Chapter 7 Questions (7.1-7.33) V18

Chapter 7 Questions (7.1-7.33) V18 - NPV and Capital...

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NPV and Capital Budgeting 7.1 Which of the following should be treated as incremental cash flows when computing the NPV of an investment? a. A reduction in the sales of a company’s other products caused by the investment b. An expenditure on plant and equipment that has not yet been made and will be made only if the project is accepted c. Costs of research and development undertaken in connection with the product during the past three years d. Annual depreciation expense from the investment e. Dividend payments by the firm f. The resale value of plant and equipment at the end of the project’s life g. Salary and medical costs for production personnel who will be employed only if the project is accepted 7.2 Your company currently produces and sells steel-shaft golf clubs. The Board of Directors wants you to consider the introduction of a new line of titanium bubble woods with graphite shafts. Which of the following costs are not relevant? I. Land you already own that will be used for the project, but otherwise will be sold for $700,000, its market value. II. A $300,000 drop in your sales of steel-shaft clubs if the titanium woods with graphite shafts are introduced. III. $200,000 spent on Research and Development last year on graphite shafts. a. I only b. II only c. III only d. I and III only e. II and III only 7.3 The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated below. Cash flows are in $ thousands, and the corporate tax rate is 34 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. Year 0 Year 1 Year 2 Year 3 Year 4 Investment $10,000 - - - - Sales Revenue - $7,000 $7,000 $7,000 $7,000 Operating Costs - 2,000 2,000 2,000 2,000 Depreciation - 2,500 2,500 2,500 2,500 Net Working Capital (end of year) 200 250 300 200 - a. Compute the incremental net income of the investment in each year. b. Compute the incremental cash flows of the investment in each year. c. Suppose the appropriate discount rate is 12 percent. What is the NPV of the project?
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7.4 According to the February 7, 2002, issue of The Sports Universe , the Seattle Mariner’s designated runner, Andy Schneider, signed a three-year contract in January 2002 with the following provisions: $1,400,000 signing bonus $2,500,000 salary per year for three years 10 years of deferred payments of $1,250,000 per year (these payments begin in year 4) Several bonus provisions that total as much as $750,000 per year for the three years of the contract Assume that Schneider has a 60-percent probability of receiving the bonuses each year, and that he signed the contract on January 1, 2002. Use the expected value of the bonuses as incremental cash flows. Assume that expected cash flows are discounted at 12.36 percent. Ignore taxes. Schneider’s signing bonus was paid on January 1, 2002. Schneider’s salary and bonuses other than the signing bonus are paid at the end of
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Chapter 7 Questions (7.1-7.33) V18 - NPV and Capital...

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