Test_Bank cf estimation and risk analysis

# Test_Bank cf estimation and risk analysis - TEST BANK...

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TEST BANK (Difficulty: E = Easy, M = Medium, and T = Tough) 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 11, Table 11-2.) Easy: Investment outlay Answer: c Diff: E 1 . 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. -\$22,180 b. -\$30,000 c. -\$33,600 d. -\$36,000 e. -\$40,000 Risk-adjusted discount rate Answer: c Diff: E 2 . 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 11 - Page 1

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[MACRS table required] New project NPV Answer: d Diff: M 3 . 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 project’s NPV? a. -\$15,394 b. -\$14,093 c. -\$58,512 d. -\$21,493 e. -\$46,901 [MACRS table required] New project NPV Answer: b Diff: M 4 . 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. \$1,014
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## This note was uploaded on 11/23/2010 for the course FINANCE 08FB40447 taught by Professor Raymond during the Spring '10 term at University of Manchester.

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Test_Bank cf estimation and risk analysis - TEST BANK...

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