A cost that has already been paid, or the liability to pay has already been incurred, is a(n):
B.net working capital expense.
C.salvage value expense.
A firm’s WACC can be correctly used to discount the expected cash flows of a new project when that project:
A.has the same level of risk as the firm’s current operations.
B.will be financed solely with new debt and internal equity.
C.will be financed with the same proportions of debt and equity as those currently used by the overall firm.
D.will be financed solely with internal equity.
E.will be managed by the firm’s current managers.
A project costing $6,200 initially is expected to produce cash inflows of $2,860 a year for three years. After the three years, the project will be shut down and will be sold at the end of Year 4 for an estimated net cash amount of $3,300. What is the net present value of this project if the required rate of return is 11.3 percent?
A project has an initial cost of $10,600 and produces cash inflows of $3,700, $4,900, and $2,500 for Years 1 to 3, respectively. What is the project’s discounted payback period if the required rate of return is 7.5 percent?
A project will increase sales by $140,000 and cash expenses by $95,000. The project will cost $100,000 and will be depreciated using the straight-line method to a zero book value over the 4-year life of the project. The company has a marginal tax rate of 34 percent. What is the value of the annual depreciation tax shield?
A proposed project costs $300 and has cash flows of $80, $200, $75, and $90 for Years 1 to 4, respectively. Because of its high risk, the project has been assigned a discount rate of 16 percent. In dollars, how much will this project return in today’s dollars for every $1 invested?
A situation in which accepting one investment prevents the acceptance of another investment is called the:
A.mutually exclusive investment decision.
B.multiple rates of return decision.
C.issues of scale problem.
D.operational ambiguity decision.
E.net present value profile.
An analysis of what happens to the estimate of a project’s net present value when you examine a vast number of different likely economic situations is called _____ analysis.
An analysis of what happens to the estimate of net present value when only one variable is changed is called _____ analysis.
Comparing two otherwise equivalent firms, the beta of the common stock of a levered firm is _______ the beta of the common stock of an unlevered firm.
C.roughly equivalent to
Custom Cars purchased some $39,000 of fixed assets two years ago that are classified as 5-year MACRS property. The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. The tax rate is 34 percent. If the assets are sold today for $19,000, what will be the aftertax cash flow from the sale?
For a profitable firm, an increase in which one of the following will increase the operating cash flow?
Hall Corp. has 25,000 shares of common stock outstanding with a market price of $32 a share and an expected dividend yield of 5.7 percent. Dividends increase by 4.2 percent annually. The firm also has $450,000 of debt outstanding that is selling at 102 percent of par that has a yield to maturity of 6.8 percent. The tax rate is 35 percent. The firm is considering a project that has the same risk level as the firm’s current operations, an initial cost of $328,000 and cash inflows of $52,500, $155,000, and $225,000 for Years 1 to 3, respectively. What is the NPV of the project?
It will cost $3,000 to acquire a small ice cream cart. Ice cream sales are expected to be $1,400 a year for three years. After the three years, the cart is expected to be worthless as that is the expected remaining life of the cooling system. What is the payback period of the ice cream cart?
Jack’s Construction Co. has 80,000 bonds outstanding that are selling at par value. Bonds with similar characteristics are yielding 8.6 percent. The company also has 4 million shares of common stock outstanding. The stock has a beta of 1.1 and sells for $40 a share. The U.S. Treasury bill is yielding 4 percent and the market risk premium is 8 percent. Jack’s tax rate is 34 percent. What is Jack’s weighted average cost of capital?
Jamestown Ltd. currently produces boat sails and is considering expanding its operations to include awnings. The expansion would require the use of land the firm purchased three years ago at a cost of $142,000 that is currently valued at $137,500. The expansion could use some equipment that is currently sitting idle if $6,700 of modifications were made to it. The equipment originally cost $139,500 six years ago, has a current book value of $24,700, and a current market value of $39,000 if sold as is. Other capital purchases costing $780,000 will also be required. What is the amount of the initial cash flow for this expansion project?
Jamie’s Motor Home Sales currently sells 1,100 Class A motor homes, 2,200 Class C motor homes, and 2,800 pop-up trailers each year. Jamie is considering adding a mid-range camper and expects that if she does so she can sell 1,500 of them. However, if the new camper is added, Jamie expects that her Class A sales will decline to 850 units while the Class C camper sales decline to 2,000. The sales of pop-ups will not be affected. Class A motor homes sell for an average of $140,000 each. Class C homes are priced at $59,500 and the pop-ups sell for $5,000 each. The new mid-range camper will sell for $42,900. What is the erosion (or cannibalization) cost of adding the mid-range camper?
Kurt’s Cabinets is looking at a project that will require $80,000 in fixed assets and another $20,000 in net working capital. The project is expected to produce annual sales of $110,000 with associated costs of $70,000 per year. The project has a 4-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The tax rate is 35 percent. What is the annual operating cash flow for this project?
Lee’s Furniture just purchased $24,000 of fixed assets that are classified as 5-year MACRS property. The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. What is the amount of the depreciation expense for the third year?
Matt is analyzing two mutually exclusive projects of similar size. Both projects have 5-year lives. Project A has an NPV of $18,389, a payback period of 2.38 years, an IRR of 15.9 percent, and a discount rate of 13.6 percent. Project B has an NPV of $19,748, a payback period of 2.69 years, an IRR of 13.4 percent, and a discount rate of 12.8 percent. He can afford to fund either project, but not both. Matt should accept:
A.Project B based on its NPV.
B.neither project based on their IRRs.
C.Project A because of its IRR.
D.both projects as they both have positive NPVs.
E.Project A because of its payback period.
One purpose of identifying all of the incremental cash flows related to a proposed project is to:
A.identify any and all changes in the cash flows of the firm for the past year so they can be included in the analysis.
B.make each project appear as profitable as possible for the firm.
C.isolate the total sunk costs so they can be evaluated to determine if the project will add value to the firm.
D.include both the proposed and the current operations of a firm in the analysis of the project.
E.eliminate any cost which has previously been incurred so that it can be omitted from the analysis of the project.
Peter’s Audio has a yield to maturity on its debt of 7.8 percent, a cost of equity of 12.4 percent, and a cost of preferred stock of 8 percent. The firm has 105,000 shares of common stock outstanding at a market price of $22 a share. There are 25,000 shares of preferred stock outstanding at a market price of $45 a share. The bond issue has a total face value of $1.5 million and sells at 98 percent of face value. If the tax rate is 34 percent, what is the weighted average cost of capital?
Project A is opening a bakery at 10 Center Street. Project B is opening a specialty coffee shop at the same address. Both projects have unconventional cash flows, that is, both projects have positive and negative cash flows that occur following the initial investment. When trying to decide which project to accept, given sufficient funding to accept either, you should rely most heavily on the _____ method of analysis.
A.net present value
C.internal rate of return
Samson’s purchased a lot four years ago at a cost of $398,000. At that time, the firm spent $289,000 to build a small retail outlet on the site. The most recent appraisal on the property placed a value of $629,000 on the property and building. Samson’s now wants to tear down the original structure and build a new strip mall on the site at an estimated cost of $2.3 million. What amount should be used as the initial cash flow for the new project?
Tech Enterprises is considering a new project that will require $325,000 for fixed assets, $160,000 for inventory, and $35,000 for accounts receivable. Accounts payable and accruals are expected to increase by $100,000 in total. The project has a 5-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 25 percent of their original cost and the net working capital will return to its original level before the project. The project is expected to generate annual sales of $554,000 and costs of $430,000. The tax rate is 35 percent and the required rate of return is 15 percent. What is the net present value of this project?
The Adept Co. is analyzing a proposed project. The company expects to sell 3,100 units, give or take 5 percent. The expected variable cost per unit is $9 and the expected fixed costs are $10,500. Cost estimates are considered accurate within a plus or minus 4 percent range. The depreciation expense is $4,000. The sale price is estimated at $18 a unit, give or take 3 percent. What is the sales revenue under the most optimistic case scenario?
The By-Way Co. has sales of $435,000, costs of $254,000, depreciation of $35,000, interest expense of $22,000, and taxes of $43,400. What is the amount of the company’s operating cash flow?
The Galley Inc. purchased some 3-year MACRS property two years ago at a cost of $19,800. The MACRS rates are 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent. The firm no longer uses this property so is selling it today at a price of $13,500. What is the amount of the pretax profit on the sale?
The changes in a firm’s future cash flows that are a direct consequence of accepting a project are called the project’s _____ cash flows.
B.net present value
Other things remaining the same, the internal rate of return (IRR) for a project will increase if:
A.the initial cost of the project can be reduced.
B.the discount rate is increased.
C.each cash inflow is moved such that it occurs one year later than originally projected.
D.the total amount of the cash inflows is reduced.
E.the required rate of return is reduced.
The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the:
D.net working capital period.
E.discounted payback period.
The primary reason that company projects with positive net present values are considered acceptable is that:
A.they create value for the owners of the firm.
B.the required cash inflows exceed the actual cash inflows.
C.they return the initial cash outlay within three years or less.
D.the project’s rate of return exceeds the rate of inflation.
E.the investment’s cost exceeds the present value of the cash inflows.
Thornley Machines is considering a 3-year project with an initial cost for fixed assets of $618,000. The project will reduce operating costs by $265,000 a year. The equipment will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the equipment will be sold for an estimated $60,000. The tax rate is 34 percent. The project will require $23,000 in extra inventory at the beginning of its life. What is the NPV if the discount rate assigned to the project is 14 percent?
Walks Softly sells customized shoes. Currently, it sells 14,800 pairs of shoes annually at an average price of $59 a pair. It is considering adding a lower-priced line of shoes that will be priced at $39 a pair. Walks Softly estimates it can sell 6,000 pairs of the lower-priced shoes but will sell 3,500 less pairs of the higher-priced shoes by doing so. What annual sales revenue should be used when evaluating the addition of the lower-priced shoes?
What is the cost of equity for a firm that has a beta of 1.2 if the risk-free rate of return is 2.9 percent and the expected market return is 11.4 percent?
What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent.
When computing the weighted average cost of capital, which of these are adjusted for taxes?
A.the costs of all forms of financing
B.cost of equity
C.both the cost of equity and the cost of preferred stock
D.cost of debt
E.cost of preferred stock
Wilson’s Market is considering two mutually exclusive projects that will not be repeated. The required rate of return is 13.9 percent for Project A and 12.5 percent for Project B. Project A has an initial cost of $54,500, and is expected to produce net cash flows of $16,400, $28,900, and $31,700 for Years 1 to 3, respectively. Project B has an initial cost of $69,400, and is expected to produce net cash flows of $0, $48,300, and $42,100, for Years 1 to 3, respectively. Which project, or projects, if either, should be accepted and why?
A.neither project; because neither has an NPV equal to or greater than its initial cost
B.Project A; because its NPV is positive and greater than Project B’s NPV
C.Project B; because it has a negative NPV which indicates acceptance
D.Project A; because it has the higher required rate of return
E.Project B; because it has the largest total cash inflow
You spent $500 last week fixing the transmission in your car. Now, the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the $500 you spent fixing the transmission is a(n) _____ cost.
A company’s perpetual preferred stock currently sells for $92.50 per share, and it pays an $8.00 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 5.00% of the issue price. What is the firm’s cost of preferred stock?
As the winner of a contest, you are now CFO for the day for Maguire Inc. and your day’s job involves raising capital for expansion. Maguire’s common stock currently sells for $45.00 per share, the company expects to earn $2.75 per share during the current year, its expected payout ratio is 70%, and its expected constant growth rate in dividends is 6.00%. New stock can be sold to the public at the current price, but a flotation cost of 8% would be incurred. What is the company’s cost of newly issued equity?
Kenny Electric Company’s bonds were issued several years ago and now have 20 years to maturity. These bonds have a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm’s tax rate is 40%, what is its after-tax cost of debt?