questi drawback by alicejenny

VIEWS: 12 PAGES: 36

									         A
    Which of
    the
1   following
    statement
    is correct?
2
    >One
    drawback
    of the
    discounted
    payback is
    that this
    method
    does not
    consider
3   the time
    value of
    money,
    while the
    regular
    payback
    overcomes
    this
    drawback.
    >If project's
    payback is
    positive,
    then the
    project
4   should be
    accepted
    because it
    mush have
    a positive
    NPV.
    >The
    shorter a
5   project's
    pay back
    period, the
    less
    desirable
    the project
    is normally
    considered
    to eb by
    this
    criterion.
    >The
    regular
    payback
    ignores
    cahs flows
    beyond the
    payback
6   period, but
    the
    discounted
    payback
    method
    overcomes
    this
    problem.
    >One
    drawback
    of the
    discounted
    payback
    criterion is
    that this
7   method
    does not
    take
    account of
    cash flows
    beyond the
    payback
    period


8
         A
    Which of
    the
1   followign
    statements
    is correct?
2
    >The
    modified
    internal rate
    of return
    method
    (MIRR) is
    generally
    regarded
    by
3   academics
    as being
    the best
    single
    method for
    evaluating
    capital
    budgeting
    projects.
    >The
    internal rate
    of return
    method
    (IRR) is
    generally
    regarded
    by
4   academics
    as being
    the best
    single
    method for
    evaluation
    capital
    budgeting
    projects.
    >The net
    present
    value
    method
    (NPV) is
    generally
    regarded
    by
5   academics
    as being
    the best
    single
    method for
    evaluating
    capital
    budgeting
    projects.
    >The
    payback
    method is
    generally
    regarded
    by
    academics
6   as being
    the best
    single
    method for
    evaluating
    capital
    budgeting
    projects.
    >The
    discounted
    payback
    method is
    generally
7   regarded
    by
    academics
    as being
    the best
    single
    method for
    evaluating
    capital
    budgeting
    projects


9
          A         B        C         D       E          F
    Berhman
    Foods is
    evaluating a
1   project with
    the following
    annual net
    cash flows:
2
3
4                       0          1       2          3          4

5                   ($600)       $50   $100        $150       $350

6
    Because
    Behrmann is
    a small firm
    with limited
    resources,
    its managers
7   worry about
    how long
    capital will
    be tied up in
    projects.
    What is this
    project's
     payback
     period?
     Assume that
     Behrmann's
     cash flows
     are spaced
     evently
     throughout
     the year.
8    3.51 years

9    4.12 years

10
     4.24 years


11
     3.86 years


12
     3.69 years


13


14


15


     Some fo
     Behrmann's
16   managers
     use a
     general
     guideline
     when
     evaluating
     projects:
     accept
     projects that
     pay back
     their
     investment
     in less than
     four years. If
     you use this
     "payback
     rule" to
     evaluate the
     project
     described
     above,
     should
     Behrmann
     accept the
     project?
17


18
     No


19
     Yes


20


21


22
     If the
23   prokect's
     WACC is
     10.9%, what
     is its NPV?
24


25
          ($53.07)


26
          ($72.63)


27
          ($69.44)


28
          ($62.98)


29
          ($75.79)


30


31


     If
     Behrmann's
32   managers
     decide to
     accept the
     project
     based on its
     impact on
     shareholder
     value,
     should they
     accept the
     project?
33


34
     No


35
     Yes


36



10
           A       B   C   D   E   F
     Ford
     Industries
     is
     evaluating
     two
     mutually
1    exclusive
     projects
     with the
     following
     net cash
     flows:
2
3                      0        1       2      3       4

4    Project A   ($2,000)    $300    $500   $800   $1,200

5    Project B   ($2,000)   $1,000   $800   $500    $200

6
     Ford's
     WACC is
     8.7% and
     both
     projects
     have the
     same risk
     as the
     firm's
7    average
     prject.
     Calculate
     each
     project's
     net
     present
     value
     (NPV)
8
9    NPV A

10
                 $146.50


11
                 $101.01


12
                 $134.99


13               $193.44
14
                  $181.56


15


16
     NPV B         $78.96


17
                   $93.21


18
                  $129.58


19
                  $139.99


20
                  $100.39


21


     Ford CFO
     has
     instructed
     managers
22   to use the
     IRR
     method
     when
     choosing
     between
mutually
exclusive
projects. If
managers
choose the
project
with the
highest
IRR, ho
much
value will
be lost?
(Hint: If the
project
with the
highest
IRR also
has the
highest
NPV, then
no value is
lost
because
the firm
selects the
project
that adds
the most
value.
Otherwise,
the
difference
between
the two
project'
NPVs is
the value
lost from
using the
IRR
method
instead of
the NPV
     method).
23


24
         $51.98


25
         $43.20


26
         $47.57


27
         $30.37


28
                $0


29



11
          A          B   C   D   E   F
     Calvert
     Constructio
     n is
     analyzing a
1    highly
     profitable
     project with
     the
     following
     cash flows:
2
3                        0        1        2        3        4

4                  ($8,000)   $4,500   $4,500   $3,000   $3,000

5
6
     The project
     has the
     same risk
     as the
     firm's
7    average
     project.
     Calculate
     the project
     IRR.
8        27.89%

9        29.12%

10
         36.61%


11
         25.46%


12
         34.35%


13


14
     Some
     managers
     think the
     "expected
     rate of
     return" on
     the project
     will be
     overstated
     if they use
     the IRR
     Method.
15   They think
     that
     intermediat
     ed cash
     flows
     received
     from the
     project can
     only be
     reinvested
     at the firm's
     WACC of
     14.0%.
     Calculate
     the MIRR.
16
          24.54%


17
          25.04%


18
          23.03%


19        27.57%
20
         24.04%


21



12
         A         B          C       D       E          F
1
2
3
     You are
     evaluating
     the project
     with cash
4    inflows as
     shown
     below.
     Your boss
5
6              0          1       2       3          4          5

7                      $500   $800    $800        $800       $600

8
9
     If the
10   project
     WACC is
     9.9%, what
     is its NPV?
11
        $142.67


12
        $170.75


13
        $101.39


14
         $47.90


15
        $128.80


16



13
           A           B       C       D       E
     Brandy Inc. is
     analyzing with
1    the following
     cash flows:
2
3
4                  0       1       2       3       4
5           ($3,000)    $1,200   ($400)   $1,800   $1,800

6
     This project
     has ? Cash
     flows.
     Brandy's
     WACC is
     10.6% and the
     project has the
     same risk as
7    the firm's
     average
     project.Calcula
     te this
     project's
     modified
     internal rate of
     return (MIRR).
8    >normal

9    >non-normal

10


11
               12.57%


12
               12.80%


13
               12.72%


14
               12.87%
15
            12.95%


16


17


18


     If Brandy's
     managers
     select projects
19   based on the
     MIRR criterion,
     should they
     accept this
     independent
     project?
20


21
     No


22
     Yes


23



14
         A
    Conclusion
    s about
1   capital
    budgeting
    Which of
    the
    following
    conclusion
    s about
2   capital
    budgeting
    are valid?
    Check all
    that apply.
3
    >Managers
    have been
    slow to
    adopt the
    IRR because
4   percentage
    returns are a
    harder
    concept for
    them to
    grasp.
    >The NPV is
    the best
    project
    criterion
    because it
    shos how
5   much value
    the company
    is creating
    for its
    shareholders
    .
    >The
6   discounted
    payback
    period
    improves on
    the regular
    payback
    period
    accounting
    for the time
    value of
    money.
    >Because
    the MIRR
    and NPV
    use the
    same
    reinvestment
    rate
    assumption,
7   they always
    lead to the
    same
    accept/reject
    decision for
    mutually
    exclusive
    projects
    >BecauseN
    PV is the
    best project
    criterion,
    only it
8   should be
    used and the
    other criteria
    should be
    ignored.


Chapter 12---->
15
                                             A                                           B
1
     Hunter Industries is evaluating a capital budgeting project and has come
     across a few issues that require special attention. Classify each item as a
2    sunk cost, externality, opportunity cost, or a change in net operating
     working capital (NOWC). Then, in the last column, indicate whether the
     item should be included in the project's analysis or not.
3
                                                                                       Sun
4                                                                                      Cos
     The new project is expected to reduce sales revenue for one of the company's
5    other product lines.
6
     The project will use some equipment that the firm owns but isn't using
7    currently. However, a used equipment dealer has offered to buy the equipment
8
     Hunter spent nearly $1.1 million in market research to develop new product
9    ideas.
10


11 Many of the new sales from this project will be made on credit, causing
     account receivable to increase.

12


     The factory that the project will use could be used for another project that is
13 expected to have a slightly positive net present value (NPV)
14


15


16


17


     Suppose Hunter will be issuing debt to support this project and other
18 capital budgetting projects this year. The firm's interest expense will
     increase by $700,000. Should the change in interest expense be included
     in the analysis?
19


20
     Yes


21
     No


22



16
                    A                        B             C            D            E
1
     Bancroft Inc. has summarized
2    the expected cash flows from
     a proposed project below.
3                                      t=0           t=1          t=2          t=3

4    Total Investment outlay            ($400,000)

5    Operating Cash flow, OCF                          $120,000     $120,000     $120

6    Total Termination cash flow

7
8
9
10 If the project's WACC is 10.5%
     , what is the project NPV?

11


12
                          $18,911.39


13
                          $13,193.42


14
                          $15,085.40


15
                           $7,599.93
16
                          $9,450.82


17


18


19


     The firm used its WACC of
     10.5% to evaluate this project
     because it believes the project
     is of average risk. Support the
20   project actually had lower-
     than-average-risk, and the
     CFO thinks the WACC should
     be risk-adjusted. What effect
     would this have on the
     project's NPV?
21


22
     >Decrease NPV


23
     >No effect on NPV


24
     >Increase NPV


25
26


     Bancroft Inc. is going to use
     factory space for this project
     that it usually rents to other
     firms. If this project is
     accepted, Bancroft will not be
     able to rent the space any
27   time. If the firm usually
     generates $10,000 a year in
     after-tax leasing revenuw from
     the factory space, what is the
     value of the prject when you
     consider this factor? Assume
     Bancroft still considers the
     project to have average risk
     and uses a WACC of 10.5%
28


29
                       ($19,908.96)


30
                       ($11,059.94)


31
                       ($18,165.16)


32
                        ($9,250.49)


33                        ($21,640)
34


35


36


     Suppose Bancroft's
     management team discloses
     that nearly $400,000 in
37   research and development
     costs were incurred before the
     new project proposal was put
     together. What effect would
     this have on the project's
     NPV?
38


39
     >Decrease NPV


40
     >No effect on NPV


41
     >Increase NPV


42
17
         A
1
    Grant
    Publishing
    just
    undertook
    a project
    that
    required a
    $290,000
    investment
    in NOWC,
    which will
    recovered
    fully at the
    end of the
    project's
    life in five
    years. At
2   that time,
    the
    required
    equipment
    will not be
    depreciate
    d fully and
    still will
    have a
    book value
    of
    $100,000.
    The firm's
    tax rate is
    40%. If the
    salvage
    value at
     the end of
     five years
     turns out
     to be
     $100,000,
     what will
     be the
     project's
     total
     terminatio
     n cash
     flow?
3
4      $370,000

5      $410,000

6      $400,000

7      $360,000

8      $390,000

9
10


     Suppose
     that in five
     years,
     Grant
     Publishing
11   actually is
     able to get
     $140,000
     for the
     equipment
     even
     thought it
     has a book
     value of
     only
     $100,000.
     What is
     the
     project's
     terminal
     year cash
     flow now?
12
13
       $480,000


14     $398,000

15     $414,000

16     $464,000

17     $406,000

18
19


     Now
     suppose
     the
     equipment
     gets sold
     for $50,000
20   in five
     years,.
     What is
     the
     project's
     terminal
     year cash
     flow now?
21
22
       $356,000


23     $336,000

24     $360,000

25     $414,000

26     $340,000


18
         A
     Durning
     Inc. is
     evaluating
     a new
     capital
     budgeting
     project
     and
     conductin
     g some
     basic risk
1    analysis.
     First, it
     calculated
     the
     project's
     NPV at
     various
     levels for
     the
     project's
     key inputs:
     price per
     unit,
     variable
     cost per
     unit, and
     the
     project's
     WACC.
     This
     process is
     a
2
     >simulation
3    analysis
     >sensitivity
4    analysis
     >scenario
5    analysis
6
     whose
     results are
7    graphed
     below
8
9
10


11


12
13
14


15


16


17


18


19


20


21


22


23


24
25


26


27


28


29


30


31


32


33


34


35
36


37


     According
     to this
     analysis,
     which
38   variable is
     the key
     value
     driver for
     the
     project?
39
40
     >WACC

     >Variable
41   cost per
     unit
     >Price per
42   unit
43
44


     At the
     current
     input value
45   estimated,
     does this
     project
     have a
     positive or
     negative
     NPV?
     >Negative
46   NPV
     >Positive
47   NPV
48
49


     Which
     type of
     firm is
50   more likely
     to base its
     decision
     on stand-
     alone risk?
     >A small,
     closely held
     firm whose
     owners
51   have much
     of their
     wealth tied
     up in the
     firm
     >A large,
     widely held
     firm whose
     owners are
     well
     diversified
52   and do not
     have very
     much of
     their wealth
     tied up in
     the firm

								
To top