FIN 370T Wk 5 – Apply: Homework

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FIN 370T Wk 5 – Apply: Homework
FIN 370T Wk 5 – Apply: Homework
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FIN 370T Wk 5 – Apply: Homework

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

  • −$1,800

  • +$1,800

  • +$200

 

 

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

  • complementary effect.

  • substitutionary effect.

  • opportunity effect.

  • pro forma effect

 

 

The research chemists at MegaClean created a new cleaner that keeps car and truck tires shiny and clean for one year. They believe that this product will be highly successful and will attract customers to purchase their existing line of household cleaning products. This is an example of:

Multiple Choice

  • sunk cost.

  • opportunity effect.

  • complementary effect.

  • substitutionary effect.

 

 

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

  • $24,000

  • $14,640

  • $11,600

  • $10,300

 

 

Effects that arise from a new product or service that decrease sales of the firm’s existing products or services are referred to as:

Multiple Choice

  • marginal effects.

  • substitutionary effects.

  • complementary effects.

  • sunk effects.

 

 

Suppose you sell a fixed asset for $112,000 when its book value is $112,000. 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

  • $112,000

  • $0

  • $34,720

  • $68,320

 

 

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

  • +$4,000

  • −$6,000

  • −$4,000

  • +$6,000

 

 

A new project would require an immediate increase in raw materials in the amount $17,000. The firm expects that accounts payable will automatically increase $7,000. How much must the firm expect its investment in net working capital to increase if they accept this project?

Multiple Choice

  • $7,000

  • $10,000

  • $17,000

  • $24,000

 

 

Suppose you sell a fixed asset for $75,000 when its book value is $80,000. If your company’s marginal tax rate is 35 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

  • $80,000

  • $5,000

  • $48,750

  • $76,750

 

 

AB Mining Company just commissioned a firm to identify if an unused portion of their mine contains any silver or gold at a cost of $125,000. This is an example of a(n):

Multiple Choice

  • incremental cash flow.

  • opportunity cost.

  • sunk cost.

  • relevant cash flow.

 

 

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

Multiple Choice

  • 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.

  • Get a government grant to purchase the asset.

 

 

Your company is considering a new project that will require $10,000 of new equipment at the start of the project. The equipment will have a depreciable life of five years and will be depreciated to a book value of $3,000 using straight-line depreciation. The cost of capital is 9 percent, and the firm’s tax rate is 34 percent. Estimate the present value of the tax benefits from depreciation.

Multiple Choice

  • $1,400

  • $924

  • $1,851

  • $476

 

 

Your company is considering a new project that will require $100,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $5,000 using straight-line depreciation. The cost of capital is 14 percent, and the firm’s tax rate is 30 percent. Estimate the present value of the tax benefits from depreciation.

Multiple Choice

  • $14,865.93

  • $14,030.79

  • $15,017.25

  • $15,997.13

 

 

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

  • $381.36

  • $586.07

  • $601.51

  • $428.04

 

 

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

  • 3.86 years, accept

  • 3.45 years, accept

  • 3.86 years, reject

  • 3.45 years, reject

 

 

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

  • $262,622.77

  • $248,962.50

  • $247,410.67

  • $183,507.96

 

 

Compute the NPV statistic for Project Y given the following cash flows and if the appropriate cost of capital is 12 percent.

Project Y

 

Time       0          1          2          3          4          5

Cash Flow      –$    10,000               $     3,000                 $     4,000                 $     1,000                 $     2,000                   $     500

________________________________________

Multiple Choice

  • −$1,866.12

  • −$1,539.14

  • $18,133,88

  • −$1,366.99

 

 

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 18.19 percent and the project should be accepted.

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

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

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

 

 

We accept projects with a positive NPV because it means that:

Multiple Choice

  • we have recovered all our costs.

  • we are creating wealth for shareholders.

  • the project’s expected return exceeds the cost of capital.

  • all of the options.

 

 

Compute the NPV for Project X with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

 

Time       0          1          2          3          4

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

________________________________________

Multiple Choice

  • $248,962.50

  • $247,410.67

  • $183,507.96

  • $262,622.77

 

 

Compute the NPV statistic for Project X given the following cash flows if the appropriate cost of capital is 12 percent.

Project X

 

Time       0          1          2          3          4

Cash Flow      –$    15,000               $     6,000                 $     10,000               $     12,000               –$    1,000

________________________________________

Multiple Choice

  • $6,234.93

  • $7,505.96

  • $8,417.80

  • $37,505.96

 

 

When choosing between two mutually exclusive projects using the payback period method for evaluating capital projects, one would choose:

Multiple Choice

  • the project that pays back the soonest if it is equal to or less than managers’ maximum payback period.

  • the project that pays back the soonest.

  • either project if they both are more than managers’ maximum payback period.

  • neither project if they both are less than managers’ maximum payback period.

 

 

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

  • $993.97

  • $1,008.03

  • $894.37

 

 

Which of the following statements is correct?

Multiple Choice

  • A weakness of both payback and discounted payback is that neither accounts for cash flows received after the payback.Correct

  • Discounted payback uses a more aggressive reinvestment rate assumption than payback.

  • Neither payback nor discounted payback uses time value of money concepts.

  • None of the statements are correct.

 

 

Compute the IRR statistic 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 10 percent.

 

Time:      0     1     2     3     4     5

Cash flow:      −75  −75  0     100  75    50

Multiple Choice

  • 10 percent, reject

  • 10 percent, accept

  • 13.26 percent, accept

  • 13.26 percent, reject

 

 

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

  • Profitability index

  • Net present value

  • Modified internal rate of return

  • Discounted payback

 

 

A decision rule and associated methodology for converting the NPV statistic into a rate-based metric is referred to as:

Multiple Choice

  • profitability index.

  • MIRR.

  • NPV.

  • discounted payback.

 

 

Which of the following best describes the NPV profile?

Multiple Choice

  • A graph of a project’s NPV as a function of possible IRRs.

  • A graph of a project’s NPV over time.

  • A graph of a project’s NPV as a function of possible capital costs.

  • None of the statements are correct.

 

 

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

 

Time       0          1          2          3          4

Cash Flow      –$    15,000               $     6,000                 $     10,000               $     12,000               $     1,000

________________________________________

Multiple Choice

  • 2

  • 3

  • Unable to determine unless we have the cost of capital.

  • 1

 

 

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

  • Internal rate of return

  • Discounted payback

  • Profitability index

  • Net present value