1. Northwest Industries is considering a project with the following cash flows:
Initial Outlay = $2,800,000
After-tax operating cash flows for years 1-4 = $850,000 per year
Additional after-tax terminal cash flow at end of Year 4 = $125,000
Compute the net present value of this project if the company's discount rate is 14%.
a. $239,209
b. $725,000
c. -$138,561
d. -$249,335
2. Compute the payback period for a project with the following cash flows received uniformly within each year:
Initial Outlay = $100
Cash Flows: Year 1 = $40
Year 2 = $50
Year 3 = $60
a. 2.17 years
b. 3 years
c. 4 years
d. 3.17 years
3. What is the net present value's assumption about how cash flows are re-invested?
a. They are reinvested at the IRR.
b. They are reinvested only at the end of the project.
c. They are reinvested at the APR.
d. They are reinvested at the firm's discount rate.
4. Your firm is considering an investment that will cost $750,000 today. The investment will produce cash flows of $250,000 in year 1, $300,000 in years 2 through 4, and $100,000 in year 5. The discount rate that your firm uses for projects of this type is 13.25%. What is the investment's profitability index?
a. 1.4
b. 1.6
c. 1.2
d. .2
5. If the NPV (Net Present Value) of a project with multiple sign reversals is positive, then the project's required rate of return ________ its calculated IRR (Internal Rate of Return).
a. must be greater than
b. could be greater or less than
c. must be less than
d. Cannot be determined without actual cash flows.
6. Determine the five-year equivalent annual annuity of the following project if the appropriate discount rate is 16%:
Initial Outflow = $150,000
Cash Flow Year 1 = $40,000
Cash Flow Year 2 = $90,000
Cash Flow Year 3 = $60,000
Cash Flow Year 4 = $0
Cash Flow Year 5 = $80,000
a. $8,520
b. $7,058
c. $9,872
d. $9,454
7. Your company is considering the replacement of an old delivery van with a new one that is more efficient. The old van cost $30,000 when it was purchased 5 years ago. The old van is being depreciated using the simplified straight-line method over a useful life of 10 years. The old van could be sold today for $5,000. The new van has an invoice price of $75,000, and it will cost $5,000 to modify the van to carry the company's products. Cost savings from use of the new van are expected to be $22,000 per year for 5 years, at which time the van will be sold for its estimated salvage value of $15,000. The new van will be depreciated using the simplified straightline method over its 5-year useful life. The company's tax rate is 35%. Working capital is expected to increase by $3,000 at the inception of the project, but this amount will be recaptured at the end of year five. What is the incremental free cash flow for year one?
a. $22,250
b. $18,850
c. $21,305
d. $19,900
8. The recapture of net working capital at the end of a project will
a. increase terminal year free cash flow by the change in net working capital times the corporate tax rate.
b. increase terminal year free cash flow.
c. decrease terminal year free cash flow by the change in net working capital times the corporate tax rate.
d. have no effect on the terminal year free cash flow because the net working capital change has already been included in a prior year.
9. A new machine can be purchased for $1,000,000. It will cost $65,000 to ship and $35,000 to modify the machine. A $30,000 recently completed feasibility study indicated that the firm can employ an existing factory owned by the firm, which would have otherwise been sold for $150,000. The firm will borrow $750,000 to finance the acquisition. Total interest expense for 5-years is expected to approximate $250,000. What is the investment cost of the machine for capital budgeting purposes?
a. $2,030,000
b. $1,530,000
c. $1,100,000
d. $1,250,000
e. $1,280,000
10. PDF Corp. needs to replace an old lathe with a new, more efficient model. The old lathe was purchased for $50,000 nine years ago and has a current book value of $5,000. (The old machine is being depreciated on a straightline basis over a ten-year useful life.) The new lathe costs $100,000. It will cost the company $10,000 to get the new lathe to the factory and get it installed. The old machine will be sold as scrap metal for $2,000. The new machine is also being depreciated on a straight-line basis over ten years. Sales are expected to increase by $8,000 per year while operating expenses are expected to decrease by $12,000 per year. PDF's marginal tax rate is 40%. Additional working capital of $3,000 is required to maintain the new machine and higher sales level. The new lathe is expected to be sold for $5,000 at the end of the project's ten-year life. What is the project's terminal cash flow?
a. $8,000
b. $6,000
c. $5,000
d. $3,000
11. Advantages of using simulation include:
a. a range of possible outcomes presented.
b. is good only for single period investments since discounting is not possible.
c. adjustment for risk in the resulting distribution of net present values.
d. graphically displays all possible outcomes of the investment.
12. A company has preferred stock that can be sold for $28 per share. The preferred stock pays an annual dividend of 5% based on a par value of $100. Flotation costs associated with the sale of preferred stock equal $1.50 per share. The company's marginal tax rate is 35%. Therefore, the cost of preferred stock is:
a. 18.87%
b. 17.86%
c. 11.61%
d. 12.26%
13. Which of the following differentiates the cost of retained earnings from the cost of newly-issued common stock?
a. The flotation costs incurred when issuing new securities.
b. The greater marginal tax rate faced by the now-larger firm.
c. The larger dividends paid to the new common stockholders.
d. The cost of the pre-emptive rights held by existing shareholders.
14. General Bill's will issue preferred stock to finance a new artillery line. The firm's existing preferred stock pays a dividend of $4.00 per share and is selling for $40 per share. Investment bankers have advised General Bill that flotation costs on the new preferred issue would be 5% of the selling price. The General's marginal tax rate is 30%. What is the relevant cost of new preferred stock?
a. 15.00%
b. 7.37%
c. 10.00%
d. 10.53%
e. 7.00%