Reference no: EM132753439
1. Newton Corp. spent $3 million two years ago to build a plant for a new product. It then decided not to go forward with the project, so the building is available for sale or for a new project. Newton owns the building free and clear - there is no mortgage on it. Which of the following statements is CORRECT?
a. The after-tax proceeds from the sale should be charged as a cost to any new project that would use the plant space.
b. Since the building has been paid for, it can be used by another project with no additional cost. Therefore, it should not be reflected in the cash flows for any new project.
c. Since the building was built in the past, its cost is a sunk cost and thus need not be considered when new projects are being evaluated, even if it would be used by those new projects.
d. If the building could be sold, then the after-tax proceeds that would be generated by any such sale should be charged as a cost to a company's financial statements but does not bear any cost to a new project that would use it.
e. None of the above.
2. Is it true? Explain. Typically, a project will have a shorter Discounted payback period if the firm uses accelerated rather than straight-line depreciation.
3. The company initiated the project which cash flows are shown below. It's 100% debt financed. The tax rate is 20%. The annual yield on the company's bonds is 10%.
0 1 2 3 4 -$10200 $1400 $2570 $3650 $4870
Calculate the project's NPV and decide on whether you accept it or not.
Evaluate the project's Discounted PB, given the preset limit of 3 years.
4. Your new employer is considering a new project whose data are shown below. The equipment that would be used has a 4-year tax life, and the allowed depreciation rates for such property are 33.33%, 44.45%, 14.81%, and 7.41% for Years 1 through 4. Revenues and other operating costs are expected to be constant over the project's expected life. What is the Year 3 cash flow?
Equipment cost (depreciable basis) $76000
Sales revenues, each year $94000
Operating costs (excl. deprec.) $36000
Tax rate 35.0%
5. Which of the following statements is NOT a characteristic of the NPV evaluation method?
a. Takes into account all cash flows, both prior and beyond the payback period.
b. Accounts for the time value of money.
c. Does not provide an indication regarding a project's liquidity.
d. Does not take account of differences in size among projects.
e. Reflects how the project contributes to the value for investors.
6. Is it true? Explain. Corporate valuation model assumes that operating assets bring value to the firm as they generate cash flows, and non-operating assets do not generate any cash flows, therefore they are not taken into account in the estimation of the value.
7. Is it true? Opportunity costs include those cash inflows that could be generated from assets the firm already owns if those assets are not used for the project being evaluated.
8. Based on the corporate valuation model, value of operations is $1240 million. Its balance sheet shows $200 million of investments in government bonds, $150 million of accounts receivable, $190 million of accounts payable, $260 million of notes payable, $155 million of inventories, $380 million of long-term debt, $168 million of accruals, $445 million of common stock, and $320 million of retained earnings. What is the best estimate for the firm's value of equity, in millions?