Part I: True or False. Please provide the appropriate reason to validate your response:
1) All benefits expected from a proposed project must be measured on a cash flow basis which may be found by adding any non-cash charges deducted as expense on the firm's income statement back to net profits after taxes.
2) The weight average cost of capital (WACC) reflects the expected average future cost of funds over the long-run.
3) Firms are able to raise funds through the sale of commercial paper more cheaply than by borrowing from a commercial bank.
4) Relevant cash flows are the incremental cash outflows and inflows associated with a proposed capital expenditure.
5) The firm's free cash flow (FCF) represents the amount of cash flow available to investors (stockholders and bondholders) after the firm has met all operating needs and after having paid for net fixed asset investments and net current asset investments
6) If a firm's marginal tax rate is increased, this would, other things held constant, lower the cost of debt used to calculate its WACC.
7) Conflicts between two mutually exclusive projects, where the NPV method chooses one project but the IRR method chooses the other, should generally be resolved in favor of the project with the higher NPV.
8) In the valuation process, the higher the risk, the greater the required return.
Part II: Short Answer- Please show calculations
Q1) If I collect my accounts receivables every 38 days, pay my accounts payable every 35 days, and my inventory turns over 8.4 times per year, what is my cash conversion cycle?
Q2) Determine the IRR on the following projects:
a. Initial outlay of $35,000 with an after-tax cash flow at the end of the year of $5,836 for seven years
b. Initial outlay of $350,000 with an after-tax cash flow at the end of the year of $70,000 for seven years
c. Initial outlay of $3,500 with an after-tax cash flow at the end of the year of $1,500 for three years