Reference no: EM133065071

Question 1: Suppose that Melbane Ltd already has divisions in both Melbourne and Brisbane. Melbane is now considering setting up a third division in Adelaide. This expansion will require one senior manager from Melbourne and one from Brisbane to relocate to Adelaide. Ignore relocation expenses. Is their annual compensation relevant to the decision to expand?

Question 2: RetroMusic Ltd is a producer of MP3 players which currently have either 20 gigabytes or 30 gigabytes of storage. Now the company is considering launching a new production line making mini MP3 players with 5 gigabytes of storage. Analysts forecast that RetroMusic will be able to sell 1 million such mini MP3 players if the investment is taken. In making the investment decision, discuss what the company should consider other than the sales of the mini MP3 players.

Question 3: QualityLiving Ltd is a real estate investment company that builds and remodels apartment buildings in northern Victoria. It is currently considering remodelling a few idle buildings that it owns into luxury apartment buildings. The company bought those buildings eight months ago. How should the market value of the buildings be treated in evaluating this project?

Question 4: High-End Fashions Ltd bought a production line of ankle-length skirts last year at a cost of $500,000. This year, however, miniskirts are hot in the market and ankle-length skirts are completely out of fashion. High-End has the option to rebuild the production line and use it to produce miniskirts, with a cost of $300,000 and expected revenue of $700,000.

How should the company treat the cost of $500,000 of the old production line in evaluating the rebuilding plan?

Question 5: When two mutually exclusive projects have different lives, how can an analyst determine which is better? What is the underlying assumption in this method?

Question 6: Nominal versus real cash flows: What is the difference between nominal and real cash flows? Which rate of return should we use to discount each type of cash flow?

Question 7: Calculating terminal-year FCF: Healthy Potions Ltd, a pharmaceutical company bought a machine that produces pain-reliever medicine at a cost of $2 million. The machine has been depreciated over the past 5 years, and the current book value is $800,000. The company decides to sell the machine now at its market price of $1 million. The company tax rate is 30 percent. What are the relevant cash flows? How do they change if the market price of the machine is $600,000 instead?

Question 8: Investment cash flows: Eye Potions Ltd. is considering investing in a new production line of eye drops. Other than investing in the equipment, the company needs to increase its cash and cash equivalents by $10,000, increase the level of inventory by $30,000, increase accounts receivable by $25,000, and increase accounts payable by $5,000 at the beginning of the project. Eye Potions will recover these changes in working capital at the end of the project 10 years later. Assume the appropriate discount rate to be 12 percent. What are the relevant present values of the cash flows?

Question 9: Projects with different lives: You are starting a family pizza restaurant and need to buy a motorcycle for delivery orders. You have two models in mind. Model A costs $9,000 and is expected to run for 6 years; model B is more expensive, with a price of $14,000 and an expected life of 10 years. The annual maintenance costs are $800 for model A and $700 for model B. Assume that the opportunity cost of capital is 10 percent. Which one should you buy using (a) the NPV perpetuity method and (b) the EAC method?

Question 11: You are the CFO of SlimBody Ltd a retailer of the exercise machine Bodyslim and related accessories. Your company is considering opening up a new store in Perth. The store will have a life of 20 years. It will generate annual sales of 5,000 exercise machines, and the price of each machine is $2,500. The annual sales of accessories will be $600,000, and the operating expenses of running the store, including labour and rent, will amount to 50 percent of the revenues from the exercise machines. The initial investment in the store will equal $30 million and will be fully depreciated on a straight-line basis over the 20-year life of the store. Your company will need to invest $2 million in additional working capital immediately, and recover it at the end of the investment. Your company's tax rate is 30 percent. The opportunity cost of opening up the store is 10 percent. What are the incremental cash flows from this project at the beginning of the project as well as in years 1-19 and 20? Should you approve it?

Question 12: ACME manufacturing is considering replacing an existing production line with a new line that has a greater output capacity and operates with less labour than the existing line. The new line would cost $1 million, have a 5-year life, and would be depreciated using the straight-line depreciation method over 5 years. At the end of 5 years, the new line could be sold as scrap for $200,000 (in year 5 dollars). Because the new line is more automated, it would require fewer operators, resulting in a saving of $40,000 per year before tax and unadjusted for inflation (in today's dollars). Additional sales with the new machine are expected to result in additional net cash inflows, before tax, of $60,000 per year (in today's dollars). If ACME invests in the new line, a one-time investment of $10,000 in additional working capital will be required. The tax rate is 30 percent, the opportunity cost of capital is 10 percent, and the annual rate of inflation is 3 percent. What is the NPV of the new production line?

Question 13: When assembling the cash flows to calculate an NPV or IRR, the project's after-tax interest expenses should be subtracted from the cash flows for
A. the NPV calculation, but not the IRR calculation.
B. the IRR calculation, but not the NPV calculation.
C. both the NPV calculation and the IRR calculation.
D. neither the NPV calculation nor the IRR calculation.