Question: When evaluating a new project, firms should include in the projected cash flows all of the following EXCEPT:
A Changes in net operating working capital attributable to the project.
B Previous expenditures associated with a market test to determine the feasibility of the project provided those costs have been expensed for tax purposes.
C The value of a building owned by the firm that will be used for this project.
D A decline in the sales of an existing product provided that decline is directly attributable to this project.
E The salvage value of assets used for the project at the end of the project’s life.
Question: ZumBahlen Inc. is considering the following mutually exclusive projects:
At what cost of capital will the net present value of the two projects be the same? (That is, what is the “crossover” rate?)
Question: Your company, Q4 Inc., is considering a new project whose data are shown below. The required equipment has a 3-year tax life, and the MACRS 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 operating life. What is the project’s operating cash flow during Year 4?
Question: Rivoli Roofing is considering mutually exclusive Projects A and B, which have the following cash flows:
At what cost of capital would the two projects have the same net present value (NPV)?
Question: Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
A If Project A has a higher IRR than Project B, then Project A must have the lower NPV.
B If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
C The IRR calculation implicitly assumes that all cash flows are reinvested at the WACC.
D The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than being reinvested in the business.
E If a project has normal cash flows and its IRR exceeds its WACC, then the project’s NPV must be positive.
Question: Jazz World Inc. is considering a project that has the following cash flow and WACC data. What is the project’s NPV? Note that a project’s NPV can be negative, in which case it will be rejected.
Question: Which of the following statements is correct? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.
A A project’s regular IRR is found by discounting the cash inflows at the WACC to find the present value (PV), then compounding this PV to find the IRR
B If a project’s IRR is greater than the WACC, then its NPV must be negative
C To find a project’s IRR, we must solve for the discount rate that causes the PV of the inflows to equal the PV of the project’s costs
D To find a project’s IRR, we must find a discount rate that is equal to the WACC
Question: The regular payback method has a number of disadvantages. Which of these items are a disadvantage of this method?
A Lack of an objective, market-determined benchmark for making decisions.
B Ignores cash flows beyond the payback period.
C Does not directly account for the time value of money.
D All of these are disadvantages.
Question: Which of the following statements is most CORRECT?
A Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers.
B The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed.
C Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger.
D Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what’s probably a lower cost, diversification benefits are generally not a valid motive for a publicly held firm.
E All of the answers above are correct.
Question: Suppose that currently, 1 British pound equals 1.62 U.S. dollars and 1 U.S. dollar equals 1.62 Swiss francs. What is the cross exchange rate between the pound and the franc?
A 1 British pound equals 3.2400 Swiss francs
B 1 British pound equals 2.6244 Swiss francs
C 1 British pound equals 1.8588 Swiss francs
D 1 British pound equals 1.0000 Swiss francs
E 1 British pound equals 0.3810 Swiss francs
Question: Which of the following statements is most CORRECT?
A The high value of the U.S. dollar relative to Japanese and European currencies in the 1980s, made U.S. companies comparatively inexpensive to foreign buyers, spurring many mergers.
B During the 1980s, the Reagan and Bush administrations tried to foster greater competition and they were adamant about preventing the loss of competition; thus, most large mergers were disallowed.
C The expansion of the junk bond market made debt more freely available for large acquisitions and LBOs in the 1980s, and thus, it resulted in an increased level of merger activity.
D Increased nationalization of business and a desire to scale down and focus on producing in one’s home country virtually halted international mergers in the 1980s.
E Answers a and b are correct
Question: A company is considering a proposed new plant that would increase productive capacity. Which of the following statements is CORRECT?
A 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, it would in effect be “double counted.”
B Since depreciation is a non-cash expense, the firm does not need to deal with depreciation when calculating the operating cash flows.
C When estimating the project’s operating cash flows, it is important to include any opportunity costs and sunk costs, but the firm should ignore cash flow effects of externalities since they are accounted for in the discounting process.
D Capital budgeting decisions should be based on before-tax cash flows.
E The WACC used to discount cash flows in a capital budgeting analysis should be calculated on a before-tax basis.
Question: Sorenson Stores is considering a project that has the following cash flows:
The project has a payback of 2.5 years, and the firm’s cost of capital is 12%. Assume all cash flows occur evenly throughout the year. What is the project’s NPV?
Question: The Federal Reserve recently shifted its monetary policy, causing Lasik Vision’s WACC to change. Lasik had recently analyzed the project whose cash flows are shown below. However, the CFO wants to reconsider this and all other proposed projects in view of the Fed action. How much did the changed WACC cause the forecasted NPV to change? Assume that the Fed action does not affect the cash flows, and note that a project’s projected NPV can be negative, in which case it should be rejected.
Question: In 1985, a given Japanese imported automobile sold for 1,476,000 yen, or $8,200. If the car still sold for the same amount of yen today but the current exchange rate is 144 yen per dollar, what would the car be selling for today in U.S. dollars?
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