FIN 370 Week 5 Apply: Project Cash Flows and Capital Budgeting Homework

Review the Week 5 “Practice: Project Cash Flows and Capital Budgeting Quiz” in Connect®.

Complete the Week 5 “Apply: Project Cash Flows and Capital Budgeting Homework” in Connect®.

Note: You have only one attempt available to complete assignments. Grades must be transferred manually to eCampus by your instructor. Don’t worry, this might happen after your due date

The process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements is referred to as:

Multiple Choice

incremental cash flows.

estimation and depreciation analysis.

pro forma analysis.

substitute and complement.

Coke is planning on marketing a new drink called Very Berry Coke which is a mixture of raspberry and blackberry flavors blended to perfection and added to the highly secret Coca-Cola formula. This new product is expected to reduce the sales of their existing product, Cherry Coke, by $10 million per year. This is an example of a:

Multiple Choice

substitutionary effect.

pro forma effect.

opportunity effect.

complementary effect.

A new project would require an immediate increase in raw materials in the amount of $1,000. The firm expects that accounts payable will automatically increase $800. How much must the firm expect its investment in net working capital to change if they accept this project?

Multiple Choice

−$200

+$200

+$1,800

−$1,800

A local bank is contemplating adding a new ATM to their lobby. They will need another phone line to provide communications that has a monthly cost of $50 per month. This is an example of:

Multiple Choice

complementary costs.

incremental cash flow.

sunk cost.

none of the options.

Suppose you sell a fixed asset for $99,000 when its book value is $129,000. If your company’s marginal tax rate is 39 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?

Multiple Choice

$110,700

$80,700

$84,800

$77,300

Suppose you sell a fixed asset for $99,000 when its book value is $75,000. If your company’s marginal tax rate is 39 percent, what is the gain or loss on the sale of the asset?

Multiple Choice

$14,640

$10,300

$24,000

$11,600

To correctly project cash flows, we need to consider all of the factors EXCEPT:

Multiple Choice

the likely impact that the new service or product will have on the firm’s existing products’ cost and revenues.

use of assets or employees already employed by the firm.

the new product’s or service’s costs and revenues.

All of the options are factors that need to be considered.

Which of these is the process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements?

Multiple Choice

Substitutionary analysis

Pro forma analysis

Cash flow analysis

Incremental cash flows

All of the following can be included in the depreciable basis of an asset EXCEPT:

Multiple Choice

sales tax.

freight charges.

variable costs.

installation fees.

A new project would require an immediate increase in raw materials in the amount $6,000. The firm expects that accounts payable will automatically increase $2,000. How much must the firm expect its investment in net working capital to increase if they accept this project?

Multiple Choice

−$6,000

−$4,000

+$6,000

+$4,000

Accelerated depreciation allows firms to:

Multiple Choice

receive less of the dollars of depreciation earlier in the asset’s life.

receive more of the dollars of depreciation later in the asset’s life.

receive more of the dollars of depreciation earlier in the asset’s life.

not pay any taxes during an asset’s life.

Your company is considering a new project that will require $250,000 of new equipment at the start of the project. The equipment will have a depreciable life of eight years and will be depreciated to a book value of $10,000 using straight-line depreciation. The cost of capital is 12 percent, and the firm’s tax rate is 34 percent. Estimate the present value of the tax benefits from depreciation.

Multiple Choice

$50,669.93

$86,997.13

$75,017.54

$63,617.52

Section 179 allows a business, with certain restrictions, to do which of the following?

Multiple Choice

Get a government grant to purchase the asset.

Expense the asset using double declining balance depreciation during the life of the asset.

Offset the tax liability with the cost of the asset in the year of purchase.

Expense the asset immediately in the year of purchase.

You are trying to pick the least expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $13,000 to purchase and which will have OCF of −$1,200 annually throughout the vehicle’s expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $23,000 to purchase and which will have OCF of −$550 annually throughout that vehicle’s expected five-year life. Both cars will be worthless at the end of their life. If you intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 16 percent, what is the difference in the EAC of the two cars?

Multiple Choice

$428.04

$586.07

$381.36

$601.51

Compute the NPV statistic for Project Y given the following cash flows if the appropriate cost of capital is 10 percent.

Project Y

Time       0          1          2          3          4          5

Cash Flow      –$    50,000               $     7,000                 $     20,000               $     20,000               $     20,000                 $     10,000

________________________________________

Multiple Choice

$7.788.34

$107,788.34

−$19,594.29

$9.367.11

A capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows is referred to as:

Multiple Choice

MIRR.

PI.

NPV.

IRR.

Compute the NPV for Project X with the cash flows shown as follows if the appropriate cost of capital is 9 percent.

Time       0          1          2          3          4          5

Cash Flow      –$    5,000                 $     1,000                 $     2,000                 $     2,000                 $     500               $     500

________________________________________

Multiple Choice

−$2,013.18

$486.29

$9,824.34

−$175.66

Compute the NPV statistic for Project X given the following cash flows if the appropriate cost of capital is 10 percent.

Project X

Time       0          1          2          3          4

Cash Flow      –$    100,000              –$    36,000               $     200,000              $     210,000              –$    10,000

________________________________________

Multiple Choice

$183,507.96

$262,622.77

$247,410.67

$248,962.50

Neither payback period nor discounted payback period techniques for evaluating capital projects account for:

Multiple Choice

cash flows that occur during payback.

cash flows that occur after payback.

time value of money.

market rates of return.

A firm is evaluating a potential investment that is expected to generate cash flows of $100 in years 1 through 4 and $400 in years 5 through 7. The initial investment is $750. What is the payback for this investment?

Multiple Choice

4.88 years

5.88 years

5.48 years

4.48 years

Which of these describe groups or pairs of projects where you can accept one but not all?

Multiple Choice

Mutually dependent

Mutually exclusive

Independent

Dependent

Compute the NPV statistic for Project Y given the following cash flows if the appropriate cost of capital is 10 percent.

Project Y

Time       0          1          2          3          4

Cash Flow      –$    8,000                 $     3,350                 $     4,180                 $     1,520                 $     2,000

________________________________________

Multiple Choice

$964.72

$894.37

$993.97

$1,008.03

Compute the discounted payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent and the maximum allowable discounted payback is three years.

Time:      0     1     2     3     4     5

Cash flow:      −5,000    500  2,000      3,000      1,500      500

Multiple Choice

3.45 years, accept

3.86 years, reject

3.86 years, accept

3.45 years, reject

Compute the MIRR statistic for Project I and note whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 15 percent.

Project I

Time       0          1          2          3          4          5

Cash Flow      –$    1,000                 $     400             $     300             $     200             $     300             $     50

________________________________________

Multiple Choice

The project’s MIRR is 17.17 percent and the project should be accepted.

The project’s MIRR is 10.29 percent and the project should be rejected.

The project’s MIRR is 12.67 percent and the project should be rejected.

The project’s MIRR is 18.19 percent and the project should be accepted.

Which of these is a capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows?

Multiple Choice

Net present value

Discounted payback

Profitability index

Internal rate of return

Compute the IRR for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 9 percent.

Time:      0     1     2     3     4     5

Cash flow:      −1,000    −75  100  100  0     2,000

Multiple Choice

9 percent, reject

16.61 percent, reject

9 percent, accept

16.61 percent, accept

How many possible IRRs could you find for the following set of cash flows?

Time       0          1          2          3          4

Cash Flow      –$    201,000              –$    37,350               $     460,180              $     217,020              –$    5,000

________________________________________

Multiple Choice

1

4

2

3

Which of these is a capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project’s rate of return?

Multiple Choice

Net present value

Profitability index

Internal rate of return

Discounted payback

Compute the PI statistic for Project Z and advise the firm whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

Project Z

Time       0          1          2          3          4          5

Cash Flow      –$    1,000                 $     350             $     380             $     420             $     300             $     100

________________________________________

Multiple Choice

The project’s PI is 16.48 percent and the project should be accepted.

The project’s PI is 8.48 percent and the project should be accepted.

The project’s PI is 21.48 percent and the project should be accepted.

The project’s PI is 8.48 percent and the project should be rejected.

Which of the following is a capital budgeting technique that converts a project’s cash flows using a more consistent reinvestment rate prior to applying the Internal Rate of Return, IRR, decision rule?

Multiple Choice

Discounted payback

Modified internal rate of return

Profitability index

Net present value