Reference no: EM132753437

1. Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project?

a. Since the firm's director of capital budgeting spent some of her time last year to evaluate the new project, a portion of her salary for that year should be charged to the project's initial cost.

b. The company has spent and expensed $1 million on R&D associated with the new project.

c. The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million per year.

d. The company spent and expensed $10 million on a marketing study before its current analysis regarding whether to accept or reject the project.

e. The firm's facilities, used for the project, could be leased out for $50 000 per month starting from this year.

f. None of the above.

2. Driver Inc. is considering a project that has the following cash flows and WACC data. What is the project's discounted payback and project's NPV? If a rate of return for this type of projects preset by top-management is 9.5%, is this project acceptable?

WACC 10.00%

Year 0 1 2 3 4

Cash flows -$1050 $425 $495 $545 $605

3. Is it true? Explain. The drawback of the internal rate of return as investment criterion is that IRR cuts off projects with a long payback period.

4. Is it true? Explain. Market-value added is measured as additional value that could be calculated as an excess of the market capitalization of the company over its book value.

5. The company you work for is considering a new project with 4 years life, whose data are shown below. What is the project's Year 3 cash flow?

Sales revenues, each year $83500

Depreciation $7000

Other operating costs $22000

Interest expense $6000

Tax rate 40.0%

6. Projects A and B are equally risky, mutually exclusive, and have normal cash flows. Project A has an IRR of 14%, while Project B's IRR is 11%. Which of the following statements is CORRECT?

a. If the WACC is 12%, both projects will have positive NPVs.
b. If the WACC is 8%, Project A will have the higher NPV.
c. If the WACC is 13%, both projects will have a negative NPV.
d. Project A's NPV is more sensitive to changes in WACC than Project B's.
e. None of the above.

7. Peter Inc. has the following balance sheet (mln dollars). How much total operating capital does the firm have?

Cash $120.00
Accounts payable $130.00
Short-term investments 30.00
Accruals 40.00
Accounts receivable 35.00
Notes payable 60.00
Inventory 70.00
Current liabilities $230.00
Current assets $255.00
Long-term debt 120.00
Gross fixed assets $540.00
Common stock 160.00
Accumulated deprec. 60.00
Retained earnings 225.00
Net fixed assets $480.00
Total common equity $385.00
Total assets $735.00
Total liab. & equity 735.00