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Exam 11: Capital Budgeting Cash Flows and Risk Refinements

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Question 101

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Cash outlays that had been previously made and have no effect on the cash flows relevant to a current decision are called

A) incremental historical costs.
B) incremental past expenses.
C) opportunity costs foregone.
D) sunk costs.

E) B) and C)
F) All of the above

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Question 102

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Table 11.10 Johnson Farm Implement is faced with two mutually exclusive projects, P and Q. The following are the data about the two projects. -Evaluate the projects using risk-adjusted discount rates. (See Table 11.10)

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NPV_P = 15,000 (2.487)...

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Question 103

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A firm is evaluating two mutually exclusive projects that have unequal lives. The firm must evaluate the projects using the annualized net present value approach and recommend which project they should select. The firm's cost of capital has been determined to be 14 percent, and the projects have the following initial investments and cash flows:

Table 11.12 Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent. -The NPVs of projects A and B are ________. (See Table 11.12)

All projects should always use the WACC as the required return for capital budgeting purposes.

Risk-adjusted discount rates (RADRs) are the risk-adjustment factors that represent the percent of estimated cash inflows that investors would be satisfied to receive for certain rather than the cash inflows that are possible for each year.

The three major cash flow components include the initial investment, operating cash inflows, and terminal cash flows.

Simulation analysis is a behavioral approach that evaluates the impact on the firm's return of simultaneous changes in a number of variables.

To calculate the initial investment, we subtract all cash inflows occurring at time zero from all cash outflows occurring at time zero.

A corporation is selling an existing asset for $1,700. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is

All benefits expected from a proposed project must be measured on a cash flow basis which may be found by adding any non-cash charges deducted as an expense on the firm's income statement back to net profits after taxes.

The change in net working capital when evaluating a capital budgeting decision is

Table 11.4 Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent. *Not applicable -For Proposal 2, the tax effect on the sale of the existing asset results in ________. (See Table 11.4)

Table 11.8 A firm is considering investment in a capital project which is described below. The firm's cost of capital is 18 percent and the risk-free rate is 6 percent. The project has a risk index of 1.5. The firm uses the following equation to determine the risk adjusted discount rate, RADR, for each project: RADR = Rf + Risk Index (Cost of capital - Rf) -The net present value of the project when adjusting for risk is ________. (See Table 11.8)

Table 11.4 Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent. *Not applicable -For Proposal 3, the annual incremental after-tax cash flow from operations for year 3 is ________. (See Table 11.4)