Finance 445 Practice Exam Chapters 1, 2, 5, and part of Chapter 6. Part One. Multiple Choice Questions.


 Dale White
 1 years ago
 Views:
Transcription
1 Finance 445 Practice Exam Chapters 1, 2, 5, and part of Chapter 6 Part One. Multiple Choice Questions. 1. Similar to the example given in class, assume that a corporation has $500 of cash revenue and $300 of cash expenses. Therefore the corporation has $200 of taxable income. The corporation pays taxes at the 40% income tax rate (i.e., all of the $200 of taxable income will be taxed at 40%). The corporation plans to pay any cash left over after the payment of income taxes to the stockholders. If the stockholders pay taxes at the 20% tax rate (i.e., any dividends they receive will be taxed at 20%), how much income tax (both corporate and individual) will be paid? A. $82 B. $104 C. $112 D. $116 E. $120 F. $ A project requires an initial investment of $10 million and produces a single positive cash flow in one year. The opportunity cost of capital for the project is 8%. The expected return for the project is X%. Which of the following statements is true? A. The project will create value for the owner only if the expected return for the project is greater than 8%. B. The project will create value for the owner if the expected return for the project is greater than 0% (even if the expected return is less than 8%) 3. A project requires an initial investment of $1000 and produces one of two cash flows in one year: $1300 or $900. The probability of the $1300 cash flow is 40%. The probability of the $900 cash flow is 60%. Using a 10% discount rate, what is the NPV of the project? A. $ B. $60.00 C D. $36.36 E. $60.00 F. $ Today is January 1, A newly formed corporation raises $10 million through a stock issue and uses the money to purchase $10 million of land, buildings, and equipment in order to undertake a new project. The corporation has no other assets. Therefore, the January 1, 2000 book value (accounting value) for the assets is $10,000,000. Managers of the corporation and outside investors know that the project NPV is negative. Based on this, the market value of the firm s assets is the book value of its assets. A. Greater than B. Thesameas C. Less than 5. The internal rate of return for Project A is 6%. Using an opportunity cost of capital of 8%, the NPV for Project A is +$250. Based on this information: A. The modified internal rate of return will be greater than 8%. B. The modified internal rate of return will be greater than 6%, but less than 8%. C. The modified internal rate of return will be less than 6%. D. There are not enough facts to answer this question.
2 6. The internal rate of return for the following project is 14.80%. Using a 5% opportunity cost of capital, compare the project s internal rate of return with its modified internal rate of return $100 $100 $100 $100 $100 $100 $1000 A. The internal rate of return is greater than the modified internal rate of return. B. The internal rate of return is less than the modified internal rate of return. 7. A project has a negative cash flow at time zero, a positive cash flow at time one, and a negative cash flow at time two. Because the project has two sign changes, there could be two internal rates of return. (Assume that there are two internal rates of return in this case.) With two sign changes: A. There will be one net present value. B. There will be two net present values. C. There could either be oneortwonet present values. (More information is needed to determine the exact number of net present values.) 8. Using a 5% opportunity cost of capital, what is the modified internal rate of return of the following cash flow stream? 0 1 +$100 $120 A % B % C % D % E % F % 9. A firm is considering a tenyear project that will require the purchase of one of two different depreciable assets. Both will cost $100,000 and both will be worthless at the end of the project. Either asset could be used on the project with no difference in the project s incremental cash flows (other than possible depreciation effects). Since the firm uses straightline depreciation for financial statement reporting purposes, the accounting depreciation is $10,000 per year for both assets. However for tax purposes, the first depreciable asset is classified as fiveyear MACRS property and the second as sevenyear MACRS property. Assuming that the firm is in the 34% income tax bracket for each of the years of the analysis, and using a 5% opportunity cost of capital, which of the two depreciable assets will produce the highest project NPV? (Hint: The follow table gives the yearly MACRS taxdepreciation rates.) year 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% 7year 14.29% 24.49% 17.49% 12.49% 8.93% 8.93% 8.93% 4.45% A. The project NPV is the same using either of the two depreciable assets. B. The first depreciable asset (the fiveyear MACRS asset). C. The second depreciable asset (the sevenyear MACRS asset). 10. A firm is considering a fiveyear project that will require the purchase of inventory. The firm will purchase 1000 units of inventory for $1 per unit once a month for the next 60 months. (Assume no inflation in the purchase price.) Using a 5% opportunity cost of capital, the NPV of the project is $5000 if the firm will make payment for the inventory one month after purchase. Assume that the supplier will allow the firm to make
3 payment two months after purchase without any penalty. Continuing to use the 5% opportunity cost of capital, what effect will this change in assumption have on the project NPV? A. The NPV will be higher than $5000. B. The NPV will be equal to $5000. C. The NPV will be lower than $ A firm is considering two possible projects. The first project will require an initial investment of $100,000 and produces positive cash flows of $20,000 a year for the next 10 years. In addition to these cash flows, this project will increase cash flows on the firm s existing projects by $5000 per year. The second project also requires an initial investment of $100,000 and produces positive cash flows of $20,000 a year for the next 10 years. In addition, it also affects the cash flows of the firm s existing projects. However, unlike the first project, this second project will decrease cash flows on the firm s existing projects by $5000 per year. Using a 5% opportunity cost of capital, which of the projects have the higher NPV? A. The first project. B. The second project. C. Both projects have the same NPV. (The effects on the cash flows of the firm s other existing projects should be ignored in the analysis.) 12. A project requires an initial investment of $5000 and produces positive cash flows of $X per year for five years. Using a 7% opportunity cost of capital, the equivalent annual cash flow (EAC) for the project is $ Which of the two cash flow streams will have the higher NPV using a 7% discount rate? Cash Flow #1 $5000 $X $X $X $X $X Cash Flow #2 $ $ $ $ $ $ A. Cash Flow #1 B. Cash Flow #2 C. Both cash flows have the same NPV. 13. You are trying to decide whether you should replace an old machine with a new machine this year or wait until next year. One part of the NPV calculation in this machine replacement analysis is the estimated cash flows associated with the salvage value of the old machine. Assume that your company has a marginal income tax rate of 34%. You originally estimate the salvage value of the old machine as $50,000 if sold today and $35,000 if sold in one year. Based on this (and your analysis of the other cash flows from replacing the old machine), and using a 5% discount rate, you determine that the NPV associated with replacing the old machine with a new machine this year (t = 0), instead of next year (t = 1), is $0. After thinking about it more, you now think that the salvage value of the old machine if it is sold in one year is $36,000 (instead of $35,000). Keeping all of the other assumptions the same, this single change in assumptions will: A. Make the NPV positive (i.e., you should replace the old machine with a new machine at t = 0). B. Make the NPV negative (i.e., you should not replace the old machine with a new machine at t = 0). C. Have no effect on the NPV (i.e., the NPV remains equal to zero). Problem Questions. 1. The U.S. Government is offering the ability to rent forest service land with the following terms: Rental period = Perpetual Rental payments = Once a year (skip every seventh payment, i.e., no payment due in year 7, 14, 21, 28, etc.) Rental payments = $10,000 (no inflation) Use a real discount rate = 3% For example, the cash flows through year 10 look like this:
4 $0 $10000 $10000 $10000 $10000 $10000 $10000 $0 $10000 $10000 And so on What is the present value of the rent cash flows? 2. It is January 1, 2000 and ABC Inc. (a calendar year taxpayer) is considering a project. If the project is not accepted, ABC Inc. will have $102,000 of state taxable income. If the project is accepted, ABC Inc. will have $122,000 of state taxable income. As in class, assume that the corporation accurately estimates the Kentucky state income tax and pays this amount to the State of Kentucky during the year Using the Federal and Kentucky corporate income tax rate schedules on the next page, calculate the amount of additional federal and state income tax ABC Inc. will need to pay in the year 2000 if it accepts the project. 3. The nominal discount rate is 7% per year, the expected inflation rate is % per year, and the real discount rate is 4% per year. The following project cash flows are presented using nominal dollars. Repeat the analysis using method one discussed in class. (Method one uses constant dollar, i.e., real cash flows, for revenues and associated taxes. It uses nominal dollars for tax depreciation and associated cash flows resulting from the depreciation deduction on the tax return.) Analysis Using Nominal Figures Unit sales Price per unit Revenue 1, , , , Depreciation (583.28) (777.88) (259.18) (129.68) Taxable Income Income Tax at 34% (151.49) (95.42) (282.16) (336.87) Subtotal Adjustments Add: Depreciation Subtract: Initial Investment (1,750.00) Cash Flow (1,750.00) NPV at 7% = 1, Tax depreciation rates 33.33% 44.45% 14.81% 7.41% 4. Your firm is considering a project that requires an initial investment of $112,000 and will produce positive cash flows of $2,400 per year in perpetuity (starting in one year). In addition to these cash flows, you must consider the following: Assume that undertaking this project requires the use of an existing machine. If the project is rejected, this old machine will last 9 more years before it needs to be replaced with a new machine. However, if the project is accepted, the old machine will need to be replaced in 6 years with a new machine. This new machine has more than enough capacity to handle the new project and all other existing projects, will cost $45000 to purchase (either at t = 9 or t = 6) and will cost $8600 per year to operate for the next 12 years (until t = 21 or t = 18). At the end of this 12year period, an identical machine with the same cash flows will be purchased. This will continue forever. Assume that the figures presented are real cash flows. Therefore, the cash flows are the same if the replacement machine is purchased at time 9 or time 6. Use a 3% real discount rate. As in the example discussed in class, ignore the cash flows associated with maintaining and operating the existing machine. A) Initially ignore the cost of using the excess capacity of the old machine. Using the 3% real discount rate, the initial investment of $112,000, and the expected cash flows of $2,400 per year in perpetuity (starting in one year), what is the NPV of the project? B) What is the equivalent annual cash flow (EAC) for the new replacement machine? Make sure you indicate whether the EAC is negative or positive.
5 C) What is the NPV of the project (after taking into account the additional costs associated with having to buy the new machine at the end of the 6th year instead of the end of the 9th year)? Corporate Income Tax Rates (Federal) Bracket Tax Rate $0  $50,000 15% $50,000  $75,000 25% $75,000  $100,000 34% $100,000  $335,000 39% $335,000  $10,000,000 34% $10,000,000  $15,000,000 35% $15,000,000  $18,333,333 38% Above $18,333,333 35% Corporate Income Tax Rates (Kentucky) Bracket Tax Rate $0  $25,000 4% $25,000  $50,000 5% $50,000  $100,000 6% $100,000  $250,000 7% Above $250, %.
6 Finance 445 Practice Exam Chapters 1, 2, 5, and part of Chapter 6 Multiple Choice Solutions Problem Questions: 1. PV Your work 2. Kentucky state income tax (with project) Kentucky state income tax (without project) Addition state income tax Federal income tax (with project) Federal income tax (without project) Addition Federal income tax Your work
7 3. Fill out the following table with your solution to problem 3. Unit sales Price per unit Revenue Income Tax (at 34%) Cash Flow % = Depreciation income tax deduction Cash flow from depreciation tax deduction (at 34%) % = NPV of project = Your work 4. Preliminary calculation of the project NPV EAC Final calculation of the project NPV (The preliminary calculation of the Project NPV does not include the cost of using the excess capacity of the old machine. The final calculation of the project NPV includes this cost.) Your work
8 Finance 445 Practice Exam Answers Multiple Choice Solutions 1. B 2. A 3. C 4. C 5. A 6. A 7. A 8. C 9. B 10. A 11. A 12. B 13. B Problem Questions: 1. PV = $289, Solution hints: (A) calculate the EAC over the sevenyear period, (B) calculate the PV of a perpetuity of cash flows equal to the EAC 2. Kentucky state income tax (with project) = $6, Kentucky state income tax (without project) = $5, Addition state income tax = $1, Federal income tax (with project) = $28, Federal income tax (without project) = $21, Addition Federal income tax = $7, Fill out the following table with your solution to problem Unit sales Price per unit $1 $1 $1 $1 Revenue $1, $1, $1, $1, Income Tax (at 34%) $ (340.00) $ (340.00) $ (340.00) $ (340.00) Cash Flow $ $ $ $ % = $ Depreciation income tax deduction $ (583.28) $ (777.88) $ (259.18) $ (129.68) Cash flow from depreciation tax deduction (at 34%) $ $ $ $ % = $ NPV of project = $ $ $ = $1, Preliminary calculation of the project NPV = $32, EAC = $13, Final calculation of the project NPV = $63,082.08
9 Solution hints for problem 4 Preliminary calculate of project NPV = $112,000 + ($2400 / 0.03) = $32,000 The EAC is calculated by first calculating the NPV of a single purchase of the new replacement machine. The cash flows are: $45,000 (purchase price) $8,600 (per year for 12 years) NPV = $130, EAC = $13, Take a PV of the EAC at time 7, 8, and 9 using the 3% real rate and add this answer to $32,000 to determine the final NPV PV of EAC at time 7, 8, and 9 = $31, Preliminary NPV = $32,000 Final NPV = $63,082.08
CHAPTER 7 MAKING CAPITAL INVESTMENT DECISIONS
CHAPTER 7 MAKING CAPITAL INVESTMENT DECISIONS Answers to Concepts Review and Critical Thinking Questions 1. In this context, an opportunity cost refers to the value of an asset or other input that will
More informationIncremental Cash Flows
Making Capital Investment Decisions Incremental Cash Flows Cash flows matter not accounting earnings. Sunk costs do not matter. Incremental cash flows matter. Opportunity costs matter. Side effects like
More informationNet Present Value and Capital Budgeting. What to Discount
Net Present Value and Capital Budgeting (Text reference: Chapter 7) Topics what to discount the CCA system total project cash flow vs. tax shield approach detailed CCA calculations and examples project
More informationChapter 09  Using Discounted CashFlow Analysis to Make Investment Decisions
Solutions to Chapter 9 Using Discounted CashFlow Analysis to Make Investment Decisions 1. Net income = ($74 $42 $10) [0.35 ($74 $42 $10)] = $22 $7.7 = $14.3 million Revenues cash expenses taxes paid =
More informationCAPITAL BUDGETING. Net Present Value and Other Investment Criteria
CAPITAL BUDGETING Net Present Value and Other Investment Criteria Net Present Value (NPV) Net present value is the difference between an investment s market value (in today s dollars) and its cost (also
More information1.1 Introduction. Chapter 1: Feasibility Studies: An Overview
Chapter 1: Introduction 1.1 Introduction Every long term decision the firm makes is a capital budgeting decision whenever it changes the company s cash flows. Consider launching a new product. This involves
More informationChapter 8. Using Discounted Cash Flow Analysis to Make Investment Decisions
Chapter 8 Using Discounted Cash Flow Analysis to Make Investment Decisions 82 Topics Covered Discounted Cash Flows (not Accounting Profits) Incremental Cash Flows Treatment of Inflation Separate Investment
More informationFinance for Cultural Organisations Lecture 8. Capital Budgeting: Making Capital Investment Decisions
Finance for Cultural Organisations Lecture 8. Capital Budgeting: Making Capital Investment Decisions Lecture 8. Capital Budgeting: Making Capital Investment Decisions Understand how to determine the relevant
More informationKey Concepts and Skills
Key Concepts and Skills Chapter 9 Making Capital Investment Decisions Understand how to determine the relevant cash flows for a proposed investment Understand how to analyze a project s projected cash
More informationChapter 9 Cash Flow and Capital Budgeting
Chapter 9 Cash Flow and Capital Budgeting MULTIPLE CHOICE 1. Gamma Electronics is considering the purchase of testing equipment that will cost $500,000. The equipment has a 5year lifetime with no salvage
More informationHow will the firm's total aftertax cash flows change if the new project is accepted?
NPV and Capital Budgeting: A Short Note on Estimation of Project Cash Flows (Relevant to AAT Examination Paper 4 Business Economics and Financial Mathematics) KC Chow The most important valuedriving decisions
More informationFinal Course Paper 2 Strategic Financial Management Chapter 2 Part 6 CA. Anurag Singal
Final Course Paper 2 Strategic Financial Management Chapter 2 Part 6 CA. Anurag Singal Replacement Decision Replacement decision is one of the most important classifications of capital budgeting. Replacement
More informationOverview of Lecture 9
Overview of Lecture 9 Taxes The Tax Code Calculating aftertax cash flows What Discount Rate to Use? Materials covered: Reader, Lecture 7 BM Chapter 6, pp. 121134. M. Spiegel and R. Stanton, 2000 1 Review:
More informationChapter 8: Fundamentals of Capital Budgeting
Chapter 8: Fundamentals of Capital Budgeting1 Chapter 8: Fundamentals of Capital Budgeting Big Picture: To value a project, we must first estimate its cash flows. Note: most managers estimate a project
More informationInvestment Decisions and Capital Budgeting
Investment Decisions and Capital Budgeting FINANCE 350 Global Financial Management Professor Alon Brav Fuqua School of Business Duke University 1 Issues in Capital Budgeting: Investment How should capital
More informationModule 4: Free Cash Flow (FCF) Which cash flows do we discount?
70391  Finance Module 4: Free Cash Flow (FCF) Which cash flows do we discount? 70391 Finance Fall 2016 Tepper School of Business Carnegie Mellon University c 2016 Chris Telmer. Some content from slides
More informationValuation Free Cash Flows. Katharina Lewellen Finance Theory II April 2, 2003
Valuation Free Cash Flows Katharina Lewellen Finance Theory II April 2, 2003 Valuation Tools A key task of managers is to undertake valuation exercises in order to allocate capital between mutually exclusive
More informationCHAPTER 7. Fundamentals of Capital Budgeting. Chapter Synopsis
CHAPTER 7 Fundamentals of Capital Budgeting Chapter Synopsis 7.1 Forecasting Earnings A firm s capital budget lists all of the projects that a firm plans to undertake during the next period. The selection
More informationCHAPTER 7: NPV AND CAPITAL BUDGETING
CHAPTER 7: NPV AND CAPITAL BUDGETING I. Introduction Assigned problems are 3, 7, 34, 36, and 41. Read Appendix A. The key to analyzing a new project is to think incrementally. We calculate the incremental
More informationChapter 7: Fundamentals of Capital Budgeting
Chapter 7: Fundamentals of Capital Budgeting1 Chapter 7: Fundamentals of Capital Budgeting Big Picture: To value a project, we must first estimate its cash flows. Note: most managers estimate a project
More informationCash Flow Estimation. Topics to be covered
Cash Flow Estimation Topics to be covered Discount Cash Flow, Not Profit Discount Incremental Cash Flow  Include all direct effects.  Forget Sunk Costs  Include Opportunity Costs  Recognize the Investment
More informationCorporate Finance: Final Exam
Corporate Finance: Final Exam Answer all questions and show necessary work. Please be brief. This is an open books, open notes exam. For partial credit, when discounting, please show the discount rate
More informationCapital Budgeting Focus on cash flows, not profits. Focus on incremental cash flows. Account for time.
Capital Budgeting Virtually all managers face capitalbudgeting decisions in the course of their careers. The most common of these is the simple yes versus no choice about a capital investment. The following
More informationChapter Review and SelfTest Problems
340 PART FOUR Capital Budgeting costs and cash revenues and costs. We also went over the calculation of depreciation expense under current tax law. 4. Some special cases encountered in using discounted
More informationCHAPTER 10 MAKING CAPITAL INVESTMENT DECISIONS
CHAPTER 10 MAKING CAPITAL INVESTMENT DECISIONS Answers to Concepts Review and Critical Thinking Questions 1. In this context, an opportunity cost refers to the value of an asset or other input that will
More informationHomework #3 BUSI 408 Summer II 2013
Homework #3 BUSI 408 Summer II 2013 This assignment is due 12 July 2013 at the beginning of class. Answer each question with numbers rounded to two decimal places. For relevant questions, identify the
More informationChapter 9. Year Revenue COGS Depreciation S&A Taxable Income Aftertax Operating Income 1 $20.60 $12.36 $1.00 $2.06 $5.18 $3.11
Chapter 9 91 We assume that revenues and selling & administrative expenses will increase at the rate of inflation. Year Revenue COGS Depreciation S&A Taxable Income Aftertax Operating Income 1 $20.60
More informationStrategy and Analysis in Using NPV. How Positive NPV Arises
Strategy and Analysis in Using NPV (Text reference: Chapter 8) Topics how positive NPV arises decision trees sensitivity analysis scenario analysis breakeven analysis investment options AFM 271  Strategy
More informationSample Test for entrance into Acct 3110 and Acct 3310
Sample Test for entrance into Acct 3110 and Acct 3310 1. Which of the following financial statements could properly have the following in the date line: For the Year Ended December 31, 2010"? a. Balance
More informationMAKING INVESTMENT DECISONS WITH THE NET PRESENT VALUE RULE. Chapter 6 WHAT TO DISCOUNT. 1. Only cash flow is relevant
MAKING INVESTMENT DECISONS WITH THE NET PRESENT VALUE RULE Chapter 6 WHAT TO DISCOUNT 1. Only cash flow is relevant 2. Estimate incremental cash flows 3. Be consistent in treatment of inflation 4. Recognize
More informationCHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA
CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA Basic 1. To calculate the payback period, we need to find the time that the project has recovered its initial investment. After two years, the
More informationDUKE UNIVERSITY Fuqua School of Business. FINANCE 351  CORPORATE FINANCE Problem Set #1 Prof. Simon Gervais Fall 2011 Term 2.
DUKE UNIVERSITY Fuqua School of Business FINANCE 351  CORPORATE FINANCE Problem Set #1 Prof. Simon Gervais Fall 2011 Term 2 Questions 1. Two years ago, you put $20,000 dollars in a savings account earning
More informationCapital Budgeting II. Professor: Burcu Esmer
Capital Budgeting II Professor: Burcu Esmer 1 Cash Flows Last chapter introduced valuation techniques based on discounted cash flows. This chapter develops criteria for properly identifying and calculating
More informationCHAPTER 8: ESTIMATING CASH FLOWS
CHAPTER 8: ESTIMATING CASH FLOWS 81 a. Straight line depreciation = ($15  $3)/10 = $1.20 Annual Tax Savings from Depreciation = $ 1.2 (0.4) = $0.48 Present Value of Tax Savings from Depreciation = $
More informationNet Present Value (NPV)
Investment Criteria 208 Net Present Value (NPV) What: NPV is a measure of how much value is created or added today by undertaking an investment (the difference between the investment s market value and
More informationReview Solutions FV = 4000*(1+.08/4) 5 = $4416.32
Review Solutions 1. Planning to use the money to finish your last year in school, you deposit $4,000 into a savings account with a quoted annual interest rate (APR) of 8% and quarterly compounding. Fifteen
More informationChapter 6 Making Capital Investment Decisions
University of Science and Technology Beijing Dongling School of Economics and management Chapter 6 Making Capital Investment Decisions Oct. 2012 Dr. Xiao Ming USTB 1 Key Concepts and Skills Understand
More informationChapter 14 Demonstration Problem Solutions Page 1
Chapter 14 Demonstration Problem Solutions Page 1 Demo 141 ANSWER a. First, we need to calculate the tax bill: Year (A) (B) (CAB) (D.4C) Cash Flow Depreciation Taxable Inc Tx Rate Taxes 1 $ 100,000 
More informationChapter 6. Making Capital Investment Decisions 60. Copyright 2013 by The McGrawHill Companies, Inc. All rights reserved.
Chapter 6 Making Capital Investment Decisions McGrawHill/Irwin Copyright 2013 by The McGrawHill Companies, Inc. All rights reserved. 60 What is capital budgeting? Should we build this plant? Chapters
More information
Midterm exam financiering/finance.
Midterm exam financiering/finance Question 1 An agency problem can be alleviated by: A) requiring all organizations to be sole proprietorships. B) compensating managers in such a way that
More informationAGENDA LEARNING OBJECTIVES ANALYZING PROJECT CASH FLOWS. Chapter 12. Learning Objectives Principles Used in This Chapter
Chapter 12 ANALYZING PROJECT CASH FLOWS AGENDA Learning Objectives Principles Used in This Chapter 1. Identifying Incremental Cash Flows 2. Forecasting Project Cash Flows 3. Inflation and Capital Budgeting
More information] (3.3) ] (1 + r)t (3.4)
Present value = future value after t periods (3.1) (1 + r) t PV of perpetuity = C = cash payment (3.2) r interest rate Present value of tyear annuity = C [ 1 1 ] (3.3) r r(1 + r) t Future value of annuity
More informationCapital Budgeting Formula
apital Budgeting Formula Not in the book. Wei s summary If salvage value S is less than U n : If salvage value S is greater than U n : Note: IF t : incremental cash flows (could be negative) )(NW): change
More informationChapter 7 Fundamentals of Capital Budgeting
Chapter 7 Fundamentals of Capital Budgeting Copyright 2011 Pearson Prentice Hall. All rights reserved. Chapter Outline 7.1 Forecasting Earnings 7.2 Determining Free Cash Flow and NPV 7.3 Choosing Among
More informationLecture 5 (Chapter 9) Investment Criteria. Some Problems
Lecture 5 (Chapter 9) Investment Criteria Up to now, we have analyzed how to finance a firm (capital structure) Today we switch to analyzing what to do with the money once we ve got it (capital budgeting
More informationIssues in Capital Budgeting
Lecture: Week V 1 Issues in Capital Budgeting What is Capital Budgeting? The process of making and managing expenditures on longlived assets. Allocating available capital amongst investment opportunities.
More informationTIME VALUE OF MONEY PROBLEM #8: NET PRESENT VALUE Professor Peter Harris Mathematics by Sharon Petrushka
TIME VALUE OF MONEY PROBLEM #8: NET PRESENT VALUE Professor Peter Harris Mathematics by Sharon Petrushka Introduction Creativity Unlimited Corporation is contemplating buying a machine for $100,000, which
More informationCHAPTER 10 & 11 The Basics of Capital Budgeting & Cash Flow Estimation
CHAPTER 10 & 11 The Basics of Capital Budgeting & Cash Flow Estimation Should we build this plant? 101 Capital Budgeting Overview Project Classifications Analysis Methods/Decision Rules Comparison of
More informationCapital Budgeting continued: Overview: (1) Estimating cash flows (2) CB examples (3) Dealing with uncertainty of cash flows
Capital Budgeting continued: Overview: (1) Estimating cash flows (2) CB examples (3) Dealing with uncertainty of cash flows Chapter 7: 1,4,6,7,20,25 Chapter 8: 1,3,5,8,13 (clarification for problem 13b:
More information3/28/2012 TERMS: SOME TEXTS MAY USE DIFFERENT TERMS. the Annual Amount (most often a savings). costs equals the present value of the project savings.
ECONOMIC ANALYSIS AND LIFE CYCLE COSTING ECONOMIC ANALYSIS AND LIFE CYCLE COSTING SECTION I Engineering Economy and Economics 1. Several questions on basic economics. 2. Several problems on simple engineering
More informationCHAPTER 6. Problems and Questions
1 CHAPTER 6 Problems and Questions 1. A small manufacturing firm, which has limited access to capital, has a capital rationing constraint of $150 million and is faced with the following investment projects
More informationFinancial Markets and Valuation  Tutorial 2: SOLUTIONS. Bonds, Stock Valuation & Capital Budgeting
Financial Markets and Valuation  Tutorial : SOLUTIONS Bonds, Stock Valuation & Capital Budgeting (*) denotes those problems to be covered in detail during the tutorial session Bonds Problem. (Ross, Westerfield
More informationModule 2: Preparing for Capital Venture Financing Financial Forecasting Methods TABLE OF CONTENTS
Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods Module 2: Preparing for Capital Venture Financing Financial Forecasting Methods 1.0 FINANCIAL FORECASTING METHODS 1.01 Introduction
More information( ) ( )( ) ( ) 2 ( ) 3. n n = 100 000 1+ 0.10 = 100 000 1.331 = 133100
Mariusz Próchniak Chair of Economics II Warsaw School of Economics CAPITAL BUDGETING Managerial Economics 1 2 1 Future value (FV) r annual interest rate B the amount of money held today Interest is compounded
More informationGlobal Financial Management
1 Global Financial Management Valuation of Cash Flows Investment Decisions and Capital Budgeting Copyright 1999 by Alon Brav, Campbell R. Harvey, Stephen Gray and Ernst Maug. All rights reserved. No part
More informationSolutions to Chapter 3. Accounting and Finance
Solutions to Chapter 3 Accounting and Finance 1. Sophie s Sofas Liabilities & Assets Shareholders Equity Cash $ 10,000 Accounts payable $ 17,000 Accounts receivable 22,000 Longterm debt 170,000 Inventory
More informationEXAM 1 REVIEW QUESTIONS
EXAM 1 REVIEW QUESTIONS 1) Free cash flow. Consider the following financial statements for United Technologies Corp. What is UT's free cash flow (total cash flow from assets) for 2001? UNITED TECHNOLOGIES:
More informationCapital Budgeting continued: Overview:(1) Estimating cash flows (2) CB examples (3) Dealing with uncertainty of cash flows
Capital Budgeting continued: Overview:(1) Estimating cash flows (2) CB examples (3) Dealing with uncertainty of cash flows Chapter 7: 1,5,7,8,27,32 Chapter 8: 1,3,5,8,13 (clarification for problem 13b:
More informationCHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA
CHAPTER 9 NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA 1. To calculate the payback period, we need to find the time that the project has recovered its initial investment. After three years, the project
More informationEconomic Feasibility Studies
Economic Feasibility Studies ١ Introduction Every long term decision the firm makes is a capital budgeting decision whenever it changes the company s cash flows. The difficulty with making these decisions
More informationCHAPTER 10 Financial Statements NOTE
NOTE In practice, accruals accounts and prepayments accounts are implied rather than drawn up. It is common for expense accounts to show simply a balance c/d and a balance b/d. The accrual or prepayment
More informationWhich projects should the corporation undertake
Which projects should the corporation undertake Investment criteria 1. Investment into a new project generates a flow of cash and, therefore, a standard DPV rule should be the first choice under consideration.
More informationChapter 7 Fundamentals of Capital Budgeting
Chapter 7 Fundamentals of Capital Budgeting 71. Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats.
More informationCHAPTER 25. P.25.16 The following data are furnished by the Hypothetical Leasing Ltd (HLL):
CHAPTER 25 Solved Problems P.25.16 The following data are furnished by the Hypothetical Leasing Ltd (HLL): Investment cost Rs 500 lakh Primary lease term 5 years Estimated residual value after the primary
More informationIncome Measurement and Profitability Analysis
PROFITABILITY ANALYSIS The following financial statements for Spencer Company will be used to demonstrate the calculation of the various ratios in profitability analysis. Spencer Company Comparative Balance
More informationValuation. The Big Picture: Part II  Valuation
Valuation The Big Picture: Part II  Valuation A. Valuation: Free Cash Flow and Risk Apr 1 Apr 3 Lecture: Valuation of Free Cash Flows Case: Ameritrade B. Valuation: WACC and APV Apr 8 Apr 10 Apr 15 Lecture:
More informationOklahoma State University Spears School of Business. Capital Investments
Oklahoma State University Spears School of Business Capital Investments Slide 2 Incremental Cash Flows Cash flows matter not accounting earnings. Sunk costs do not matter. Incremental cash flows matter.
More informationCorporate Finance, Fall 03 E. Hotchkiss Exam # 1
Corporate Finance, Fall 03 E. Hotchkiss Exam # 1 Name: Please read each question carefully, and neatly write all answers on this exam paper. It is very important that you show all work so that you can
More informationAccounting Skills Assessment Practice Exam Page 1 of 10
NAU ACCOUNTING SKILLS ASSESSMENT PRACTICE EXAM & KEY 1. A company received cash and issued common stock. What was the effect on the accounting equation? Assets Liabilities Stockholders Equity A. + NE +
More informationLecture 18. Income Taxes
Lecture 18 Income Taxes Rate of return Rate of return: Beforetax = B Aftertax = A As an approximation: B = A/(1T), where T = tax rate Note that A < B (always!) If A =.1 and T =.49, then B =.196 2 Rate
More informationWeek 1: Solutions to HW Problems
Week 1: Solutions to HW Problems 101 a. Payback A (cash flows in thousands): Annual Period Cash Flows Cumulative 0 ($5,000) ($5,000) 1 5,000 (0,000) 10,000 (10,000) 3 15,000 5,000 4 0,000 5,000 Payback
More informationCash Flow, Taxes, and Project Evaluation. Remember Income versus Cashflow
Cash Flow, Taxes, and Project Evaluation Of the four steps in calculating NPV, the most difficult is the first: Forecasting cash flows. We now focus on this problem, with special attention to What is cash
More informationCHAPTER 8 INTEREST RATES AND BOND VALUATION
CHAPTER 8 INTEREST RATES AND BOND VALUATION Solutions to Questions and Problems 1. The price of a pure discount (zero coupon) bond is the present value of the par value. Remember, even though there are
More informationFIN 3403 Quiz #1  Version 1 12 points [Show all work for credit] Time Value
FIN 3403 Quiz #1  Version 1 [Show all work for credit] Time Value Frohlich Fall 1998 Do either problem one or two: (12 pts.) [show all work] 1. A)The Tried and True Company had earnings of $.30 per share
More informationChapter 11 Cash Flow Estimation and Risk Analysis ANSWERS TO SELECTED ENDOFCHAPTER QUESTIONS
Chapter 11 Cash Flow Estimation and Risk Analysis ANSWERS TO SELECTED ENDOFCHAPTER QUESTIONS 111 a. Cash flow, which is the relevant financial variable, represents the actual flow of cash. Accounting
More informationReview for Exam 2. Instructions: Please read carefully
Review for Exam 2 Instructions: Please read carefully The exam will have 20 multiple choice questions and 4 work problems. Questions in the multiple choice section will be either concept or calculation
More informationTRANSACTIONS ANALYSIS EXAMPLE. Maxwell Partners Medical Diagnostic Services report the following information for 2011, their first year of operations:
TRANSACTIONS ANALYSIS EXAMPLE Maxwell Partners Medical Diagnostic Services report the following information for 2011, their first year of operations: 1. Billings to clients for services provided: $350,000
More informationExam 2 Study Guide. o o
1. LS7a An account was established 7 years ago with an initial deposit. Today the account is credited with annual interest of $860. The interest rate is 7.7% compounded annually. No other deposits or withdrawals
More informationFinal Paper 2 Strategic Financial Management Chapter 2 Part 4 CA. Anurag Singal
Final Paper 2 Strategic Financial Management Chapter 2 Part 4 CA. Anurag Singal Capital Budgeting under Capital Rationing Standard Deviation Capital Budgeting Under Inflation Availability of funds may
More informationUniversity of Rio Grande Fall 2010
University of Rio Grande Fall 2010 Financial Management (Fin 20403) Practice Questions for Midterm 1 Answers the questions. (Or Identify the letter of the choice that best completes the statement if there
More informationMeasuring Investment Returns
Measuring Investment Returns Aswath Damodaran Stern School of Business Aswath Damodaran 156 First Principles Invest in projects that yield a return greater than the minimum acceptable hurdle rate. The
More informationSession #5 Capital Budgeting  II Damodaran  Chapter 9: 6,12,16,18 Chapter 10: 2,10,16(a&b) Chapter 11: 6,12,14
Session #5 Capital Budgeting  II Damodaran  Chapter 9: 6,12,16,18 Chapter 10: 2,10,16(a&b) Chapter 11: 6,12,14 I. Additional Issues in Capital Budgeting. A. Capital rationing: Use profitability index
More informationChapter 6. 1. Your firm is considering two investment projects with the following patterns of expected future net aftertax cash flows:
Chapter 6 1. Your firm is considering two investment projects with the following patterns of expected future net aftertax cash flows: Year Project A Project B 1 $1 million $5 million 2 2 million 4 million
More informationFast Tools & Resources. Capital Budgeting
Capital Budgeting With this program, the user can evaluate capital budgeting problems and perform comprehensive investment analysis comparisons on up to 4 separate projects or investments. Fast Tools &
More informationUnderstanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions
Understanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions Chapter 7 Capital Investments and Cash Flow Analysis Concept Check 7.1 1. What is capital budgeting?
More informationChapter 9: Net Present Value and Other Investment Criteria. Faculty of Business Administration Lakehead University Spring 2003 May 20, 2003
Chapter 9: Net Present Value and Other Investment Criteria Faculty of Business Administration Lakehead University Spring 2003 May 20, 2003 Outline 9.1 Net Present Value 9.2 The Payback Rule 9.3 The Average
More informationCapital Investment Analysis and Project Assessment
PURDUE EXTENSION EC731 Capital Investment Analysis and Project Assessment Michael Boehlje and Cole Ehmke Department of Agricultural Economics Capital investment decisions that involve the purchase of
More informationSampleFinal Finance 320 Finance Department
SampleFinal Finance 320 Finance Department Name Chapters: 1, 2, 3, 4, 5, 6, 7, 8, 9, 11, 12, and 13 1) A C corporation earns $4.50 per share before taxes. The corporate tax rate is 35%, the personal tax
More informationThings to do before the first class meeting
FINANCE 351 Corporate Finance John Graham Things to do before the first class meeting C Read the Gifford and Brealey and Myers material (see class schedule) C Read over the syllabus and class schedule.
More informationWill the future benefits of this project be large enough to justify the investment given the risk involved?
Chapter 1 The Overall Process Capital Expenditures Whenever we make an expenditure that generates a cash flow benefit for more than one year, this is a capital expenditure. Examples include the purchase
More informationMBA 8230 Corporation Finance (Part II) Practice Final Exam #2
MBA 8230 Corporation Finance (Part II) Practice Final Exam #2 1. Which of the following input factors, if increased, would result in a decrease in the value of a call option? a. the volatility of the company's
More information2. (Ignore income taxes in this problem.) The following data pertain to an investment in equipment:
1. The net present value and internal rate of return methods of capital budgeting are superior to the payback method in that they: A) are easier to implement. B) consider the time value of money. C) require
More informationENTREPRENEURIAL FINANCE: Strategy Valuation and Deal Structure
ENTREPRENEURIAL FINANCE: Strategy Valuation and Deal Structure Chapter 9 Valuation Questions and Problems 1. You are considering purchasing shares of DeltaCad Inc. for $40/share. Your analysis of the company
More informationAcct 3110 Qualifying Exam Sample Questions as of May 31, 2016
Acct 3110 Qualifying Exam Sample Questions as of May 31, 2016 1. The primary objective of financial reporting is to provide financial information about the reporting company that is useful: *a. to existing
More informationCapital Budgeting Cash Flows
Learning Objectives 11 Capital Budgeting Cash Flows 1 Corporate Financial Management 3e Emery Finnerty Stowe 12 Calculate incremental aftertax cash flows for a capital budgeting project. Explain the
More informationChapter 7: Net Present Value and Capital Budgeting
Chapter 7: Net Present Value and Capital Budgeting 7.1 a. Yes, the reduction in the sales of the company s other products, referred to as erosion, should be treated as an incremental cash flow. These lost
More informationCourse 3: Capital Budgeting Analysis
Excellence in Financial Management Course 3: Capital Budgeting Analysis Prepared by: Matt H. Evans, CPA, CMA, CFM This course provides a concise overview of capital budgeting analysis. This course is recommended
More informationOutline of Lecture 10
Outline of Lecture 10 Investment Decision Guidelines Materials covered: Reader, Lecture 8 BM Chapter 6. M. Spiegel and R. Stanton, 2000 1 Investment Decision Guidelines Should you invest in a project?
More informationCash Flow Estimation. Cash Flows in General. Asking the Right Question
1 2 Chapter Outline Cash Flows in General Compute Project s NPV Cash Flow Estimation Cash Flows in General Measuring Incremental Cash Flows Cash flows should be measured on an incremental basis Incremental
More information