Question 1

Use the information for the question(s)below.
Epiphany Industries is considering a new capital budgeting project that will last for three years.Epiphany plans on using a cost of capital of 12% to evaluate this project.Based on extensive research,it has prepared the following incremental cash flow projects:
 
-The net present value (NPV)for Epiphany's Project is closest to:

Accepted Answer

11ea7fd1_1f77_5d54_99dd_f786a6fca67e_TB1622_00

Question 2

Cromwell Industries is considering a new project which will have costs,revenues,etc.as shown by the data above.If the cost of capital is 8.5%,what is the net present value (NPV)of this project?

Accepted Answer

The answer of 
Cromwell Industries is considering a new project...

Question 3

The change in net working capital from year 1 to year 2 is closest to:

Accepted Answer

The change in net working capital is calculated as the difference between the current assets and current liabilities. From year 1 to year 2, the current assets increased by $360 and the current liabilities decreased by $36, resulting in an increase in net working capital of $360.

Question 4

Bubba Ho-Tep Company reported net income of $300 million for the most recent fiscal year.The firm had depreciation expenses of $125 million and capital expenditures of $150 million.Although it had no interest expense,the firm did have an increase in net working capital of $20 million.What is Bubba Ho-Tep's free cash flow?

Accepted Answer

Free cash flow measures the amount of cash a company has left after accounting for its capital expenditures and working capital needs.

Free cash flow = Net Income - (Capital Expenditures + Depreciation) +/- Change in Net Working Capital

Plugging in the given values, we get:

Free cash flow = $300 million - ($150 million + $125 million) + $20 million 
Free cash flow = $25 million + $20 million 
Free cash flow = $45 million

Therefore, the correct answer is B) $255 million.

Question 5

Use the information for the question(s)below.
Epiphany Industries is considering a new capital budgeting project that will last for three years.Epiphany plans on using a cost of capital of 12% to evaluate this project.Based on extensive research,it has prepared the following incremental cash flow projects:
 
-The free cash flow for the last year of Epiphany's project is closest to:

Accepted Answer

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Question 6

The Sisyphean Company is considering a new project that will have an annual depreciation expense of $2.5 million.If Sisyphean's marginal corporate tax rate is 40% and its average corporate tax rate is 30%,then what is the value of the depreciation tax shield on the company's new project?

Accepted Answer

The depreciation tax shield is calculated as the depreciation expense multiplied by the marginal tax rate. Therefore, $2.5 million * 40% = $1,000,000.

Question 7

You are considering adding a microbrewery onto one of your firm's existing restaurants.This will entail an increase in inventory of $8000,an increase in accounts payables of $2500,and an increase in property,plant,and equipment of $40,000.All other accounts will remain unchanged.The change in net working capital resulting from the addition of the microbrewery is:

Accepted Answer

The answer of You are considering adding a microbrewery onto...

Question 8

Use the information for the question(s)below.
Shepard Industries is evaluating a proposal to expand its current distribution facilities.Management has projected the project will produce the following cash flows for the first two years (in millions).
 
-The depreciation tax shield for Shepard Industries project in year 2 is closest to:

Accepted Answer

The answer of Use the information for the question(s)below.
Shepard Industries...

Question 9

A garage is installing a new "bubble-wash" car wash.It will promote the car wash as a fun activity for the family,and it is expected that the novelty of this approach will boost sales in the medium term.If the cost of capital is 10%,what is the net present value (NPV)of this project?

Accepted Answer

The answer of 
A garage is installing a new "bubble-wash"...

Question 10

You are considering adding a microbrewery onto one of your firm's existing restaurants.This will entail an investment of $40,000 in new equipment.This equipment will be depreciated straight line over five years.If your firm's marginal corporate tax rate is 35%,then what is the value of the microbrewery's depreciation tax shield in the first year of operation?

Accepted Answer

A)First figure out the straight line depreciation.
$40,000/5 years = $8000 depreciation per year.
Then .35 × $8000 = $2800 depreciation tax shield per year.

Question 11

Use the information for the question(s)below.
Temporary Housing Services Incorporated (THSI)is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane.THSI will lease space in this facility to various agencies and groups providing relief services to the area.THSI estimates that this project will initially cost $5 million to set up and will generate $20 million in revenues during its first and only year in operation (paid in one year).Operating expenses are expected to total $12 million during this year and depreciation expense will be another $3 million.THSI will require no working capital for this investment.THSI's marginal tax rate is 35%.
-Ignoring the original investment of $5 million,what is THSI's free cash flow for the first and only year of operation?

Accepted Answer

D)FCF = (revenues - expenses - depreciation)× (1 - tax rate)+ depreciation
FCF = (20 - 12 - 3)× (1 - .35)+ 3 = 6.25

Question 12

Use the information for the question(s)below.
The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years.The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0.
The cane manufacturing machine will result in sales of 2000 canes in year 1.Sales are estimated to grow by 10% per year each year through year 3.The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant.The canes have a cost per unit to manufacture of $9 each.
Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts.It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash,4% of its annual sales in accounts receivable,9% of its annual sales in inventory,and 5% of its annual sales in accounts payable.The firm is in the 35% tax bracket and has a cost of capital of 10%.
-The required net working capital in the second year for the Sisyphean Corporation's project is closest to:

Accepted Answer

The answer of Use the information for the question(s)below.
The Sisyphean...

Question 13

Use the information for the question(s)below.
The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years.The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0.
The cane manufacturing machine will result in sales of 2000 canes in year 1.Sales are estimated to grow by 10% per year each year through year 3.The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant.The canes have a cost per unit to manufacture of $9 each.
Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts.It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash,4% of its annual sales in accounts receivable,9% of its annual sales in inventory,and 5% of its annual sales in accounts payable.The firm is in the 35% tax bracket and has a cost of capital of 10%.
-The required net working capital in the first year for the Sisyphean Corporation's project is closest to:

Accepted Answer

The answer of Use the information for the question(s)below.
The Sisyphean...

Question 14

Luther Industries has outstanding tax loss carryforwards of $70 million from losses over the past four years.If Luther earns $15 million per year in pretax income from now on,in how many years will Luther first pay taxes?

Accepted Answer

Luther can offset its $15 million annual pretax income with the $70 million tax loss carryforwards. It will take 5 years to fully utilize the $70 million ($15 million x 5 years = $75 million), so Luther will first pay taxes in the 5th year.

Question 15

Use the information for the question(s)below.
Shepard Industries is evaluating a proposal to expand its current distribution facilities.Management has projected the project will produce the following cash flows for the first two years (in millions).
 
-The depreciation tax shield for Shepard Industries project in year 1 is closest to:

Accepted Answer

The answer of Use the information for the question(s)below.
Shepard Industries...

Question 16

Use the information for the question(s)below.
Temporary Housing Services Incorporated (THSI)is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane.THSI will lease space in this facility to various agencies and groups providing relief services to the area.THSI estimates that this project will initially cost $5 million to set up and will generate $20 million in revenues during its first and only year in operation (paid in one year).Operating expenses are expected to total $12 million during this year and depreciation expense will be another $3 million.THSI will require no working capital for this investment.THSI's marginal tax rate is 35%.
-Assume that THSI's cost of capital for this project is 15%.The net present value (NPV)of this temporary housing project is closest to:

Accepted Answer

To calculate the NPV, we need to discount the project's cash flows at the cost of capital. The cash flows are as follows:

Year 0: -$5 million (initial investment)
Year 1: $20 million (revenues) - $12 million (operating expenses) - $3 million (depreciation) = $5 million (operating cash flow)

Using a financial calculator, we can calculate the NPV as follows:

CF0 = -5,000,000
CF1 = 5,000,000
I = 15%
N = 1
NPV = $435,114

Since the NPV is positive, the project is expected to generate a return higher than the cost of capital. Therefore, THSI should undertake the temporary housing project.

Question 17

A company buys tracking software for its warehouse which,along with the computer system and ancillaries to run it,will cost $1.8 million.This purchase will be deducted over five years.It is expected that the software will reduce inventory by $10.5 million at the end of the first year after it is installed,though there will be an annual cost of $120,000 per year to run the system.If the company's marginal tax rate is 40%,how will the purchase of this item change the company's free cash flows in the first year?

Accepted Answer

The correct answer is A. The purchase of the tracking software will increase the company's free cash flows in the first year by $10,020,000. This is calculated as follows:* Increase in inventory: $10.5 million* Annual cost of running the system: $120,000* Depreciation on the software: $1.8 million / 5 = $360,000* Tax savings on depreciation: $360,000 * 40% = $144,000* Free cash flow: $10.5 million - $120,000 - $360,000 + $144,000 = $10,020,000

Question 18

Your firm is considering building a new office complex.Your firm already owns land suitable for the new complex.The current book value of the land is $100,000;however,a commercial real estate agent has informed you that an outside buyer is interested in purchasing this land and would be willing to pay $650,000 for it.When calculating the net present value (NPV)of your new office complex,ignoring taxes,the appropriate incremental cash flow for the use of this land is:

Accepted Answer

The answer of Your firm is considering building a new...

Question 19

Use the information for the question(s)below.
Epiphany Industries is considering a new capital budgeting project that will last for three years.Epiphany plans on using a cost of capital of 12% to evaluate this project.Based on extensive research,it has prepared the following incremental cash flow projects:
 
-The free cash flow for the first year of Epiphany's project is closest to:

Accepted Answer

11ea7fd1_1f76_e822_99dd_6f7d1fa53d99_TB1622_00

Question 20

Use the table for the question(s)below.  
-A firm reports that in a certain year it had a net income of $4.5 million,depreciation expenses of $2.8 million,capital expenditures of $2.3 million,and Net Working Capital decreased by $1.5 million.What is the firm's free cash flow for that year?

Accepted Answer

The answer of Use the table for the question(s)below. ...

Quiz 9: Fundamentals of Capital Budgeting

Cromwell Industries is considering a new project which will have costs,revenues,etc.as shown by the data above.If the cost of capital is 8.5%,what is the net present value (NPV) of this project?

The change in net working capital from year 1 to year 2 is closest to:

The Sisyphean Company is considering a new project that will have an annual depreciation expense of $2.5 million.If Sisyphean's marginal corporate tax rate is 40% and its average corporate tax rate is 30%,then what is the value of the depreciation tax shield on the company's new project?

A garage is installing a new "bubble-wash" car wash.It will promote the car wash as a fun activity for the family,and it is expected that the novelty of this approach will boost sales in the medium term.If the cost of capital is 10%,what is the net present value (NPV) of this project?

Luther Industries has outstanding tax loss carryforwards of $70 million from losses over the past four years.If Luther earns $15 million per year in pretax income from now on,in how many years will Luther first pay taxes?

Use the table for the question(s) below. -A firm reports that in a certain year it had a net income of $4.5 million,depreciation expenses of $2.8 million,capital expenditures of $2.3 million,and Net Working Capital decreased by $1.5 million.What is the firm's free cash flow for that year?