1) Which of the following statements is false?
A) The NPV will be positive if the IRR is less than the cost of capital.
B) If the multiple IRR problem does not exist, any independent project acceptable by NPV method will also be acceptable by the IRR method.
C) When IRR = k (the cost of capital), NPV = 0.
D) The IRR can be positive even if the NPV is negative.
E) The NPV method is not affected by the multiple IRR problem.
2) The most widely used capital budgeting technique is:
A) the payback period.
B) net present value.
C) internal rate of return.
D) the profitability index.
E) modified internal rate of return.
3) The primary problem with the NPV technique of capital budgeting is:
A) that many people without a background in financial theory may not understand it.
B) that there is no adjustments for risk.
C) an unclear decision rule.
D) the fact that it ignores the time value of money.
E) that it uses unorthodox time value of money techniques.
4) An advantage of the net present value (NPV) method is that it:
A) does not employ time value of money techniques.
B) is easy to use when available capital or resources are limited.
C) does not rely on the cost of capital.
D) provides its users with a clear decision criterion.
E) provides a "bang for the buck" analysis for each project.
5) An NPV profile:
A) graphs the NPV at a variety of discount rates.
B) graphs the NPV at a variety of internal rates of return.
C) graphs the NPV at a variety of modified internal rates of return.
D) graphs the payback period at a variety of discount rates.
E) compares the NPV and the IRR to determine which mutually exclusive projects should be accepted.
6) An NPV profile is most helpful in dealing with what type of problem?
A) Difficulty in forecasting cash flows
B) The technical sophistication required to interpret NPV results
C) The fact that some projects may have multiple NPVs
D) Problems in estimating a firm's cost of capital
E) Making a decision about a project when recommendations from the payback and NPV calculations conflict
7) If only one capital budgeting technique could be used to evaluate a project, which of the following would be the most preferred?
A) Payback
B) IRR
C) MIRR
D) Profitability index
E) NPV
8) Analysts at Tabby Fur Storage predict that the net present value of a proposed new $10 million warehouse is $1 million. How should these findings be interpreted?
A) Although NPV is positive, its value is too low for such a large expenditure and as a result, the project should be rejected.
B) The project should be rejected because the NPV is less than the cost of the warehouse.
C) The project should be accepted because it will add value to the firm.
D) More information such as the payback period should be evaluated since the reliance on only one capital budgeting technique should be discouraged.
E) The project does not meet the acceptance criteria of the NPV method and should be rejected.
9) Pear Computer Corp. plans to introduce a new model called the Bartlett, whose sales are expected to grow rapidly until the computer becomes obsolete in five years. Net cash inflows to be realized at the end of the first year are $1 million, and they are expected to increase $1 million per year for each of the remaining 4 years. Cash outflows for production expenses are $3.5 million today and an additional $1.5 million at the end of the second year to increase capacity. If Pear's cost of capital is 10%, what is the project's NPV? Round to nearest whole dollar amount.
A) $9,412,700
B) $5,912,919
C) $6,173,452
D) $5,123,936
E) $8,998,418
10) Droids-R-Us Inc. (DRU), is considering the installation of a new production line to make service mechanoids. The cost of the new manufacturing equipment is $2.2 million. The machines are classified as 7-year properties. (MACRS rates are provided in the table, below.) The machines will be purchased at the beginning of 2014. (DRU uses a mid-year placed-in-service convention.) DRU's engineers estimate that the new assembly line could be ready for operations in early 2014. Annual EBITDA is forecasted to be $1.3M for 2014 and all subsequent years of the project. DRU's marginal tax rate is 35%. What is the value of the depreciation tax shield in 2015? (Do NOT assume that the equipment is salvaged in 2015.) Round your answers to the nearest dollar.
|
Year
|
5-Year
|
7-Year
|
10-Year
|
|
1
|
20.00%
|
14.29%
|
10.00%
|
|
2
|
32.00%
|
24.49%
|
18.00%
|
|
3
|
19.20%
|
17.49%
|
14.40%
|
|
4
|
11.52%
|
12.49%
|
11.52%
|
|
5
|
11.52%
|
8.93%
|
9.22%
|
11) A corporation has decided to replace an existing machine with a newer model. The old machine had an initial purchase price of $35,000, and has $20,000 in accumulated depreciation. If the 40% tax rate applies to the corporation and the old asset can be sold for $10,000, what will be the tax effect of the replacement?
A) No effect
B) Loss of $2,000
C) Refund of $2,000
D) Loss of $4,000
12)Using the following data, what is the change in net working capital?
|
Account
|
Change in Balance
|
|
Cash
|
+ $12,000
|
|
Accounts Payable
|
+ $21,000
|
|
Accrued Liabilities
|
+ $ 6,000
|
|
Depreciation
|
+ $10,000
|
|
Inventories
|
+ $24,000
|
A) -$4,000
B) -$1,000
C) +$9,000
D) +$19.000
13) The Boeing Corp. is considering building a new aircraft, the 787--larger than the 747 and larger than the Airbus A380. The company's Renton WA Facility, where 747s are currently manufactured, would have to be expanded. Expansion costs are forecast to be $2.5B, incurred at t = 0. Also at time t = 0, before production begins, inventory will be increased by $1.855B. Assume that this inventory is sold at the end of the project at t = 2. The first sales from operation of the new plant will occur at the end of year 1 (t = 1). Boeing forecasts sales of 220 planes in each of the two years. The plane will be sold for $130M each. The cost of manufacturing a plane is $115M. Annual overhead expenses are $775M. The construction facilities are classified as 15 year property. When the plant is closed it will be sold for $1B. The company is in the 34% marginal tax bracket. Boeing's cost of capital is 12%. What is the initial cash flow for the project?
MACRS Depreciation Rates
|
Year
|
10-Year
|
15-Year
|
|
1
|
10.00%
|
5.00%
|
|
2
|
18.00%
|
9.50%
|
|
3
|
14.40%
|
8.55%
|
A) -$645M
B) -$1,885M
C) -$2,500M
D) -$4,355M
E) -$5,000M