of the projects above should be accepted. None of the projects above should be accepted. (13.8) Risk-adjusted NPV Register to View AnswerDiff: E 44 . Project X has an up-front cost of $1 million, whereas Project Y has an up-front cost of only $200,000. Both projects last five years and provide positive cash flows in Years 1-5. Project X is riskier; its risk-adjusted WACC is 12 percent. Project Y is safer; its risk-adjusted WACC is 8 percent. After discounting each of the projects cash flows at the projects risk-adjusted WACC, you find that Project X has a NPV of $20,000, and Project Y has a NPV of $15,000. The projects are mutually exclusive and cannot be repeated. The firm is not capital constrained; it can raise as much capital as it needs, provided it has profitable projects in which to invest. Given this information, which of the following statements is most correct? a. The firm should select Project Y because it has a higher return; ($15,000/$200,000) is greater than ($20,000/$1,000,000). b. The firm should select Project X because it has a higher NPV. c. The firm should select Project Y because it is less risky. d. The firm should reject both projects because their IRRs are less than the risk-adjusted WACC. e. Statements a and c are correct. Chapter 13: Capital Budgeting: Cash Flows and Risk Page 9 Medium (13.2) Cash flows and accounting measures 45 . Which of the following statements is correct? Register to View AnswerDiff: M a. An asset that is sold for less than book value at the end of a project's life will generate a loss for the firm and will cause an actual cash outflow attributable to the project. b. Only incremental cash flows are relevant in project analysis and the proper incremental cash flows are the reported accounting profits because they form the true basis for investor and managerial decisions. c. It is unrealistic to expect that increases in net operating working capital that are required at the start of an expansion project are simply recovered at the project's completion. Thus, these cash flows are included only at the start of a project. d. Equipment sold for more than its book value at the end of a project's life will increase income and, despite increasing taxes, will generate a greater cash flow than if the same asset is sold at book value. e. All of the statements above are false. Page 10 Chapter 13: Capital Budgeting: Cash Flows and Risk (3.2) ow estimation 46 . Which of the following statements is correct? Register to View Answer Diff: M a. In a capital budgeting analysis where part of the funds used to finance the project are raised as debt, failure to include interest expense as a cost in the cash flow statement when determining the project's cash flows will lead to an upward bias in the NPV. b. The preceding statement would be true if "upward" were replaced with "downward." c. The existence of "externalities" reduces the NPV to a level below the value that would exist in the absence of externalities. d. If one of the assets that would be used by a potential project is already owned by the firm, and if that asset could be leased to another firm if the project is not undertaken, then the net rent that could be obtained should be charged as a cost to the project under consideration. e. The rent referred to in statement d is a sunk cost, and as such it should be ignored. (13.3) Relevant cash flows Register to View AnswerDiff: M 47 . Regarding the net present value of a replacement decision, which of the following statements is false? a. The present value of the after-tax cost reduction benefits resulting from the new investment is treated as an inflow. b. The after-tax market value of the old equipment is treated as an inflow at t = 0. c. The present value of depreciation expenses on the new equipment, multiplied by the tax rate, is treated as an inflow. d. Any loss on the sale of the old equipment is multiplied by the tax rate and is treated as an outflow at t = 0. e. An increase in net operating working capital is treated as an outflow when the project begins and as an inflow when the project ends. (13.3) Relevant cash flows Register to View AnswerDiff: M 48 . Sanford & Son Inc. is thinking about expanding their business by opening another shop on property they purchased 10 years ago. Which of the following items should be included in the analysis of this endeavor? a. The property was cleared of trees and brush 5 years ago at a cost of $5,000. b. The new shop is expected to affect the profitability of the existing shop since some current customers will transfer their business to the new shop. Sanford and Son estimate that profits at the existing shop will decrease by 10 percent. c. Sanford & Son can lease the entire property to another company (that wants to grow flowers on the lot) for $5,000 per year. d. Both statements b and c should be included in the analysis. e. All of the statements above should be included in the analysis. Chapter 13: Capital Budgeting: Cash Flows and Risk Page 11 (13.3) Relevant cash flows Register to View AnswerDiff: M 49 . Pickles Corp. is a company which sells bottled iced tea. The company is thinking about expanding its operations into the bottled lemonade business. Which of the following factors should the company incorporate into its capital budgeting decision as it decides whether or not to enter the lemonade business? a. If the company enters the lemonade business, its iced tea sales are expected to fall 5 percent as some consumers switch from iced tea to lemonade. b. Two years ago the company spent $3 million to renovate a building for a proposed project which was never undertaken. If the project is adopted, the plan is to have the lemonade produced in this building. c. If the company doesnt produce lemonade, it can lease the building to another company and receive after-tax cash flows of $500,000 a year. d. All of the statements above are correct. e. Answers a and c are correct. (13.3) Relevant cash flows 50 . Which of the following statements is most correct? Register to View AnswerDiff: M a. Capital budgeting analysis for expansion and replacement projects is essentially the same because the types of cash flows involved are the same. b. In estimating net cash flows for the purpose of capital budgeting, interest and dividend payments should not be included since the effects of these items are already included in the weighted average cost of capital. c. When equipment is sold, companies receive a tax credit as long as the salvage value is less than the initial cost of the equipment. d. All of the answers above are correct. e. None of the answers above is correct. (13.3) Incremental cash flows Register to View AnswerDiff: M 51 . Which of the following constitutes an example of a cost which is not incremental, and therefore not relevant in an accept/reject decision? a. A firm has a parcel of land that can be used for a new plant site or, alternatively, can be used to grow watermelons. b. A firm can produce a new cleaning product that will generate new sales, but some of the new sales will be from customers who switch from another product the company currently produces. c. A firm orders and receives a piece of new equipment which is shipped across the country and requires $25,000 in installation and set-up costs. d. All of the above are not examples of incremental cash flows. e. Answers a, b, and c are examples of incremental cash flows, and therefore, relevant cash flows. Page 12 Chapter 13: Capital Budgeting: Cash Flows and Risk (13.3) Factors affecting cash flows Register to View AnswerDiff: M 52 . Which of the following is not considered a relevant concern in determining incremental cash flows for a new product? a. The use of factory floor space which is currently unused but available for production of any product. b. Revenues from the existing product that would be lost as a result of some customers switching to the new product. c. Shipping and installation costs associated with preparing the machine to be used to produce the new product. d. The cost of a product analysis completed in the previous tax year and specific to the new product. e. None of the above. (All are relevant concerns in estimating relevant cash flows attributable to a new-product project.) 53 (13.4) Depreciation cash flows Register to View AnswerDiff: M . Which of the following statement completions is incorrect? For a profitable firm, when MACRS accelerated depreciation is compared to straight-line depreciation, MACRS accelerated allowances produce a. Higher depreciation charges in the early years of an asset's life. b. Larger cash flows in the earlier years of an asset's life. c. Larger total undiscounted profits from the project over the project's life. d. Smaller accounting profits in the early years, assuming the company uses the same depreciation method for tax and book purposes. e. None of the above. (All of the above are correct.) (13.5) Inflation effects Register to View AnswerDiff: M 54 . Suppose the firm's WACC is stated in nominal terms, but the project's expected cash flows are expressed in real dollars. In this situation, other things held constant, the calculated NPV would a. b. c. d. e. Be correct. Be biased downward. Be biased upward. Possibly have a bias, but it could be upward or downward. More information is needed; otherwise, we can make no reasonable statement. 55 (13.6) Corporate risk Register to View AnswerDiff: M . In theory, the decision maker should view market risk as being of primary importance. However, within-firm, or corporate, risk is relevant to a firm's a. Well-diversified stockholders, because it may affect debt capacity and operating income. b. Management, because it affects job stability. c. Creditors, because it affects the firm's credit worthiness. d. All of the answers above are correct. e. Only answers a and c are correct. Chapter 13: Capital Budgeting: Cash Flows and Risk Page 13 (13.6) Methods of analysis 56 . Which of the following statements is correct? Register to View Answer Diff: M a. Sensitivity analysis is incomplete because it fails to consider the range of likely values of key variables as reflected in their probability distributions. b. In comparing two projects using sensitivity analysis, the one with the steeper lines would be considered less risky, because a small error in estimating a variable, such as unit sales, would produce only a small error in the project's NPV. c. The primary advantage of simulation analysis over scenario analysis is that scenario analysis requires a relatively powerful computer, coupled with an efficient financial planning software package, whereas simulation analysis can be done using a PC with a spreadsheet program or even a calculator. d. Sensitivity analysis is a risk analysis technique that considers both the sensitivity of NPV to changes in key variables and the likely range of variable values. e. Answers c and d are correct. (13.6) Monte Carlo simulation 57 . Monte Carlo simulation Register to View AnswerDiff: M a. Can be useful for estimating a project's stand-alone risk. b. Is capable of using probability distributions for variables as input data instead of a single numerical estimate for each variable. c. Produces both an expected NPV (or IRR) and a measure of the riskiness of the NPV or IRR. d. All of the answers above. e. Only answers a and b are correct. (13.8) Risk-adjusted discount rate Register to View AnswerDiff: M 58 . If a company uses the same discount rate for evaluating all projects, which of the following results is likely? a. b. c. d. e. Accepting Rejecting Accepting Accepting Answers a poor, high-risk projects. good, low-risk projects. only good, low-risk projects. no projects. and b are correct. (13.8) Risk-adjusted discount rate Register to View AnswerDiff: M 59 . If a typical U.S. company uses the same discount rate to evaluate all projects, the firm will most likely become a. b. c. d. e. Riskier over time, and its value will decline. Riskier over time, and its value will rise. Less risky over time, and its value will rise. Less risky over time, and its value will decline. There is no reason to expect its risk position or value to change over time as a result of its use of a single discount rate. Page 14 Chapter 13: Capital Budgeting: Cash Flows and Risk Multiple Choice: Problems (Note: MACRS accelerated depreciation rates should be given for many of these problems. These rates are provided in the text in Chapter 13, Table 13-2.) Easy: (13.2) Investment outlay Register to View AnswerDiff: E 60 . The Target Copy Company is contemplating the replacement of its old printing machine with a new model costing $60,000. The old machine, which originally cost $40,000, has 6 years of expected life remaining and a current book value of $30,000 versus a current market value of $24,000. Target's corporate tax rate is 40 percent. If Target sells the old machine at market value, what is the initial after-tax outlay for the new printing machine? a. b. c. d. e. -$22,180 -$30,000 -$33,600 -$36,000 -$40,000 (13.8) Risk-adjusted discount rate Register to View AnswerDiff: E 61 . Dandy Product's overall weighted average required rate of return is 10 percent. Its yogurt division is riskier than average, its fresh produce division has average risk, and its institutional foods division has below-average risk. Dandy adjusts for both divisional and project risk by adding or subtracting 2 percentage points. Thus, the maximum adjustment is 4 percentage points. What is the risk-adjusted required rate of return for a low-risk project in the yogurt division? a. 6% b. 8% c. 10% d. 12% e. 14% Chapter 13: Capital Budgeting: Cash Flows and Risk Page 15 Medium: [MACRS table required] (13.2) New project NPV Register to View AnswerDiff: M 62 . Mars Inc. is considering the purchase of a new machine which will reduce manufacturing costs by $5,000 annually. Mars will use the MACRS accelerated method to depreciate the machine, and it expects to sell the machine at the end of its 5-year operating life for $10,000. The firm expects to be able to reduce net operating working capital by $15,000 when the machine is installed, but required working capital will return to the original level when the machine is sold after 5 years. Mars's marginal tax rate is 40 percent, and it uses a 12 percent cost of capital to evaluate projects of this nature. If the machine costs $60,000, what is the projects NPV? a. b. c. d. e. -$15,394 -$14,093 -$58,512 -$21,493 -$46,901 [MACRS table required] (13.2) New project NPV Register to View AnswerDiff: M 63 . Stanton Inc. is considering the purchase of a new machine which will reduce manufacturing costs by $5,000 annually and increase earnings before depreciation and taxes by $6,000 annually. Stanton will use the MACRS method to depreciate the machine, and it expects to sell the machine at the end of its 5-year operating life for $10,000 before taxes. Stanton's marginal tax rate is 40 percent, and it uses a 9 percent cost of capital to evaluate projects of this type. If the machine's cost is $40,000, what is the project's NPV? a. b. c. d. e. $1,014 $2,292 $7,550 $ 817 $5,040 Page 16 Chapter 13: Capital Budgeting: Cash Flows and Risk (13.2) New project NPV Register to View AnswerDiff: M 64 . Parker Products manufactures a variety of household products. The company is considering introducing a new detergent. The companys CFO has collected the following information about the proposed product. (Note: You may or may not need to use all of this information, use only the information that is relevant.) The project has an anticipated economic life of 4 years. The company will have to purchase a new machine to produce the detergent. The machine has an up-front cost (t = 0) of $2 million. The machine will be depreciated on a straight-line basis over 4 years (that is, the companys depreciation expense will be $500,000 in each of the first four years (t = 1, 2, 3, and 4). The company anticipates that the machine will last for four years, and that after four years, its salvage value will equal zero. If the company goes ahead with the proposed product, it will have an effect on the companys net operating working capital. At the outset, t = 0, inventory will increase by $140,000 and accounts payable will increase by $40,000. At t = 4, the net operating working capital will be recovered after the project is completed. The detergent is expected to generate sales revenue of $1 million the first year (t = 1), $2 million the second year (t = 2), $2 million the third year (t = 3), and $1 million the final year (t = 4). Each year the operating costs (not including depreciation) are expected to equal 50 percent of sales revenue. The companys interest expense each year will be $100,000. The new detergent is expected to reduce the after-tax cash flows of the companys existing products by $250,000 a year (t = 1, 2, 3, and 4). The companys overall WACC is 10 percent. However, the proposed project is riskier than the average project for Parker; the projects WACC is estimated to be 12 percent. The companys tax rate is 40 percent. What is the net present value of the proposed project? b. c. d. e. a. -$ 765,903.97 -$1,006,659.58 -$ 824,418.62 -$ 838,997.89 -$ 778,583.43 Chapter 13: Capital Budgeting: Cash Flows and Risk Page 17 (13.6) Risky projects Register to View AnswerDiff: M 65 . Cochran Corporation has a weighted average cost of capital of 11 percent for projects of average risk. Projects of below-average risk have a cost of capital of 9 percent, while projects of above-average risk have a cost of capital equal to 13 percent. Projects A and B are mutually exclusive, whereas all other projects are independent. None of the projects will be repeated. The following table summarizes the cash flows, internal rate of return (IRR), and risk of each of the projects. Year (t) 0 1 2 3 4 Project A -$200,000 66,000 66,000 66,000 66,000 Project B -$100,000 30,000 30,000 40,000 40,000 Project C -$100,000 30,000 30,000 30,000 40,000 Project D -$100,000 30,000 30,000 40,000 50,000 Project E -$100,000 40,000 25,000 30,000 35,000 IRR Project Risk 12.110% Below Average 14.038% Below Average 10.848% Average 16.636% Above Average 11.630% Above Average Which projects will the firm select for investment? a. b. c. d. e. Projects: Projects: Projects: Projects: Projects: A, B, B, A, B, B, C, D, E C, D, E D D C, D Page 18 Chapter 13: Capital Budgeting: Cash Flows and Risk (13.6) Scenario analysis Register to View AnswerDiff: M 66 . Klott Company encounters significant uncertainty with its sales volume and price in its primary product. The firm uses scenario analysis in order to determine an expected NPV, which it then uses in its budget. The base case, best case, and worse case scenarios and probabilities are provided in the table below. What is Klott's expected NPV, standard deviation of NPV, and coefficient of variation of NPV? Probability of Outcome 0.30 0.50 0.20 NPV NPV NPV NPV NPV = = = = = $35,000; $35,000; $10,300; $13,900; $10,300; NPV NPV NPV NPV NPV Unit Sales Volume 6,000 10,000 13,000 = = = = = 17,500; 11,667; 12,083; 8,476; 13,900; CVNPV CVNPV CVNPV CVNPV CVNPV Sales Price $3,600 4,200 4,400 = = = = = 2.00. 0.33. 1.17. 0.61. 1.35. NPV (In Thousands) -$6,000 +13,000 +28,000 Worst case Base case Best case a. b. c. d. e. Expected Expected Expected Expected Expected (13.8) Risk-adjusted NPV Register to View AnswerDiff: M 67 . Virus Stopper Inc., a supplier of computer safeguard systems, uses a cost of capital of 12 percent to evaluate average-risk projects, and it adds or subtracts 2 percentage points to evaluate projects of more or less risk. Currently, two mutually exclusive projects are under consideration. Both have a cost of $200,000 and will last 4 years. Project A, a riskier-than-average project, will produce annual end of year cash flows of $71,104. Project B, of less than average risk, will produce cash flows of $146,411 at the end of Years 3 and 4 only. Virus Stopper should accept a. b. c. d. e. B with Both A B with A with A with a NPV and B a NPV a NPV a NPV of $10,001. because both have NPVs greater than zero. of $8,042. of $7,177. of $15,968. Chapter 13: Capital Budgeting: Cash Flows and Risk Page 19 (13.8) Risk-adjusted NPV Register to View AnswerDiff: M 68 . Real Time Systems Inc. is considering the development of one of two mutually exclusive new computer models. Each will require a net investment of $5,000. The cash flow figures for each project are shown below: Period 1 2 3 Project A $2,000 2,500 2,250 Project B $3,000 2,600 2,900 Model B, which will use a new type of laser disk drive, is considered a high-risk project, while Model A is of average risk. Real Time adds 2 percentage points to arrive at a risk-adjusted cost of capital when evaluating a high-risk project. The cost of capital used for averagerisk projects is 12 percent. Which of the following statements regarding the NPVs for Models A and B is most correct? a. b. c. d. e. 69 NPVA NPVA NPVA NPVA None = $380; NPVB = $1,815. = $197; NPVB = $1,590. = $380; NPVB = $1,590. = $5,380; NPVB = $6,590. of the statements above is correct. Register to View AnswerDiff: M (13.9) Decision trees . Consider the following project data: (1) A $500 feasibility study will be conducted at t = 0. (2) If the study indicates potential, the firm will spend $1,000 at t = 1 to build a prototype. The best estimate now is that there is an 80 percent chance that the study will indicate potential, and a 20 percent chance that it will not. (3) If reaction to the prototype is good, the firm will spend $10,000 to build a production plant at t = 2. The best estimate now is that there is a 60 percent chance that the reaction to the prototype will be good, and a 40 percent chance that it will be poor. (4) If the plant is built, there is a 50 percent chance of a t = 3 cash inflow of $16,000 and a 50 percent chance of a $13,000 cash inflow. If the appropriate cost of capital is 10 percent, what is the project's expected NPV? a. -$35 b. -$12 c. $ 0 d. $12 e. $35 Page 20 Chapter 13: Capital Budgeting: Cash Flows and Risk Tough: [MACRS table required] (13.2) New project NPV Register to View AnswerDiff: T 70 . Foxglove Corp. is faced an with investment project. The following information is associated with this project: Year 1 2 3 4 Net Income* $50,000 60,000 70,000 60,000 Allowable Depreciation for 3-Yr. MACRS class 0.33 0.45 0.15 0.07 *Assume no interest expenses and a zero tax rate. The project involves an initial investment of $100,000 in equipment that falls in the 3-year MACRS class and has an estimated salvage value of $15,000. In addition, the company expects an initial increase in net operating working capital of $5,000 which will be recovered in year 4. The cost of capital for the project is 12 percent. What is the projects net present value? (Round your final answer to the nearest whole dollar.) a. b. c. d. e. $153,840 $159,071 $162,409 $168,604 $182,344 (13.2) New project NPV Register to View AnswerDiff: T 71 . Pierce Products is deciding whether it makes sense to purchase a new piece of equipment. The equipment costs $100,000 (payable at t = 0). The equipment will provide before-tax cash inflows of $45,000 a year at the end of each of the next four years (t = 1, 2, 3, 4). The equipment can be depreciated according to the following schedule: t t t t = = = = 1: 2: 3: 4: 0.33 0.45 0.15 0.07 At the end of four years the company expects to be able to sell the equipment for a salvage value of $10,000 (after-tax). The company is in the 40 percent tax bracket. The company has an after-tax cost of capital of 11 percent. Since there is more uncertainty about the salvage value, the company has chosen to discount the salvage value at 12 percent. What is the net present value of purchasing the equipment? a. b. c. d. e. $ 9,140.78 $16,498.72 $20,564.23 $22,853.90 $28.982.64 Page 21 Chapter 13: Capital Budgeting: Cash Flows and Risk (13.2) New project NPV Register to View AnswerDiff: T 72 . Lugar Industries is considering an investment in a proposed project which requires an initial expenditure of $100,000 at t = 0. This expenditure can be depreciated at the following annual rates: Year 1 2 3 4 5 6 Depreciation Rate 20% 32 19 12 11 6 The project has an economic life of six years. The projects revenues are forecasted to be $90,000 a year. The projects operating costs (not including depreciation) are forecasted to be $50,000 a year. After six years, the projects estimated salvage value is $10,000. The companys WACC is 10 percent, and its corporate tax rate is 40 percent. What is the projects net present value (NPV)? a. b. c. d. e. $31,684 $33,843 $34,667 $38,840 $45,453 Page 22 Chapter 13: Capital Budgeting: Cash Flows and Risk (13.2) Expansion project NPV Register to View AnswerDiff: T 73 . Mills Mining is considering an expansion project. has the following features: The proposed project The project has an initial cost of $500,000--this is also the amount which can be depreciated using the following depreciation schedule: Year 1 2 3 4 Depreciation Rate 33% 45 15 7 If the project is undertaken, at t = 0 the company will need to increase its inventories by $50,000, and its accounts payable will rise by $10,000. This net operating working capital will be recovered at the end of the projects life (t = 4). If the project is undertaken, the company will realize an additional $600,000 in sales over each of the next four years (t = 1, 2, 3, 4). The companys operating cost (not including depreciation) will equal $400,000 a year. The companys tax rate is 40 percent. At t = 4, the projects economic life is complete, but it will have a salvage value of $50,000. The projects WACC = 10 percent. What is the projects net present value (NPV)? a. b. c. d. e. $11,122.87 $50,330.14 $54,676.59 $68,336.86 $80,035.52 Chapter 13: Capital Budgeting: Cash Flows and Risk Page 23 (13.2) Expansion project NPV Register to View AnswerDiff: T 74 . Blair Bookstores is thinking about expanding its facilities. In considering the expansion, Blairs finance staff has obtained the following information: The expansion will require the company to purchase today (t = 0) $5 million of equipment. The equipment will be depreciated over the following four years at the following rate: t t t t = = = = 1 2 3 4 33% 45 15 7 The expansion will require the company to increase its net operating working capital by $500,000 today (t = 0). This net operating working capital will be recovered at the end of four years (t = 4). The equipment is not expected to have any salvage value at the end of four years. The companys operating costs, excluding depreciation, are expected to be 60 percent of the companys annual sales. The expansion will increase the companys dollar sales. The projected increases, all relative to current sales are: Year Year Year Year 1: 2: 3: 4: $3.0 3.5 4.5 4.0 million million million million (For example, in Year 4 sales will be $4 million more than they would have been had the project not been undertaken.) After the fourth year, the equipment will be obsolete, and will no longer provide any additional incremental sales. The companys tax rate is 40 percent and the companys other divisions are expected to have positive tax liabilities throughout the projects life. If the company proceeds with the expansion, it will need to use a building that the company already owns. The building is fully depreciated; however, the building is currently leased out. The company receives $300,000 rental income (before-tax) each year (payable at year end). If the company proceeds with the expansion, the company will no longer receive this rental income. The WACC for the project is 10 percent. What is the proposed project's NPV? a. b. c. d. e. -$1,034,876 -$1,248,378 -$1,589,885 -$5,410,523 -$ 748,378 Page 24 Chapter 13: Capital Budgeting: Cash Flows and Risk Multiple part: (The following information applies to the next four problems.) [MACRS table required] The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price is $40,000, and it falls into the MACRS 3-year class. Purchase of the computer would require an increase in net operating working capital of $2,000. The computer would increase the firm's before-tax revenues by $20,000 per year but would also increase operating costs by $5,000 per year. The computer is expected to be used for 3 years and then be sold for $25,000. The firm's marginal tax rate is 40 percent, and the project's cost of capital is 14 percent. (13.2) New project investment 75 . What is the net investment required at t = 0? a. b. c. d. e. -$42,000 -$40,000 -$38,600 -$37,600 -$36,600 Register to View AnswerDiff: M Register to View AnswerDiff: E (13.2) Operating cash flow 76 . What is the operating cash flow in Year 2? a. b. c. d. e. $ 9,000 $10,240 $11,687 $13,453 $16,200 (13.2) Non-operating cash flows Register to View AnswerDiff: M 77 . What is the total value of the terminal year non-operating cash flows at the end of Year 3? a. b. c. d. e. $18,120 $19,000 $21,000 $25,000 $27,000 Register to View AnswerDiff: M (13.2) New project NPV 78 . What is the project's NPV? a. b. c. d. e. $2,622 $2,803 $2,917 $5,712 $6,438 Chapter 13: Capital Budgeting: Cash Flows and Risk Page 25 (The following information applies to the next four problems.) [MACRS table required] You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck. The truck's basic price is $50,000, and it will cost another $10,000 to modify it for special use by your firm. The truck falls into the MACRS three-year class, and it will be sold after three years for $20,000. Use of the truck will require an increase in net operating working capital (spare parts inventory) of $2,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent. (13.2) New project investment Register to View AnswerDiff: E 79 . What is the net investment in the truck? (That is, what is the Year 0 net cash flow?) a. b. c. d. e. -$50,000 -$52,600 -$55,800 -$62,000 -$65,000 Register to View AnswerDiff: M (13.2) Operating cash flow 80 . What is the operating cash flow in Year 1? a. b. c. d. e. $17,820 $18,254 $19,920 $20,121 $21,737 (13.2) Non-operating cash flows Register to View AnswerDiff: M 81 . What is the total terminal (non-operating) cash flow at the end of Year 3? a. b. c. d. e. $10,000 $12,000 $15,680 $16,000 $18,000 Register to View AnswerWhat is its NPV? Diff: M (13.2) New project NPV 82 . The truck's cost of capital is 10 percent. a. -$1,547 b. -$ 562 c. $ 0 d. $ 562 e. $1,034 Page 26 Chapter 13: Capital Budgeting: Cash Flows and Risk Financial Calculator Section Multiple Choice: Problems Easy: Medium: (13.2) New project NPV Register to View AnswerDiff: M 83 . Your company is considering a machine that will cost $1,000 at Time 0 and which can be sold after 3 years for $100. To operate the machine, $200 must be invested at Time 0 in inventories; these funds will be recovered when the machine is retired at the end of Year 3. The machine will produce sales revenues of $900/year for 3 years; variable operating costs (excluding depreciation) will be 50 percent of sales. Operating cash inflows will begin 1 year from today (at Time 1). The machine will have depreciation expenses of $500, $300, and $200 in Years 1, 2, and 3, respectively. The company has a 40 percent tax rate, enough taxable income from other assets to enable it to get a tax refund from this project if the project's income is negative, and a 10 percent cost of capital. Inflation is zero. What is the project's NPV? a. b. c. d. e. $ 6.24 $ 7.89 $ 8.87 $ 9.15 $10.41 (13.2) New project NPV Register to View AnswerDiff: M 84 . Your company is considering a machine which will cost $50,000 at Time 0 and which can be sold after 3 years for $10,000. $12,000 must be invested at Time 0 in inventories and receivables; these funds will be recovered when the operation is closed at the end of Year 3. The facility will produce sales revenues of $50,000/year for 3 years; variable operating costs (excluding depreciation) will be 40 percent of sales. No fixed costs will be incurred. Operating cash inflows will begin 1 year from today (at t = 1). By an act of Congress, the machine will have depreciation expenses of $40,000, $5,000, and $5,000 in Years 1, 2, and 3 respectively. The company has a 40 percent tax rate, enough taxable income from other assets to enable it to get a tax refund on this project if the project's income is negative, and a 15 percent cost of capital. Inflation is zero. What is the project's NPV? a. b. c. d. e. $ 7,673.71 $12,851.75 $17,436.84 $24,989.67 $32,784.25 Chapter 13: Capital Budgeting: Cash Flows and Risk Page 27 (13.8) Risk-adjusted discount rate Register to View AnswerDiff: M 85 . The Unlimited, a national retailing chain, is considering an investment in one of two mutually exclusive projects. The discount rate used for Project A is 12 percent. Further, Project A costs $15,000, and it would be depreciated using MACRS. It is expected to have an after-tax salvage value of $5,000 at the end of 6 years and to produce after-tax cash flows (including depreciation) of $4,000 for each of the 6 years. Project B costs $14,815 and would also be depreciated using MACRS. B is expected to have a zero salvage value at the end of its 6-year life and to produce after-tax cash flows (including depreciation) of $5,100 each year for 6 years. The Unlimited's marginal tax rate is 40 percent. What risk-adjusted discount rate will equate the NPV of Project B to that of Project A? a. b. c. d. e. 15% 16% 18% 20% 12% Tough: [MACRS table required] (13.2) New project IRR Register to View AnswerDiff: T 86 . After a long drought, the manager of Long Branch Farm is considering the installation of an irrigation system which will cost $100,000. It is estimated that the irrigation system will increase revenues by $20,500 annually, although operating expenses other than depreciation will also increase by $5,000. The system will be depreciated using MACRS over its depreciable life (5 years) to a zero salvage value. If the tax rate on ordinary income is 40 percent, what is the project's IRR? a. b. c. d. e. 12.6% -1.3% 13.0% 10.2% -4.8% Page 28 Chapter 13: Capital Budgeting: Cash Flows and Risk (13.8) Risk-adjusted discount rate Register to View AnswerDiff: T 87 . California Mining is evaluating the introduction of a new ore production process. Two alternatives are available. Production Process A has an initial cost of $25,000, a 4-year life, and a $5,000 net salvage value, and the use of Process A will increase net cash flow by $13,000 per year for each of the 4 years that the equipment is in use. Production Process B also requires an initial investment of $25,000, will also last 4 years, and its expected net salvage value is zero, but Process B will increase net cash flow by $15,247 per year. Management believes that a risk-adjusted discount rate of 12 percent should be used for Process A. If California Mining is to be indifferent between the two processes, what risk-adjusted discount rate must be used to evaluate B? a. b. c. d. e. 8% 10% 12% 14% 16% Chapter 13: Capital Budgeting: Cash Flows and Risk Page 29 CHAPTER 13 ANSWERS AND SOLUTIONS Page 30 Chapter 13: Capital Budgeting: Cash Flows and Risk 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. (13.1) Relevant cash flows (13.1) Cash flow estimation (13.1) Cash flow estimation (13.1) Cash flow estimation (13.1) Incremental cash flows (13.3) Externalities (13.3) Externalities (13.4) Relevant cash flows (13.4) Relevant cash flows (13.4) Relevant cash flows (13.4) Net operating working capital (13.4) Depreciation cash flows (13.4) Depreciation cash flows (13.6) Market risk (13.6) Market risk (13.6) Project risk (13.6) Accepting risky projects (13.6) Quantification of risk (13.6) Effects of diversification (13.8) Risk-adjusted discount rate (13.8) Risk-adjusted discount rate (13.1) Relevant cash flows (13.3) Opportunity costs (13.3) Sunk costs (13.3) Cash flow estimation (13.3) Net operating working capital (13.5) Cash flow estimation (13.5) Depreciation cash flows (13.6) Sensitivity analysis (13.6) Project risk Register to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View Answer Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: E Diff: M Diff: M Diff: M Diff: M Diff: M Diff: M Diff: M Diff: M Diff: M 31. 32. (13.3) Relevant cash flows Register to View Answer Diff: E 3 33 . 34. (13.3) Relevant cash flows Register to View AnswerDiff: E Statements a and c are correct; therefore, statement e is the correct answer. Net cash flow = Net income + depreciation; therefore, depreciation affects operating cash flows. Sunk costs should be disregarded when making investment decisions, while opportunity costs should be considered when making investment decisions, as they represent the best alternative use of an asset. (13.3) Relevant cash flows Register to View AnswerDiff: E (13.3) Relevant cash flows Register to View AnswerDiff: E The correct answer is c. Sunk costs should be excluded from the analysis, and interest expense is incorporated in the WACC and not the cash flows. (13.3) Relevant cash flows Register to View AnswerDiff: E Statements b and c are correct; therefore, statement e is the correct answer. The $3 million spent on researching the technology is a sunk cost and should be excluded from the analysis. (13.3) Incremental cash flows Register to View AnswerDiff: E 35. 3 36 . 37. (13.3) Relevant and incremental cash flows Register to View AnswerDiff: E Statement a is correct; the other statements are false. If the company lost two other accounts with positive NPVs, this would obviously be a huge negative when considering the proposed project. If the firm has an option to abandon a project if it is unprofitable, this would make the company more likely to adopt it. An option to repeat a project is a plus not a negative. (13.3) Expansion project cash flows Register to View AnswerDiff: E Statement a is correct; the others are false. Depreciation cash flows must be considered when calculating operating cash flows. In addition, externality cash flows should be considered; however, sunk costs are not included in the analysis. (13.4) NPV and depreciation (13.6) Corporate risk (13.6) Accepting risky projects (13.8) Risk adjustment (13.8) Risk and project selection Register to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerDiff: E Diff: E Diff: E Diff: E Diff: E 38. 39. 40. 41. 42. 43. 44. (13.8) Risk-adjusted NPV Register to View AnswerDiff: E Statement a is false because the firm is not capital constrained; therefore, it should consider only NPV when evaluating projects. The return measure in statement a is irrelevant. Statement c is false because a risk-adjusted cost of capital has been used to evaluate the projects and arrive at the NPV. Statement d is false; we do not know what the projects' IRRs are. Statement b is the correct answer. (13.2) Cash flows and accounting measures (13.2) Cash flow estimation Register to View AnswerRegister to View AnswerDiff: M Diff: M 45. 46. Statement d is true--the foregone rent is an "opportunity cost" which should be charged to the project under consideration. Note that Statements a and b are both false--the cash flows should not take account of interest, because financial costs are dealt with by discounting at the WACC. If interest were deducted to find cash flows, then this cost would be "double counted," and the NPV would be downward biased. Ignoring interest when determining cash flows produces no bias in the NPV whatever. Note also that externalities can be either positive or negative--they tend to be negative if the new project is a substitute for existing products, but positive if the new project is complementary to the firm's other products. 47. 48. (13.3) Relevant cash flows Register to View AnswerDiff: M (13.3) Relevant cash flows Register to View AnswerDiff: M Statements b and c are correct; therefore, statement d is the correct answer. The cost of clearing the land is a sunk cost and should not be considered in the analysis. The expected impact of the new store on the existing store should be considered. In addition, the opportunity to lease the land represents an opportunity cost of opening a new store on the land and should be considered. (13.3) Relevant cash flows Register to View AnswerDiff: M Statements a and c are correct; therefore, statement e is the correct answer. Externalities and opportunity costs should be considered, while sunk costs should not be included in the analysis. (13.3) Relevant cash flows (13.3) Incremental cash flows (13.3) Factors affecting cash flows (13.4) Depreciation cash flows (13.5) Inflation effects (13.6) Corporate risk (13.6) Methods of analysis (13.6) Monte Carlo simulation (13.8) Risk-adjusted discount rate (13.8) Risk-adjusted discount rate (13.2) Investment outlay Initial outlay Cost of new machine Salvage value (old) Tax effect of sale = $6,000(0.4) = After-tax outlay = Register to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View Answer-$60,000 + 24,000 + 2,400 -$33,600 Diff: M Diff: M Diff: M Diff: M Diff: M Diff: M Diff: M Diff: M Diff: M Diff: M Diff: E 4 49 . 5 50 . 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 6 61 . (13.8) Risk-adjusted discount rate Register to View AnswerDiff: E rYD = 10% + 2% = 12%. However, for a low-risk project, Dandy Product subtracts 2 percentage points. Therefore, the required rate of return is 10 percent. rYD,Low-risk project = 10% + 2% - 2% = 10%. 62. (13.2) New project NPV Time line: 0 1 r = 12% Register to View Answer Diff: M 2 3 4 5 Years -45,000 7,800 10,680 NPV = ? Depreciation cash flows: MACRS Year Percent 1 0.20 2 0.32 3 0.19 4 0.12 5 0.11 6 0.06 7,560 5,880 -1,920 Annual Depreciation $12,000 19,200 11,400 7,200 6,600 3,600 $60,000 Depreciable Basis $60,000 60,000 60,000 60,000 60,000 60,000 Project analysis worksheet: Year: 0 1 2 3 4 5 I Initial outlay 1) Machine cost ($60,000) 2) Decrease in NWC 15,000 3) Total net inv. ($45,000) II Operating cash flows 4) Reduction in cost $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000 5) After-tax dec. in cost 3,000 3,000 3,000 3,000 3,000 6) Deprec. (from table) 12,000 19,200 11,400 7,200 6,600 7) Tax savings deprec. (line 6 0.4) 4,800 7,680 4,560 2,880 2,640 8) Net operating CFs (line 5 + 7) $ 7,800 $10,680 $ 7,560 $ 5,880 $ 5,640 III Terminal year CFs 9) Estimated salvage value $10,000 10) Tax on salvage value ($10,000 - $3,600)(0.4) (2,560) 11) Return of NWC (15,000) 12) Total termination CFs (7,560) IV Net CFs 13) Total Net CFs ($45,000) $ 7,800 $10,680 $ 7,560 $ 5,880 ($ 1,920) Numerical solution: NPV = -$45,000 + $7,800(1/1.12) + $10,680(1/1.122) + $7,560(1/1.123) + $5,880(1/1.124) - $1,920(1/1.125) = -$45,000 + $7,800(0.8929) + $10,680(0.7972) + $7,560(0.7118) + $5,880(0.6355) - $1,920(0.5674) = -$21,492.74 -$21,493. Financial calculator solution: Inputs: CF0 = -45,000; CF1 = 7,800; CF2 = 10,680; CF3 = 7,560; CF4 = 5,880; CF5 = -1,920; I = 12. Output: NPV = -$21,493.24 -$21,493. 63. (13.2) New project NPV Register to View AnswerDiff: M Time line: 0 r = 9% 1 2 3 4 5 Years -40,000 9,800 11,720 =? Depreciation cash flows: MACRS Year Percent 1 0.20 2 0.32 3 0.19 4 0.12 5 0.11 6 0.06 9,640 8,520 15,320 Annual Depreciation $ 8,000 12,800 7,600 4,800 4,400 2,400 $40,000 3 4 5 NPV Depreciable Basis $40,000 40,000 40,000 40,000 40,000 40,000 2 Project analysis worksheet: Year: 0 1 I Initial outlay 1) Machine cost ($40,000) 2) Decrease in NWC -3) Total net inv. ($40,000) II Operating cash flows 4) Inc. in earnings before deprec. & tax $ 6,000 5) After-tax increase in earnings (line 4 0.6) 3,600 6) Before tax reduction in cost 5,000 7) After tax reduction in cost (line 6 0.4) 3,000 8) Deprec. (from table) 8,000 9) Deprec. tax savings (line 8 0.4) 3,200 10) Net operating CFs _______ (line 5 + 7 + 9) $ 9,800 III Terminal year CFs 11) Estimated salvage value 12) Tax on salvage value ($10,000 - $2,400)(0.4) 13) Return of NWC 14) Total termination CFs IV Net CFs 15) Total Net CFs ($40,000) $ 9,800 $ 6,000 $ 6,000 $ 6,000 $ 6,000 3,600 5,000 3,000 12,800 3,600 5,000 3,000 7,600 3,600 5,000 3,000 4,800 3,600 5,000 3,000 4,400 5,120 3,040 1,920 1,760 _______ _______ _______ _______ $11,720 $ 9,640 $ 8,520 $ 8,360 $10,000 (3,040) -6,960 $11,720 $ 9,640 $ 8,520 $15,320 Numerical solution: NPV = -$40,000 + $9,800(1/1.09) + $11,720(1/1.092) + $9,640(1/1.093) + $8,520(1/1.094) + $15,320(1/1.095) = -$40,000 + $9,800(0.9174) + $11,720(0.8417) + $9,640(0.7722) + $8,520(0.7084) + $15,320(0.6499) = $2,291.29 $2,292. Financial calculator solution: Inputs: CF0 = -40,000; CF1 = 9,800; CF2 = 11,720; CF3 = 9,640; CF4 = 8,520; CF5 = 15,320; I = 9. Output: NPV = $2,291.90 $2,292. 64. (13.2) New project NPV Register to View AnswerDiff: M (In Thousands of Dollars) t = 0 t = 1 t = 2 t = 3 t = 4Initial cost-2,000Change in NWC -100Initial outlay2,100Sales$1,000$2,000$2,000$1,000Op. Costs 500 1,000 1,000 500Depr. 500 500 500 500Op. Inc. bef. taxes$ 0 $ 500$ 500$ 0Taxes (40%) 0 200 200 0Oper. Inc. from project$ 0$ 300$ 300$ 0Depr. 500 500 500 500Change in other products250250250250Return of NWC________________________+ 100Net cash flow (NCF)-2,100$ 250$ 550$ 550$ 350 Entering the NCF amounts into the cash flow register (at 12%) gives you a NPV of -$824,418.62. 6 65 . (13.6) Risky Projects Register to View AnswerLook at the NPV, IRR, and hurdle rate for each project: Project A B C D E Hurdle 9.00% 9.00% 11.00% 13.00% 13.00% NPV $13,822 $11,998 IRR 12.11% 14.04% 10.85% 16.64% 11.63% Diff: M 6 66 . Projects A and B are mutually exclusive, so we pick Project A because it has the largest NPV. Projects C, D, and E are independent so we pick the ones whose IRR exceeds the cost of capital, in this case, just D. Therefore, the projects undertaken are A and D. (13.6) Scenario analysis Calculate expected value of NPV (in thousands): Probability of Outcome, Pi Worst case 0.30 Base case 0.50 Best case 0.20 Unit Sales Sales Volume Price 6,000 $3,600 10,000 4,200 13,000 4,400 Register to View Answer Diff: M NPV (In 000s) Pi(x) -$6,000 0.3(-6,000) = -1,800 13,000 0.5(13,000) = 6,500 28,000 0.2(28,000) = 5,600 Expected NPV = $10,300 Calculate standard deviation of NPV (in thousands): Pi(x - x )2 (x - x )2 Pi(x - x )2 _____________________________________ ____________________ _________________________ Worst case Base case Best case 0.3(-6 - 10.3)2 0.5(13 - 10.3)2 0.2(28 - 10.3)2 265.69 7.29 313.29 79.707 3.645 62.658 Sum 146.01 (146.01) = 12,083. Calculate coefficient of variation (CV) of NPV: CVNPV = NPV/E(NPV) = $12,083/$10,300 = 1.17. 67. (13.8) Risk-adjusted NPV Time lines: Project A 0 r = 14% 1 2 3 | | | | CFsA -200,000 71,104 71,104 71,104 NPVA = ? Project B 0 r = 10% 1 2 3 | | | | CFsB -200,000 0 0 146,411 NPVB = ? Calculate required returns on A and B: Project A High risk rRisk adjusted = 12% + 2% = 14%. Project B Low risk rRisk adjusted = 12% - 2% = 10%. Register to View AnswerDiff: M 4 Years | 71,104 4 Years | 146,411 Tabular solution: NPVA = $71,104 [(1/0.14)-(1/(0.14 (1.144)))] - $200,000 = $71,104(2.9137) - $200,000 = $7,175.72. NPVB = $146,411(1/1.143) + $146,411(1/1.144) - $200,000 = $146,411(0.7513) + $146,411(0.6830) - $200,000 = $9,997.30. Project B has the higher NPV. Since they are mutually exclusive, select Project B. Financial calculator solution: A Inputs: CF0 = -200,000; CF1 = 71,104; Nj = 4; I = 14. Output: NPVA = $7,176.60 $7,177. B Inputs: CF0 = -200,000;CF1 = 0;Nj = 2;CF2 = 146,411;Nj = 2;I = 10. Output: NPVB = $10,001.43 $10,001. Note: The difference in the NPVB between the numerical solution and financial calculator cash flow solution of $4.13 is due to rounding. Greater precision in the PVIF factors produces identical answers. 68. (13.8) Risk-adjusted NPV Time lines: Project A 0 r = 12% 1 | | CFsA -5,000 2,000 NPVA = ? Project B 0 r= | CFsB -5,000 NPVB = ? Project A: Project B: Register to View AnswerDiff: M 2 | 2,500 3 Periods | 2,250 14% 1 | 3,000 2 | 2,600 3 Periods | 2,900 rAverage risk = 12%. rHigh risk = 12% + 2% = 14%. Numerical solution: NPVA = $2,000(1/1.12) + $2,500(1/1.122) + $2,250(1/1.123) - $5,000 = $2,000(0.8929) + $2,500(0.7972) + $2,250(0.7118) - $5,000 = $380.35 $380. NPVB = $3,000(1/14) + $2,600(1/142) + $2,900(1/143) - $5,000 = $3,000(0.8772) + $2,600(0.7695) + $2,900(0.6750) - $5,000 = $1,589.80 $1,590. Financial calculator solution: A: Inputs: CF0 = -5,000; CF1 = 2,000; CF2 = 2,500; CF3 = 2,250; I% = 12. Output: NPV = $380.20 $380. B: Inputs: CF0 = -5,000; CF1 = 3,000; CF2 = 2,600; CF3 = 2,900; I% = 14. Output: NPV = $1,589.61 $1,590. 69. (13.9) Decision trees To find the NPV of the first outcome: NPV = -$500 + $10, 000 $16, 000 $1, 000 + + 2 3 (1.1) (1.1) 1.1 = $2,347.48 Register to View AnswerDiff: M The other NPVs are found similarly: 0 -$500 -500 -500 -500 1 -$1,000 -1,000 -1,000 2 -$10,000 -10,000 3 $16,000 13,000 Prob 0.24 0.24 0.32 0.20 1.00 NPV $2,347 94 -1,409 -500 E(NPV) = 0.24($2,347) + 0.24($94) + 0.32(-$1,409) + 0.20(-$500) = $35. 70. (13.2) New project NPV Step 1 Calculate depreciation: Dep 1 = 100,000(0.33) = 33,000. Dep 2 = 100,000(0.45) = 45,000. Dep 3 = 100,000(0.15) = 15,000. Dep 4 = 100,000(0.07) = 7,000. Step 2 Calculate cash flows: CF 0 = -100,000 - 5,000 CF 1 = 50,000 + 33,000 CF 2 = 60,000 + 45,000 CF 3 = 70,000 + 15,000 CF 4 = 60,000 + 7,000 + Register to View AnswerDiff: T = -105,000. = 83,000. = 105,000. = 85,000. 5,000 + 15,000 = 87,000. Step 3 7 71 . Calculate NPV: Use CF key on calculator. Enter cash flows shown above. Enter I/YR = 12%. Solve for NPV = $168,604. (13.2) New project NPV Register to View AnswerDiff: T First, find the after-tax CFs associated with the project. This is accomplished by subtracting the depreciation expense from the raw CF, reducing this net CF by taxes and then adding back the depreciation expense. For t = 1: ($45,000 - $33,000)(1 - 0.4) + $33,000 = $40,200. Similarly, the after-tax CFs for t = 2, t = 3, and t = 4 are $45,000, $33,000, and $29,800, respectively. Now, enter these CFs along with the cost of the equipment to find the presalvage NPV (note that the salvage value is not yet accounted for in these CFs). The appropriate discount rate for these CFs is 11%. This yields a pre-salvage NPV of $16,498.72. Finally, the salvage value must be discounted. The PV of the salvage value is: N = 4, I = 12, PMT = 0, FV = -10,000, and PV = $6,355.18. Adding the PV of the salvage amount to the pre-salvage NPV yields the project NPV of $22,853.90. (13.2) New project NPV The cash flows for each of the years are as follows: 0 1 2 3 4 5 6 7 72 . Register to View Answer Diff: T [90,000 - 50,000 -(100,000)(0.20)](1-0.4)+(100,000)(0.20) = [90,000 - 50,000 -(100,000)(0.32)](1-0.4)+(100,000)(0.32) = [90,000 - 50,000 -(100,000)(0.19)](1-0.4)+(100,000)(0.19) = [90,000 - 50,000 -(100,000)(0.12)](1-0.4)+(100,000)(0.12) = [90,000 - 50,000 -(100,000)(0.11)](1-0.4)+(100,000)(0.11) = [90,000 - 50,000 -(100,000)(0.06)](1-0.4)+(100,000)(0.06) + (10,000)(1 - 0.4) = -100,000 32,000 36,800 31,600 28,800 28,400 32,400 73 Enter the cash flows and solve for the NPV = $38,839.59. . (13.2) Expansion project NPV Register to View AnswerDiff: T Get the depreciation using the MACRS table provided in the question. 0 1 2 3 4 Cost (500,000) Inventory ( 50,000) Accounts payable 10,000 Sales 600,000 600,000 600,000 600,000 Operating cost (400,000) (400,000) (400,000) (400,000) Depreciation (165,000) (225,000) ( 75,000) ( 35,000) EBT 35,000 ( 25,000) 125,000 165,000 Tax (40%) 14,000 ( 10,000) 50,000 66,000 NI 21,000 ( 15,000) 75,000 99,000 After-tax salvage value 30,000 Return of NWC 40,000 + Depreciation ________ 165,000 225,000 75,000 35,000 After-tax CF ($540,000) $186,000 $210,000 $150,000 $204,000 Note in Year 4 $40,000 of working capital is recovered plus the after tax salvage value of $30,000. Enter the cash flows into the cash flow register and solve for the NPV using the WACC of 10%. NPV = $54,676.59. 74. (13.2) Expansion project NPV Register to View AnswerDepreciation Schedule Depreciable Basis: $5,000,000 MACRS Annual Year Percent Depreciation 1 0.33 $1,650,000 2 0.45 2,250,000 3 0.15 750,000 4 0.07 350,000 The following table shows how to compute the cash flows: Diff: T 0 1 2 3 4 Cost($5,000,000)Working capital(500,000)Sales$3,000,000$3,500,000$4,500,000$4,000,000Operating costs, excl. depr. (60%) 1,800,000 2,100,000 2,700,000 2,400,000Gross Profit$1,200,000$1,400,000$1,800,000$1,600,000Depreciation (1,650,000) (2,250,000) (750,000) (350,000)Operating income($ 450,000)($ 850,000)$1,050,000$1,250,000Taxes (40%) (180,000) (340,000) 420,000 500,000After-tax income($ 270,000)($ 510,000)$ 630,000$ 750,000Plus: Depreciation 1,650,000 2,250,000 750,000 350,000After-tax income cash flow$1,380,000$1,740,000$1,380,000$1,100,000Aftertax loss of rental income(180,000)(180,000)(180,000)(180,000)Recovery of working capital_____________________________________ 500,000Net cash flow($5,500,000)$1,200,000$1,560,000$1,200,000$1,420,000The NPV of the cash flows at 10 percent is -$1,248,378. Register to View AnswerDiff: E 75. (13.2) New project investment Initial investment: Cost ($40,000) Change in NWC (2,000) ($42,000) (13.2) Operating cash flow Depreciation schedule: Depreciable basis = $40,000. Year 1 2 3 4 Operating cash flows: 1) Increase in revenues MACRS Percent 0.33 0.45 0.15 0.07 Year Depreciable Basis $40,000 40,000 40,000 40,000 1 $20,000 2 $20,000 7 76 . Register to View Answer Diff: M Annual Depreciation $13,200 18,000 6,000 2,800 $40,000 3 $20,000 2) Increase in costs 3) Before-tax change in earnings 4) After-tax change in earnings (line 3 0.60) 5) Depreciation 6) Tax savings deprec. (line 6 0.40) 7) Net operating CFs (line 4 + 6) 77. (13.2) Non-operating cash flows Additional Year 3 cash flows: Salvage value Tax on Salvage value Recovery of NWC (5,000) 15,000 9,000 13,200 5,280 $14,280 (5,000) 15,000 9,000 18,000 7,200 $16,200 (5,000) 15,000 9,000 6,000 2,400 $11,400 Register to View AnswerDiff: M 3 $25,000 (8,880)* 2,000 $18,120 *(Market value - Book value)(Tax rate) ($25,000 - $2,800)(0.40) = $8,880. 7 78 . (13.2) New project NPV Time line: 0 1 r = 14% -42,000 14,280 Register to View Answer2 3 Years Diff: M 16,200 Numerical solution: NPVr = 14% = -$42,000 + $14,280(1/1.14) + $16,200(1/1.142) + $29,520(1/1.143) = -$42,000 + $14,280(0.8772) + $16,200(0.7695) + $29,520(0.6750) = $2,918.32. Financial calculator solution: Inputs: CF0 = -42,000; CF1 = 14,280; CF2 = 16,200; CF3 = 29,520; I = 14. Output: NPV = $2,916.85 $2,917. Note: Numerical solution differs from calculator solution due to rounding. 79. (13.2) New project investment Initial investment: Cost ($50,000) Modification (10,000) Change in NWC (2,000) Total net investment = ($62,000) (13.2) Operating cash flow Depreciation schedule: Depreciable basis = $60,000. Year 1 2 3 4 Operating cash flows: MACRS Percent 0.33 0.45 0.15 0.07 Depreciable Basis $60,000 60,000 60,000 60,000 Register to View AnswerDiff: E 11,400 TV = 18,120 29,520 8 80 . Register to View Answer Diff: M Annual Depreciation $19,800 27,000 9,000 4,200 $60,000 1) Before-tax cost reduction 2) After-tax cost reduction (line 1 0.6) 3) Depreciation 4) Tax savings from deprec. (line 3 0.4) 5) Net operating CFs 8 81 . Year 1 $20,000 12,000 19,800 7,920 $19,920 2 $20,000 12,000 27,000 10,800 $22,800 3 $20,000 12,000 9,000 3,600 $15,600 Register to View AnswerDiff: M (13.2) Non-operating cash flows Additional Year 3 cash flows: 3 Salvage value $20,000 Tax on salvage value (6,320)* Recovery of NWC 2,000 Total terminal year CF $15,680 *(Market value - Book value)(Tax rate) ($20,000 - $4,200)(0.40) = $6,320. (13.2) New project NPV Time line: 0 r = 10% 1 | | -62,000 19,920 82. Register to View Answer Diff: M 2 | 22,800 Numerical solution: NPVr = 10% = -$62,000 + $19,920(1/.10) + $22,800(1/1.102) + $31,280(1/1.103) = -$62,000 + $19,920(0.9091) + $22,800(0.8264) + $31,280(0.7513) = -$1,548.14. 3 Years | 15,600 TV = 15,680 31,280 Financial calculator solution: Inputs: CF0 = -62,000; CF1 = 19,920; CF2 = 22,800; CF3 = 31,280; I = 10. Output: NPV = -$1,546.81 -$1,547. Note: Numerical solution differs from calculator solution due to rounding. 8 83 . (13.2) New project NPV Sales Costs Deprn EBT Taxes (40%) Net income Add deprn Cost Inventory Salvage value Tax on SV Ret. of inv. 0 0 (1,000) (200) 1 $900 450 500 ($ 50) (20) ($ 30) 500 $470 2 $900 450 300 $150 60 $ 90 300 $390 Register to View Answer3 $900 450 200 $250 100 $150 200 $350 100 (40) 200 $610 3 Diff: M (1,200) r = 10% 1 $470 2 $390 NPV = $7.89. IRR = 10.36%. -1,200 470 390 610 84 . (13.2) New project NPV 0 r = 15% 1 2 Register to View Answer3 Diff: M Purchase Sales - VC - Deprec. EBT - Taxes Net income + Depreciation -50,000 8 85 . NWC -12,000 RV(AT) _______ NCF -62,000 NPV15% = $7,673.71. 50,000 -20,000 -40,000 -10,000 +4,000 -6,000 +40,000 34,000 _______ 34,000 50,000 -20,000 -5,000 25,000 -10,000 15,000 +5,000 20,000 _______ 20,000 50,000 -20,000 -5,000 25,000 -10,000 15,000 +5,000 20,000 +12,000 +6,000 38,000 Register to View AnswerDiff: M (13.8) Risk-adjusted discount rate Time lines: Project A 0 r = 12% 1 2 3 | | | | CFsA -15,000 4,000 4,000 4,000 NPVA = ? = 3,978.60 Project B 0 4 | 4,000 6 | 4,000 5,000 Salvage value Terminal CF = 9,000 6 Years 5 | 4,000 r=? 1 2 | ... 5,100 | | CFsB -14,815 5,100 NPVB = NPVA = 3,978.60 | 5,100 0 Salvage value Terminal CF = 5,100 Financial calculator solution: A: Inputs: CF0 = -15,000; CF1 = 4,000; Nj = 5; CF2 = 9,000; I = 12. Output: NPV = $3,978.78. B: Inputs: CF0 = -18,793.78; CF1 = 5,100; Nj = 6. Output: IRR = 15.997% 16%. 8 86 . (13.2) New project IRR Time line: 0 IRR = ? 1 2 3 4 Register to View Answer Diff: T 5 6 Years -100,000 17,300 22,100 NPV = ? Depreciation cash flows: MACRS Year Percent 1 0.20 2 0.32 3 0.19 4 0.12 5 0.11 16,900 14,100 13,700 11,700 Depreciable Basis $100,000 100,000 100,000 100,000 100,000 Annual Depreciation $20,000 32,000 19,000 12,000 11,000 6 0.06 100,000 6,000 $100,000 Project analysis worksheet: Year: 0 1 2 3 4 5 6 I Initial outlay 1) Machine cost ($100,000) 2) Decrease in NWC -3) Total net inv. ($100,000) II Operating cash flows 4) Inc. in before tax & deprec. Earnings $15,500 $15,500 $15,500 $15,500 $15,500 $15,500 5) After-tax inc. in revenues 9,300 9,300 9,300 9,300 9,300 9,300 6) Deprec. (from table) 20,000 32,000 19,000 12,000 11,000 6,000 7) Tax savings deprec. (line 6 0.4) 8,000 12,800 8) Net operating CFs (line 5 + 7) $17,300 $22,100 $16,900 $14,100 $13,700 $11,700 III Terminal year CFs 9) Estimated salvage value 0 10) Tax on salvage value 0 11) Return of NWC 0 12) Total termination CFs 0 IV Net CFs 13) Total Net CFs ($100,000)$17,300 $22,100 $16,900 $14,100 $13,700 $11,700 Financial calculator solution: Inputs: CF0 = -100,000; CF1 = 17,300; CF2 = 22,100; CF3 = 16,900; CF4 = 14,100; CF5 = 13,700; CF6 = 11,700. Output: IRR = -1.32% 87. (13.8) Risk-adjusted discount rate Time lines: Project A 0 r = 12% 1 2 3 | | | | CFsA -25,000 13,000 13,000 13,000 NPVA = ? = 17,663 Terminal value CF4 Project B 0r=? 1 2 3 | | | | CFsB -25,000 15,247 15,247 15,247 NPVA = NPVB = 17,663 Terminal value CF4 Register to View AnswerDiff: T 7,600 4,800 4,400 2,400 4 Years | 13,000 = 5,000 = 18,000 4 Years | 15,247 = 0 = 15,247 Financial calculator solution: A: Inputs: CF0 = -25,000; CF1 = 13,000; Nj = 3; CF2 = 18,000; I = 12. Output: NPVA = 17,663.13. B: Inputs: CF0 = -42,663.13; CF1 = 15,247; Nj = 4. Output: IRR = 16.0% = r.

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Humboldt State University - BA - 462
CHAPTER 14 REAL OPTIONS(Difficulty: E = Easy, M = Medium, and T = Tough)True/False Easy:(14.1) Real options Answer: a Diff: E 1 . Real options exist when managers have the opportunity, after a project has been implemented, to make operating changes in
Humboldt State University - BA - 462
CHAPTER 15 CAPITAL STRUCTURE DECISIONS: PART I(Difficulty: E = Easy, M = Medium, T = Tough)True-False Easy:(15.1) Bankruptcy costs Answer: a Diff: E 1 . Because creditors can foresee, to at least some extent, the costs of bankruptcy, they charge a high
Humboldt State University - BA - 462
CHAPTER 16 CAPITAL STRUCTURE DECISIONS: PART II(Difficulty: E = Easy, M = Medium, and T = Tough)True/False Easy:(16.1) Taxes and capital structure Answer: a Diff: E 1 . In a world with no taxes, MM show that a firms capital structure does not affect th
Humboldt State University - BA - 462
CHAPTER 17 DISTRIBUTIONS TO SHAREHOLDERS: DIVIDENDS AND REPURCHASES(Difficulty: E = Easy, M = Medium, and T = Tough)True-False Easy:(17.3) Optimal distribution policy Answer: a Diff: E 1 . The optimal distribution policy for a firm strikes a balance be
Humboldt State University - BA - 462
CHAPTER 18 INITIAL PUBLIC OFFERINGS, INVESTMENT BANKING, AND FINANCIAL RESTRUCTURING(Difficulty: E = Easy, M = Medium, and T = Tough)True/False Easy:(18.5) Private placements Answer: b Diff: E 1 . If its managers make a tender offer and buy all shares
Humboldt State University - BA - 462
EXTENSION 18A RIGHTS OFFERINGS(Difficulty: E = Easy, M = Medium, and T = Tough)Note: None of the problems in this chapter extension are algorithmic. Multiple Choice: Problems Medium:Subscription price and ex-rights price Answer: d Diff: M 1 . Autore Co
Humboldt State University - BA - 462
CHAPTER 19 LEASE FINANCING(Difficulty: E = Easy, M = Medium, and T = Tough)True/False Easy:(19.1) Types of leases Answer: a Diff: E 1 . Many leases written today combine the features of operating and financial leases. Such leases are often called combi
Humboldt State University - BA - 462
CHAPTER 20 HYBRID FINANCING: PREFERRED STOCK, WARRANTS, AND CONVERTIBLES(Difficulty: E = Easy, M = Medium, T = Tough)True/False Easy:(20.1) Preferred stock Answer: b Diff: E 1 . The "preferred" feature of preferred stock means that it normally will pro
Humboldt State University - BA - 462
Test Bank where all the test Q come from
Humboldt State University - BA - 462
CHAPTER 22 Providing and Obtaining Credit(Difficulty: E = Easy, M = Medium, and T = Tough)True-False Medium:(22.2) Credit period1Answer: bDiff: M.The credit period is the amount of time it takes to do a credit search on a potential customer. a. Tr
Humboldt State University - BA - 462
CHAPTER 23 OTHER TOPICS IN WORKING CAPITAL MANAGEMENT(Difficulty: E = Easy, M = Medium, and T = Tough)True-False Medium:(23.2) Target cash balance Answer: b Diff: M 1 . The cash balances of most firms consist of transactions, compensating, precautionar
Humboldt State University - BA - 462
CHAPTER 24 DERIVATIVES AND RISK MANAGEMENT(Difficulty: E = Easy, M = Medium, and T = Tough)True/False Easy:(24.1) Risk management Answer: a Diff: E 1 . One objective of risk management can be to reduce the volatility of a firms cash flows. a. True b. F
Humboldt State University - BA - 462
CHAPTER 25 BANKRUPTCY, REORGANIZATION, AND LIQUIDATION(Difficulty: E = Easy, M = Medium, and T = Tough)Note: None of the questions in this chapter are algorithmic. True/False Easy:(25.2) Bankruptcy issues Answer: a Diff: E 1 . A central question that m
Humboldt State University - BA - 462
CHAPTER 26 MERGERS, LBOs, DIVESTITURES, AND HOLDING COMPANIES(Difficulty: E = Easy, M = Medium, and T = Tough)True/False Easy:(26.1) Synergistic merger Answer: a Diff: E 1 . In a merger with true synergies, the post-merger value exceeds the sum of the
Humboldt State University - BA - 462
CHAPTER 27 MULTINATIONAL FINANCIAL MANAGEMENT(Difficulty: E = Easy, M = Medium, and T = Tough)True-False Easy:(27.2) Multinational financial management 1 . Multinational financial management requires that consider the effects of changing currency value
Humboldt State University - BA - 464
study notes for test 2
Humboldt State University - BA - 451
Study notes for tests... were allowed to bring to test if less than 1 pg front and back
Humboldt State University - BA - 451
Chapter16:ContributedCapitalforalaterissuanceareconsideredanormalfinancing expenseandreducesadditionalpaidincapital.Additionalpaidincapitalfromsubscriptiondefault(50 x3)150StockholdersEquitycomponents:ContributedCapital Stocksubscription: (Capitalstock
Humboldt State University - BA - 464
Chapter 74/19/10What effect did the eSales increased by have on sales xpansion more than 2 million dollars (almost double) but net income decreased from 87,960 to (95,136).4/19/10What effect did the expansion have on theDecrease in cash, short-term
Humboldt State University - BA - 450
Date 2010 Dec. 4Account Title and Explanation Cash Sales Revenue Made cash sales. COGS Inventory To record cost of sales. Inventory Accounts payable Purchased inventory on credit. Sales returns and allowances A/R Customer returned inventory for credit. I
Humboldt State University - BA - 453
BA453 Ch10#2,8,13,18,21,25,26,27,30,32,33,35,38,39and44 2.Thefollowingexpensesareincludableasmedicalexpenses:the$500costofasmokingcessation programand$600forinsulin.Therestarenotdeductiblemedicalexpenses. 8.Arturocanincludeallofthemedicalexpensesasdeducti
Humboldt State University - BA - 453
BA453 Ch9#6,10,11,16,20,23,31,33,35,40,41,42,46,47and506. a)Salestaxcanbecapitalizedaspartofthecostofthecarusingeithermethod. b)Businessparkingcanbeclaimedusingeithermethod. c)Interestonanautoloanisdeductibleforselfemployedtaxpayers(notforemployees). d)D
Humboldt State University - BA - 453
BA453 Ch8#3,6,7,9,10,19,23,26,31,32,35,36,40,41,44,45,47,49&583.Landisnotavailableforcostrecoverybecauseitdoesnotdeclineonapredictablebasisorhavea determinableusefullife.846.Theactualrecoveryperiodforthecostofanassetifthehalfyearconventionappliesisayear
Humboldt State University - BA - 453
Tax Accounting Ch.6 # 3, 5, 7, 10, 11, 12, 32, 34, 39, 41, 42, 47, 49, 50, and 51 3. An expenditure that is classified as a deduction f rom AGI may not produce the same tax benefit as expenditure classified as a deduction for AGI. Deductions for AGI can b
Humboldt State University - BA - 453
Chapter 15 # 1,3,6,10,12,18,22,29,33,35,37,43,45,46,49,52, and 55 1. The justification for nontaxable exchanges are first, nontaxable exchanges represent a change in form but not in the substance of the taxpayers relative economic position and second, a n
Humboldt State University - BA - 340
BA 340 Principles of MarketingHeather Bosner BishopJanuary 29, 2009Case Study Chapter 2 (12 DrMarcus.com- Customer Vitamins and Supplements)Case overview : Dr. Marcus West has received a complaint from a customer, Rosanne Hester. Roseanne is a loyal c
Humboldt State University - BA - 340
BA 340 Principles of MarketingHeather Bosner BishopJanuary 29, 2009Case Study Chapter 3 (Case 10 Fultons Ice Land)Case overview : Steve Fulton owns Fultons Ice L and, the only ice-skating rink in a city of 450,000 people. He runs a successful hockey p
Humboldt State University - BA - 450
BA 450 6-1 3. Segment profit is total revenue less operating expenses. In computing segment profit, none of the following items has been added or deducted: general corporate expenses, interest revenue, i nterest expense, income taxes, or extraordinary ite
Humboldt State University - BA - 450
P5-10 1. This should be disclosed in the Income Statement as an extraordinary i tem because earthquakes are unusual and infrequent for the area. 2. This should be disclosed under other i tems on the Income Statement. I t is i nfrequent but not unusual so
Humboldt State University - BA - 450
BA450P61 FRAHMCORPORATION IncomeStatement FortheYearEndedDecember31,2010 $600,000 3,000Revenues Sales(net) Interestrevenues Totalrevenues$603,000Expenses Costofgoodssold Administrativeandofficesalaries Misellaneousofficeexpenses Baddebtsexpense Adverti
Humboldt State University - BA - 450
B A 450 Dr. Fults P4-141. The current assets on December 31, 2007 were $12,105 million. Pg 67/A4. 2. The allowance for doubtful accounts on December 31, 2007 was $56 million. Pg 67/A4.3. The par value of the companys stock was $0.25. 3, 519 million shar
Humboldt State University - BA - 453
TaxAcct.BA453 Ch.7#2,3,6,12,14,16,18,33,35,38,48,50,54,55&562.BusinessbaddebtexpensesaredeductionsforAGI.Mikewillnotbeabletoclaimabaddebtexpenseonthe inabilitytocollectthe$1,000ofthereceivablebecausehisbasisinthe$10,000is$8,000(80%)andheactuallyhas incom
Humboldt State University - BA - 453
Chapter16Homework#'s3,5,7,17,19,25,27,29,32,34,36,41,44&45 3.Melissamustdetermineherholdingperiodandthetaxstatusoftherightstothesong.She probablyhasazerotaxbasisforthesongbecauseshedidnotcapitalizeanycostsrelatingto writingthesong.Thesongisnotacapitalasse
Humboldt State University - BA - 453
10/29/2009 BA 453 Homework Chapter 14 Homework Chapter 14 Read the Chapter and answer numbers 1,9,10,12,19,26,28,30,31,34,36,40,42,44,52 and 58 1. 9. a. b. Is there a realized gain or loss? If so, is the realized gain or loss recognized? If the realized g
Humboldt State University - BA - 340
BA340PrinciplesofMarketing HeatherBosnerBishop January29,2009 CaseStudyChapter1(Case18HarrisburgVolunteerFireDepartment) Caseoverview:JesseDelaney,avolunteerfirefighter,isworkingonamarketingplan fortheHarrisburgVolunteerFireDepartment(HVFD)forthefirsttime
Humboldt State University - HIST - 110
TheBritishParliamentenactedaBillofRightsin1689tojustifytheoverthrowingofJamesII,listingParliamentarypowers suchascontrolovertaxationaswellastherightsofindividuals,suchastherighttoatrialbyjury.Thefollowingyear,they passedtheTolerationActwhichallowedProtest
Humboldt State University - HIST - 110
History110 ProfessorAronoff October30,2009 TheSlaughterhouseCases(1873) TheSlaughterhouseCases(1873)wastheSupremeCourtsfirstmajorinterpretationof theFourteenthAmendmenttotheConstitution. NewOrleansinthe1800shadproblemswithanimalentrails,dung,blood,andurin
Humboldt State University - BA - 450
BA 450 Dr.Fults P5-21. B- COGS 2. E- Other items 3. D- General and administrative expenses 4. J- Deductions from retained earnings 5. D- general and administrative expenses 6. C- Selling expenses 7. A- Sales revenue (Net) 8. B- COGS 9. I-Additions to ret
Humboldt State University - BA - 450
Accounts Payable Bal 12/3144,200Bal 12/31Accounts Receivable 37,100Accumulated Depreciation Bal 12/31 109,300Add. Pd. in Capital on Common Stock Bal. 12/31 20,000Add. Pd. In Capital on Preferred Stock Bal 12/31 3,200Allowance for Doubtful Accouts B
Humboldt State University - BA - 450
SILVOSO COMPANY For the Year Ended December 31, 2010 Schedule 1: Cost of Goods Sold Inventory, January 1, 2010 $37,800 Purchases $173,000 Transportation-In 13,500 Cost of Purchases $186,500 Less: Purchases discount taken $4,100 Less: Purchase returns and
Humboldt State University - BA - 450
1234567AllowanceforDoubfulAccouts AllowanceforDoubtfulAccounts AccountsReceivable Accountsreceivablewriitenoffduringtheyear BadDebtExpense AllowanceforDoubtfulAccounts Estimatedbaddebtsforyear AllowanceforSalesReturnsandAllowances Sales Allowancefo
Humboldt State University - BA - 464
C hapter 7: A udit EvidenceEvidence: information used by the auditor to determine whether information being audited is stated in accordance w ith the established criteriaEvidence includes information that is highly persuasive and less persuasiveSix key
UCSC - SPANISH - 980974
A Very Old Man with Enormous Wings (Un seor muy viejo con unas alas enormes) by Gabriel Garcia MarquezOn the third day of rain they had killed so many crabs inside the house that Pelayo had to cross his drenched courtyard and throw them into the sea, bec
UCSC - SPANISH - 702870
Adrift[Story. Full Text]Horacio QuirogaThe man stepped on something white, and then felt the wound in his foot. He sprang forward, and turned with an oath that he saw a yaracacus, rolled on itself, expecting another attack. The man took a quick look at
UCSC - LIT - 93840
Grapes of Wrath by John Steinbeck Chapters 13Summary: Chapter 1The cornfields of Oklahoma shrivel and fade in a long summer drought. Thick clouds of dust fill the skies, and the farmers tie handkerchiefs over their noses and mouths. At night, the dust b
UCSC - LIT - 93840
Grapes of Wrath by John Steinbeck Character ListTom Joad - The novels protagonist, and Ma and Pa Joads favorite son. Tom is good-natured and thoughtful and makes do with what life hands him. Even though he killed a man and has been separated from his fam
UCSC - LIT - 93840
GLORIA OH52 ROCKVIEW DRIVE IRVINE, CA 92612 (949) 278-0914 GLORIACM.OH@GMAIL.COM.To be accepted into the art department at University of CaliforniaSan Diego or University of Southern California in the field of Photography or Fashion Design..LSenior Y
UCSC - LIT - 93840
-Three Cups of Tea by Greg Mortenson & David Oliver Relin Things Fall Apart by Chinua Achebe, The Alchemist by Paulo Coelho, Tortilla Curtain by T.C Boyle, Five Quarters of the Orange by Joanne Harris, The Samurai's Garden by Gail Tsukiyama
UCSC - LIT - 93840
The Feather Pillow by Horacio QuirogaHer entire honeymoon gave her hot and cold shivers. A blond, angelic, and timid young girl, the childhood fancies she had dreamed about being a bride had been chilled by her husband's rough character. She loved him ve
UCSC - LIT - 93840
Impact. Text ok. Alana: 9493303322 Katherine: 9493072868 Takara: 9493079727 Kyungho: 5626865564 Text no. t.t.: 9497842508
UCSC - LIT - 93840
Anna Lee Period 5 1/5/2010 CONCEPT CHECK Chapter 18 18.1 1. The lac inducer stops the lac repressor making the lac operon. This makes the transcription of the lac operon. The trp corepressoer turns on the trp repressor and unlike the lac the trp corepress
Wichita State - CS - 560
GrowthRatesGrowthratesof functions: Inaloglogchart, theslopeoftheline correspondstothe growthrateofthe functionT (n )Linear n Quadratic n2 Cubic n31E+30 1E+28 1E+26 1E+24 1E+22 1E+20 1E+18 1E+16 1E+14 1E+12 1E+10 1E+8 1E+6 1E+4 1E+2 1E+0 1E+0Cubic
University of Texas - ANS - 302C
YearsQing dynasty startedGeneral idea- 6th century 8th centuryPopulation and Economy in ChinaAfter mid 21st century- population slightly decreased400-500 million was ideal, 700 million was carrying capacity according to resourcesRight now: necessary
University of Texas - ANS - 302C
Historical PatternsRecurrent trends in Chinese history- Dynastic Cycle- used to explain Chinas past Xia (21st-17th C. BC)- no hard evidence to show that dynasty is existence Shang (17th-11th C. BC)- lots of evidence to show existence, military state, agri
University of Texas - ANS - 302C
Origins of Chinese Civilization Ethnic Origins Pan Gu- creator of the world, just air in the world, lived a life of 18,000 years; rock split in two heaven and earth, eyes became moon and sun, flesh became dirt; legendary creator of god Hu Ji- bow used to
University of Texas - ANS - 302C
The Making of Chinese Empires Ying Zheng- first emperor of the Qin dynasty Mausoleum of the First emperor- walls inlaid with bronze, ground has mercury to mirror rivers Terra Cotta Warriors- found in 1970s, lifelike horses carved, different section of the
University of Texas - ANS - 302C
Moral Order in Chinese society- Confucius and Confucianism Topic: Confucius and ideas book to read readings in classical Chinese philosophy In China, Korea, Vietnam- Confucius teachings have shaped the values, Confucianism is not a religion; system of val
University of Texas - ANS - 302C
Alternatives to Confucianism Hundred Schools of Philosophy 1. Confucianism 2. Mohism 3. Legalism 4. Taoism During the 1. Spring and Autumn Period 2. The Warring States Before Confucianism rose, many schools of thought competing Why so many? Political and
University of Texas - ANS - 302C
Buddhism in China Confucianism is more for scholars, ordinary people there are other religions that shape their lives, such as Daoism Chinese scholar could be Taoist in his scholar life, Confucian scholar when he interacts with society, and Buddhist when
University of Texas - ANS - 302C
Chan (Zen) Buddhism Bodhidharma, 6th Century Northern Chan: gradual enlightenment (silent meditation); emphasize long term quest for Buddhism o Shenxiu (? 706) The body is the bodhi tree; The mind is like a framed clear mirror. At all times diligently cle
University of Texas - ANS - 302C
Early Modern China- before 960 is ANCIENT- govt positions in ancient china filled by military Song Dynasty (960-1279)- civilians dominated society and government positions N. Song (960-1127) S. Song (1127-1279) The Yuan Dynasty (1271-1368) The Ming Dynast