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Exam 11: Cash Flows and Capital Budgeting

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Question 21

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Explain why in practice the cash flows associated with a project are not certain cash flows.

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The projected cash flows on a project ar...

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Question 22

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Ref 11-2 Champagne, Inc., had revenues of $12 million, cash operating expenses of $8 million, and depreciation and amortization of $1.5 million during 2008. The firm purchased $700,000 of equipment during the year while increasing its inventory by $500,000 (with no corresponding increase in current liabilities) . The marginal tax rate for Champagne is 30 percent. -Free cash flow: What is Champagne's NOPAT for 2008?

A) $1,750,000
B) $2,500,000
C) $3,250,000
D) $4,000,000

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Question 23

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The research and development costs to date of a project should be considered when analyzing the cash flows of a prospective project.

Evaluate the following statement: Nominal interest rates do not incorporate the expected rate of inflation.

The cost of using an existing asset: Small Appliances, Inc., is considering starting a new line of business with the excess capacity it currently has on its rivet machine. The current machine is expected to last four years at the current rate of production. However, if a new line of business is taken on, then the machine will have to be replaced in three years instead of four. A new machine that will last four years would cost $50,000. What is the cost of taking on the new line of business? Round to the nearest dollar and assume a 9 percent cost of capital.

Brown Mack, Inc., currently has two large manufacturing divisions that share a single plant. Brown Mack owns the plant but has calculated that $6 million of overhead expenses should be allocated to the two equal-sized divisions. If Brown Mack starts a third manufacturing division, of equal size to the other two divisions, then what overhead cost should the new division take into account on its capital budgeting cash flow analysis?

Ref 11-2 Champagne, Inc., had revenues of $12 million, cash operating expenses of $8 million, and depreciation and amortization of $1.5 million during 2008. The firm purchased $700,000 of equipment during the year while increasing its inventory by $500,000 (with no corresponding increase in current liabilities) . The marginal tax rate for Champagne is 30 percent. -Free cash flow: What is Provo's cash flows associated with investments for 2008?

Evaluate the following statement: The unadjusted NPVs of two projects with different useful lives can be compared to determine which project is the better of the two.

Evaluate the following statement: A progressive tax system means that a taxpayer will pay a higher tax rate for a given dollar of earnings for every successive year.

If you add depreciation and amortization to incremental net operating profits after tax (NOPAT), then you will obtain incremental cash flow from operations.

Incremental cash flow from operations is the cash flow from a project that is expected to be generated after all operating expenses have been paid.

Why is depreciation and amortization added back when calculating free cash flows generated by a project?

Evaluate the following statement: Terminal-year free cash flows may differ from the cash flows provided in the typical year of a project for reasons such as the return/repayment of increases/reductions in additional working capital in the prior years.

Projects with different lives: Your firm is deciding whether to purchase a durable delivery vehicle or a short-term vehicle. The durable vehicle costs $25,000 and should last five years. The short-term vehicle costs $10,000 and should last two years. If the cost of capital for the firm is 15 percent, then what is the equivalent annual cost for the best choice for the firm? (Round final answer to nearest whole dollar.)

Windy Burgers is trying to determine when to harvest a herd of cows that it currently owns. If it harvests the herd in year 1, the NPV of the project would increase over an immediate harvest by 25 percent. A year 2 harvest would create an NPV increase of 15 percent over that of year 1 and year 3 would create an NPV increase of 7 percent over that of year 2. If the cost of capital is 12 percent for Windy, then which harvest year would maximize the NPV for the firm? Assume that all NPVs are calculated from the perspective of today.

Ref 11-2 Champagne, Inc., had revenues of $12 million, cash operating expenses of $8 million, and depreciation and amortization of $1.5 million during 2008. The firm purchased $700,000 of equipment during the year while increasing its inventory by $500,000 (with no corresponding increase in current liabilities) . The marginal tax rate for Champagne is 30 percent. -Free cash flow: What is Champagne's cash flow from operations for 2008?

Evaluate the following statement: When forecasting operating expenses, analysts distinguish between fixed costs which vary with sales and variable costs which do not.

Additions to tangible assets, intangible assets, and current assets can be described as:

When to replace an asset: Nemo Haulers is considering whether to purchase a new mini tractor for moving furniture within its warehouse. Nemo calculates that its current mini tractor generates $3,100 of cash flow per year. A new mini tractor would cost $3,000 and would provide cash flow of $4,000 per year for five years. What is the equivalent annual cash flow for the new mini tractor (round to the nearest dollar) , and should Nemo purchase the new tractor? Assume the cost of capital for Nemo is 10 percent.

Whenever a project has a negative impact on an existing project's cash flows, then that effect should: