ML301 Capital Budgeting Posted by Chathura Sandeepa Date October 27, 2021 Comments 0 comment Welcome to your ML301 Capital Budgeting 1. Which of the following items will lead to a rise in net working capital?A. Raw materials are purchased prior to the sale of finished goodsB. The firm increases its cash balanceC. The firm makes a sale on creditD. The firm buys inventory on creditE. Short-term interest rates falla. A,B,Cb. A,B,D,Ec. A,Cd. A,B,C,D 2. A project will generate a real cash flow three years from now of $100,000. If the nominal discount rate is 10% and expected inflation is 3%, what is the nominal cash flow for year 3?a. $112,551b. $106,090c. $109,273d. $122,504 3. Paul earns $60,000 as an engineer, and he is considering quitting his job and going to graduate school. This $60,000 should be treated as a if Paul runs an NPV analysis of his graduate degree.a. sunk costb. opportunity costc. fixed costd. cannibalization cost 4. Fox Entertainment is evaluating the NPV of launching a new iPet product. Fox paid a market research firm $120,000 last year to test the market viability of iPet. Fox Entertainment should treat this $120,000 as a for the capital budgeting decision now confronting the firm.a. fixed costb. opportunity costc. sunk costd. cannibalization cost Exhibit 9-2The following data are projected for a possible investment project: 1 2 3 4 Revenues $120,000 $140,000 $160,000 $180,000 Cost of Goods Sold $ 36,000 $ 42,000 $ 48,000 $ 54,000 Depreciation $ 80,000 $ 60,000 $ 40,000 $ 20,000 EBIT NARREND $ 4,000 $ 38,000 $ 72,000 $106,000 5. Refer to Exhibit 9-2. The project requires an initial investment of $300,000. Working capital is anticipated to be variable at 10% of revenues; the working capital investment must be made at the beginning of each period, and will be recaptured in full at the end of year The tax rate is 40%.What is the initial cash outlay?a. $300,000b. $312,000c. $232,000d. $220,000 6. Refer to Exhibit 9-2. The project requires an initial investment of $300,000. Working capital is anticipated to be variable at 10% of revenues; the working capital investment must be made at the beginning of each period, and will be recaptured in full at the end of year 4. The tax rate is 40%.What is the net cash flow to the firm in year 1?a. $48, 400b. $82,400c. $68,400d. $80,400e. $2,400 7. Refer to Exhibit 9-2. The project requires an initial investment of $300,000 on equipment. Working capital is anticipated to be variable at 10% of revenues; the working capital investment must be made at the beginning of each period, and will be recovered in full at the end of year 4. Equipment will be sold at its book value at the end of year 4. The tax rate is 40%.What is the net cash flow to the firm in year 4?a. $101,600b. $201,600c. $183,600d. $161,600 8. Refer to Exhibit 9-2. The project requires an initial investment of $300,000 on equipment. Working capital is anticipated to be variable at 10% of revenues; the working capital investment must be made at the beginning of each period, and will be recovered in full at the end of year 4. Equipment will be sold at its book value at the end of year 4. The tax rate is 40%.What is the net present value of the project if the firm’s discount rate is 10%?a. -$20,225b. -$41,731c. $24,155d. $26,570 9. Future Semiconductor is considering the purchase of photolithography equipment that will cost $3 million. The equipment requires maintenance of $5,000 at the end of each of the next five years. After five years it will be sold for $500,000. Assume a cost of capital of 15% and no taxes. What is the present value of the cost of the equipment? What is the equivalent annual cost of the equipment?a. $3,016,761; $899,947b. $2,516,760; $750,789c. $2,407,106; $718,077d. $2,768,172; $825,789 10. Sam’s Insurance must choose between two types of printers. Both printers meet the firm’s quality standard. Printer A costs $3,500 and is expected to last 3 years with operating costs of $380 per year. Printer B costs $2,500 and is expected to last 2 years with operating costs of $400 per year. Assume a discount rate of 10%. Which printer should Sam’s Insurance purchase? What is the equivalent annual cost of this machine?a. Printer B; $3,194b. Printer A; $1,625c. Printer B; $2,904d. Printer A, $1787.40 11. Arizona Truck Company (ATC) is considering the replacement of an old truck. The old truck can be sold for $7,800 now. If it is sold in one year, the resale price will be $5,500, but ATC will spend $2,500 just before selling the truck to make it attractive to a buyer. Assume a cost of capital of 12%. What is the total cost of keeping the old truck for one more year? Express the cash flow in terms of its future value one year from now.a. $5,121b. $5,736c. $4,800d. $5,376e. None of the above 12. A firm that manufactures DVD players for automakers currently has excess capacity. The firm expects that it will exhaust its excess capacity in three years. At that time it will have to invest $2 million to build new capacity. Suppose that the firm can accept additional work as a subcontractor for another company. By doing so, the firm will receive a net cash inflow of $120,000 immediately and in each of the next two years. However, the firm will have to begin expansion two years earlier than originally planned to bring new capacity on line. Assume a discount rate of 10%.What is the NPV if the firm accepts the subcontractor job?a. $328,264b. -$18,843c. $12,712d. $298,422 13. A project generates the following sequence of cash flows over two years: Year Cash Flow ($ in millions) 0 -40.00 1 8.00 2 10.00 Assume that cash flows after the second year grow at 2% annually in perpetuity, and the discount rate is 12%. What is the NPV of the project?a. $56.4mb. $54.8mc. $47.7 md. $50.4m 14. Kelley Group is considering an investment of $2 million in an asset with an economic life of four years. The cash revenues and expenses in year 1 are expected to be $1.8m and $0.5m respectively. Both revenues and expenses are expected to grow at 3 percent per year. The asset will be fully depreciated to zero using the straight line method over its economic life. The salvage value of the asset is expected to be $0.3m at the end of the fourth year. Kelley Group also needs to add net working capital of $0.1m immediately, and this capital will be recovered in full at the end of the project’s life. The tax rate is 40%. What is the investment’s cash flow in year 4?a. $1.1323mb. $1.4523mc. $1.3323md. $1.3579m 15. The value of a project at a given future point in time is known as:a. the terminal value.b. net working capital.c. opportunity cost.d. sunk cost. 16. The percentage of taxes owed on an incremental dollar of income is called:a. the minimum tax rate.b. the marginal tax rate.c. the average tax rate.d. the maximum tax rate. 17. Cash Flows that occur if and only if a project is accepted are:a. sunk costs.b. terminal costs.c. incremental cash flows.d. current cash flows. 18. Cash flows on an alternative investment that a firm decides not to make are a(n):a. opportunity cost.b. sunk cost.c. terminal value.d. incremental cash flow. 19. A cash outlay that has already been committed whether a project is accepted or not is known as a:a. opportunity cost.b. terminal value.c. net cost.d. sunk cost. 20. The difference between current assets and current liabilities is known as:a. working capital.b. net working capital.c. terminal capital.d. marginal capital. 21. When a firm introduces a new product and some of the new product’s sales come at the expense of the firm’s existing products, this is known as:a. sunk costs.b. incremental costs.c. marginal costs.d. cannibalization. 22. Sunk costs:a. are irrelevant.b. should be considered when determining an investment’s relevant cash flows.c. are equal to the firm’s opportunity costs.d. all of the above. 23. Opportunity costs:a. are irrelevant.b. should be considered when determining an investment’s relevant cash flows.c. are equal to the firm’s sunk costs.d. all of the above. 24. To help rank projects in a capital rationing environment, managers often use the:a. profitability index.b. internal rate of return.c. payback method.d. accounting rate of return 25. The makes capital budgeting complicated.a. human element, lessb. human element, morec. human analysis, mored. human analysis, less Time is Up!Time's up Share: Chathura Sandeepa Previous post Test Your Knowledge - SL2 October 27, 2021 Next post CL1 Concept Test - Paper 1 November 2, 2021