Question 1

Marshall-Miller & Company is considering the purchase of a new machine for $50,000, installed. The machine has a tax life of 5 years, and it can be depreciated according to the following rates. The firm expects to operate the machine for 4 years and then to sell it for $12,500. If the marginal tax rate is 40%, what will the after-tax salvage value be when the machine is sold at the end of Year 4?

Accepted Answer

The answer of Marshall-Miller & Company is considering the purchase...

Question 2

Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?

Accepted Answer

The cost of a study completed last year is a sunk cost and should not be included in the capital budgeting analysis as it does not result in incremental cash flows.

Question 3

Langston Labs has an overall (composite) WACC of 10%, which reflects the cost of capital for its average asset. Its assets vary widely in risk, and Langston evaluates low-risk projects with a WACC of 8%, average-risk projects at 10%, and high-risk projects at 12%. The company is considering the following projects:  Which set of projects would maximize shareholder wealth?

Accepted Answer

The answer of Langston Labs has an overall (composite) WACC...

Question 4

Your company, CSUS Inc., is considering a new project whose data are Shown below. The required equipment has a 3-year tax life, and the accelerated rates for such property are 33%, 45%, 15%, and 7% for Years
1 through 4. Revenues and other operating costs are expected to be constant over the project's 10-year expected operating life. What is the project's Year 4 cash flow?

Accepted Answer

The answer of Your company, CSUS Inc., is considering a...

Question 5

Clemson Software is considering a new project whose data are shown below. The required equipment has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight-line method over 3 years. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's Year 1 cash flow?

Accepted Answer

The answer of Clemson Software is considering a new project...

Question 6

A company is considering a proposed new plant that would increase productive capacity. Which of the following statements is CORRECT?

Accepted Answer

In calculating the project's operating cash flows, the firm should not deduct financing costs such as interest expense, because financing costs are accounted for by discounting at the WACC. If interest were deducted when estimating cash flows, this would, in effect, "double count" it.

Question 7

Which of the following rules is CORRECT for capital budgeting analysis?

Accepted Answer

The answer of Which of the following rules is CORRECT...

Question 8

Your company, RMU Inc., is considering a new project whose data are shown below. What is the project's Year 1 cash flow?

Accepted Answer

The answer of Your company, RMU Inc., is considering a...

Question 9

As a member of UA Corporation's financial staff, you must estimate the Year 1 cash flow for a proposed project with the following data. What is the Year 1 cash flow?

Accepted Answer

The answer of As a member of UA Corporation's financial...

Question 10

As assistant to the CFO of Boulder Inc., you must estimate the Year 1 cash flow for a project with the following data. What is the Year 1 cash flow?

Accepted Answer

The answer of As assistant to the CFO of Boulder...

Question 11

A firm is considering a new project whose risk is greater than the risk of the firm's average project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for management to do which of the following?

Accepted Answer

If the risk of the project is greater than the risk of the firm's average project, management should increase the cost of capital used to evaluate the project to reflect its higher-than-average risk. This is because a higher cost of capital would result in a lower NPV, which would better reflect the increased risk. Increasing the estimated IRR or NPV would not be appropriate, as this would not reflect the increased risk. Rejecting the project solely because of its increased risk may not be the best decision, as the project may still have positive NPV and be worth accepting. Ignoring the risk differential, even if the project represents a small fraction of the firm's total assets, would be shortsighted as the project's risk level is still relevant to the decision-making process.

Question 12

Liberty Services is now at the end of the final year of a project. The equipment originally cost $22,500, of which 75% has been depreciated. The firm can sell the used equipment today for $6,000, and its tax rate is 40%. What is the equipment's after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment's final market value is less than its book value, the firm will receive a tax credit as a result of the sale.

Accepted Answer

The answer of Liberty Services is now at the end...

Question 13

Which of the following statements is CORRECT?

Accepted Answer

The opportunity cost of using an asset that could be sold or leased should be included in the project's cash flows as it represents a foregone benefit.

Question 14

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 15

Currently, Powell Products has a beta of 1.0, and its sales and profits are positively correlated with the overall economy. The company estimates that a proposed new project would have a higher standard deviation and coefficient of variation than an average company project. Also, the new project's sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong. On the basis of this information, which of the following statements is CORRECT?

Accepted Answer

The answer of Currently, Powell Products has a beta of...

Question 16

Temple Corp. is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage value. No new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV?

Accepted Answer

The answer of Temple Corp. is considering a new project...

Question 17

Dalrymple Inc. is considering production of a new product. In evaluating whether to go ahead with the project, which of the following items should NOT be explicitly considered when cash flows are estimated?

Accepted Answer

Sunk costs, such as the $3 million already spent on research, should not be considered in the decision-making process as they cannot be recovered and do not affect future cash flows.

Question 18

Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?

Accepted Answer

Sunk costs are not included in capital budgeting analysis because they are not incremental cash flows.

Question 19

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 20

Sub-Prime Loan Company is thinking of opening a new office, and the key data are shown below. The company owns the building that would be used, and it could sell it for $100,000 after taxes if it decides not To open the new office. The equipment for the project would be depreciated by the straight-line method over the project's 3-year life, after which it would be worth nothing and thus it would have a zero salvage value. No new working capital would be required, and revenues and other operating costs would be constant over the project's 3-year life. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.)

Accepted Answer

The answer of Sub-Prime Loan Company is thinking of opening...

Quiz 11: Cash Flow Estimation and Risk Analysis

Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?

A company is considering a proposed new plant that would increase productive capacity. Which of the following statements is CORRECT?

Which of the following rules is CORRECT for capital budgeting analysis?

Your company, RMU Inc., is considering a new project whose data are shown below. What is the project's Year 1 cash flow?

As a member of UA Corporation's financial staff, you must estimate the Year 1 cash flow for a proposed project with the following data. What is the Year 1 cash flow?

As assistant to the CFO of Boulder Inc., you must estimate the Year 1 cash flow for a project with the following data. What is the Year 1 cash flow?

A firm is considering a new project whose risk is greater than the risk of the firm's average project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for management to do which of the following?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Dalrymple Inc. is considering production of a new product. In evaluating whether to go ahead with the project, which of the following items should NOT be explicitly considered when cash flows are estimated?

Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?

Which of the following statements is CORRECT?