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Exam 9: Fundamentals of Capital Budgeting

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Question 51

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Use the table for the question(s) below. -Visby Rides,a livery car company,is considering buying some new luxury cars.After extensive research,they come up with the above estimates of free cash flow from this project.Visby learns that a competitor is thinking of offering similar services,thus reducing Visby's sales.By how much could sales fall before the net present value (NPV) was zero,given that the cost of capital is 10%,and that cost of goods sold is 35% of revenues?

A) by 12%
B) by 18%
C) by 24%
D) by 22%
E) by 31%

F) A) and B)
G) A) and C)

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Question 52

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A manufacturer of peripheral devices for PCs decides to try and capture some of the PC gaming market by creating gaming versions of its traditional peripheral devices.It decides to start with a gaming version of its standard keyboard,increasing the number of macro keys,adding a small LCD screen to display game data,and giving the user the ability to backlight keys in different colors.If this device is a success,the manufacturer plans to release gaming versions of its trackballs and other peripherals.What option is the manufacturer gaining by the release of the new keyboard?

A) option to delay
B) option to expand
C) option to abandon
D) option to switch
E) option to sell

F) A) and B)
G) A) and E)

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Question 53

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Which of the following costs would you consider when making a capital budgeting decision?

What is the most important function of sensitivity analysis?

Why does capital budgeting focus on incremental revenues and costs,instead of the projected total revenues and costs of the firm?

A small manufacturer that makes clothespins and other household products buys new injection moulding equipment for a cost of $500,000.This will allow the manufacturer to make more clothespins in the same amount of time with an estimated increase in sales of 15%.If the manufacturer currently makes 75 tons of clothespins per year,which sell at $18,000 per ton,what will be the increase in revenue next year from the new equipment?

After research into where to place a new restaurant,Burger Billies,a small fast-food chain,plans to open a new store near a small college.The anticipated customer base is students attending the college.They learn that a major fast-food chain will be opening a franchise within the college,which leads the owners of Burger Billies to revise their estimate of sales to one below the break-even point.Which of the following is most likely the best real option for Burger Billies to take with regard to the proposed restaurant site?

When evaluating the effectiveness of an improved manufacturing process we should evaluate the total sales and costs generated by this process.

Use the table for the question(s) below. -Panjandrum Industries,a manufacturer of industrial piping,is evaluating whether it should expand into the sale of plastic fittings for home garden sprinkler systems.It has made the above estimates of free cash flows resulting from such a decision (all quantities in millions of dollars) .It is thought that if marketing expenses are increased by 40%,then revenues will rise.By how much will revenues have to rise for the net present value (NPV) of the project to increase?

What is the ultimate goal of the capital budgeting process?

Which of the following best defines incremental earnings?

Use the figure for the question(s) below. -A company planning to market a new model of motor scooter analyzes the effect of changes in the selling price of the motor scooter,the number of units that will be sold,the cost of making the motor scooter,the effect on Net Working Capital,and the cost of capital for the project.They predict that the break-even point for sales price for the motor scooter is $2480.What does this mean?

Which of the following formulas will correctly calculate Net Working Capital?

An analysis that breaks the net present value (NPV) calculation into its component assumptions and shows how the net present value (NPV) varies as one of the underlying assumptions changes is called:

Ignoring the original investment of $5 million,what is THSI's free cash flow for the first and only year of operation?

Athabasca Ag is purchasing 1,000 grain bins at a cost of $40,000 each.Each bin also has a $5,000 delivery and installation cost,and the bins have a capital cost allowance (CCA) rate of 25%.What will be the CCA deduction for year 1?

Use the information for the question(s) below. Shepard Industries is evaluating a proposal to expand its current distribution facilities.Management has projected the project will produce the following cash flows for the first two years (in millions) . -The CCA tax shield for Shepard Industries project in year 2 is closest to:

A brewer is launching a new product:: brewed ginger ale with a low alcohol content.The brewer plans to spend $4 million promoting this product this year,which is expected to expand its sales of this product to $10 million this year and $8 million next year.They do expect there will be loss of sales of $1 million this year and next year in their other products as customers switch to drinking the new ginger ale.The gross profit margin for the new ginger ale is 40%,the gross profit margin of all of the brewer's other products is 30%,and the brewer's marginal corporate tax rate is 35%.What are incremental earnings arising from the promotional campaign this year?

A textile company invests $12 million in an open-end spinning machine.The machine belongs to asset class 43 and has a capital cost allowance (CCA) rate of 30%.If the company sold it immediately after the end of year 3 for $8 million,what would be the overall present value of the CCA tax shields from this asset,given a tax rate of 40%,and a cost of capital of 12%?

A bakery invests $30,000 in a light delivery truck.The truck belongs to asset class 10 and has a capital cost allowance (CCA) rate of 30%.If the company sold it immediately after the end of year 2 for $22,000,what would be the present value of the lost CCA tax shields,given a tax rate of 40% and a cost of capital of 8%?