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Exam 4: Capital Budgeting and Business Valuation

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Question 61

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Given the following information, calculate NPV: Initial investment is $50,000; inflows for the next four years are $12,000, $4,000, $12,000, $13,000; required rate of return is 8%.

A) $83,622
B) - $16,378
C) - $10,427
D) $0

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Question 62

Multiple Choice

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Use the following information to answer the question below. A project has an initial cost of $50,000. The incremental inflows associated with the project are $20,000 in year one, $15,000 in years two and three, and $10,000 in year four. The appropriate discount rate for this project is 11%. -What is the project's payback?

A) 4.0 years
B) 3.5 years
C) 2.5 years
D) 3.0 years

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Question 63

Multiple Choice

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The change in net working capital is measured by the change in:

If there are multiple IRRs, how will you resolve the conflict?

An asset with a book value of $85,000 is sold for $80,000. This is recorded in the financial statements as a loss on disposal. Why?

Given the following information, calculate the price paid for this common stock:

Calculate the payback period for the following investment: A machine costs $100,000 with installation costs of $15,000. Cash inflows are expected to be 26,000 per year for the next seven years.

Use the following information to answer the question below. You have been asked by the CEO of Gastric Anxiety Supplier (GAS) to evaluate the proposed acquisition of a new Standardized Test Templater (PowerPoint based) for the firm's accounting area. A recently completed $100,000 marketing survey demonstrates a high demand for the product. The equipment's basic price is $740,000 and it would cost another $220,000 to modify it for high altitude (Wasatch Mountain) use. The templater will be assigned to an asset class with a CCA rate of 60% declining balance. It will be sold after 3 years for $200,000. Use of the equipment would require a one-time increase in net working capital (spare parts inventory) of $75,000. The templater would have no effect on revenues, but it is expected to save the firm $440,000 per year in pre-tax operating costs, mainly labor. The firm's tax rate is 40 percent. Gastric uses a discount rate of 20%. -What will be the present value of the of the operating cost savings over the life of the project?

In cases of ranking conflict among mutually exclusive projects where the NPV and IRR methods give different results, which project should be chosen? Why?

The expected return of a current portfolios is 10%. A new project addition is being considered. The new project would comprise 40% of the entire new portfolio. The expected return of the new project is 11%. Calculate the expected return of the entire new portfolio.

A firm is considering a project with a net present value of zero. Should the project be rejected? Would it be an automatic decision. Explain.

Depreciation associated with a project will:

Book value is equal to:

Calculate the NPV and the IRR for the following project and state whether or not you would accept the new project.

The discounted cash flow model for bonds is best described as:

A zero- coupon bond will have a price:

Use the following information to answer the question below. A project has an initial cost of $50,000. The incremental inflows associated with the project are $20,000 in year one, $15,000 in years two and three, and $10,000 in year four. The appropriate discount rate for this project is 11%. -What is the project's NPV?

Which of the following is correct?

A bond with a fixed coupon has the following relationship with the market required return other things being equal:

What is a real option that may be embedded in a capital budgeting project? Does this add or subtract value from the project?