MODULE 14 SET

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Arizona State University *

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302

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Finance

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Apr 3, 2024

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Question 1 S/5pts The cash flows used in capital budgeting calculations are based on historical revenue v forecasts of future cash revenues, cash expenses, and cash investment outlays forecasts of net income forecasts of retained earnings available for financing projects Question 2 S/35pts The term refers to the fact that these cash flows reflect the amount by which the firm's total after-tax free cash flows will change if the project is adopted. periodic perpetuity ’ incremental taxable Question 3 5 /S pts Which of the following should not be included in a schedule of cash flows from operations when evaluating a capital project? revenues ’ sunk costs depreciation

Question 4 S/Spts Which of the following is the best example of a sunk cost? future payments on a leased building future research and development costs historical research and development costs historical noncash expenses Question 5 S/35pts One example of erosion or spillover effects is additional income generated from the sales of a newly added product loss of current sales due to a new project being implemented loss of revenue due to employee theft loss of revenue due to customer reviews on Yelp.com Question 6 S/5pts If a firm has the option of leasing some factory space to another firm or utilizing it for another product line, then if the firm chose the product line how should it handle the lost lease payments on the factory space for capital budgeting purposes? Ignore it. Include it as an opportunity cost. Include half of it as additional revenue for the project Include the property taxes but nothing else.

Question 7 S/ 35 pts Brown Mack, Inc., currently has two large manufacturing divisions that share a single plant. Brown Mack owns the plant but has calculated that 6,000,000 USD of overhead expenses should be allocated to the two equal-sized divisions. If Brown Mack starts a third manufacturing division, of equal size to the other two divisions, then what overhead cost should the new division take into account on its capital budgeting cash flow analysis? ’ 0 USD 2,000,000 USD 3,000,000 USD 6,000,000 USD We only care about incremental cash flows. Allocated overhead is neither incremental nor a cash flow. Question 8 S/35pts Whenever a project has a negative impact on an existing project's cash flows, then that effect should be ignored be ignored if the project is evaluated using the correct cost of capital be included if the impact is limited to noncash expenditures " be included as a negative revenue amount on the new project's cash flow analysis

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Question 9 S/35pts General Mills just is undertaking a capital budgeting analysis on a new cereal. The firm realizes that if they come out with a new product it would affect the sales of existing products. What is the best course of action for General Mills in this analysis? Treat the reduction of sales from existing cereals as a sunk cost. Account for the reduction of sales from existing cereals in the projection of cash flows on the new product. Include the allocated costs of the new cereal in the sales of the pre-existing products. Ignore the fact that sales of other products will be affected. Question 10 5/5pts Which of the following statements is correct? Incremental net operating profits after-tax should include sunk costs associated with a project. Incremental net operating profits after-tax should include the effects of financing costs associated with a project. Incremental net operating profits after-tax should exclude the effects of depreciation costs associated with a project Incremental net operating profits after-tax should exclude the effects of financing costs associated with a project.

When compared to the straight-line depreciation method, the MACRS has ' a greater proportion of its depreciation early in the life of the asset a lesser proportion of its depreciation early in the life of the asset an equal proportion of its depreciation early in the life of the asset double the total amount of depreciation for the asset Question 12 5/5pts A tax system in which corporations pay a progressively larger share of their income in taxes as their income rises is called a flat tax system ' a progressive tax system a digressive tax system a regressive tax system Question 13 5/5 pts Carmine Sabatini operates a successful chain of Italian restaurants. He would like to expand by adding three new locations next year and by hiring three new managers. If each new restaurant is expected to generate USD 50,000 in free cash flow per year, how much can Carmine pay each new manager per year? ’ 50,000 3 50,000 (with margin: 0) Carmine could re-invest the 50,000 FCF and hire a new manager for each location.

Question 14 5/5pts Consider the information in the previous question about Carmine Sabatini and his new restaurants. Suppose that the State of Arizona imposes a new 25 percent tax "surcharge" on Carmine's cash flows. What is the new amount that Carmine can pay each new manager per year? 37,500 37,500 (with margin: 0) The new FCF is 50,000 USD x (1 - 0.25) = 37,500 After the new tax, the new managers can only be paid 37,500 Question 15 5/5pts Suppose Provo, Inc. had revenues of USD 10,000,000, cash operating expenses of USD 5,000,000, and depreciation expense of USD 1,000,000 during the year. The firm purchased USD 500,000 in equipment during the year while increasing its inventory by USD 300,000 (with no corresponding increase in current liabilities). The marginal tax rate for Provo is 40 percent. What is Provo's cash flow from operations (CFFO or operating cash flow)? 3,400,000 3,400,000 (with margin: 5) Revenues $10,000,000 - Operating expenses 5,000,000 - Depreciation 1,000,000 = EBIT 4,000,000 - Tax 40% 1,600,000 = NOPAT 2,400,000 + Depreciation 1,000,000 CFFO $3,400,000

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v ) What is Provo's Free Cash Flow (FCF)? 2,600,000 2,600,000 (with margin: 1) FCF = CFFO - CAPEX - Change in net working capital FCF = 3,400,000 - 500,000 - 300,000 FCF = 2,600,000 Question 17 5/5pts Rocky Mountain Lumber Company is considering purchasing a new wood saw that costs USD 50,000. The saw will generate incremental revenues of USD 100,000 per year for five years. The cost of materials and labor needed to generate these revenues will total USD 60,000 per year, and other incremental cash expenses will be USD 10,000 per year. What is the NPV of the new wood saw if the required rate of return is 10 percent? 63,724 63,724 (with margin: 2) FCF = Revenues - Expenses FCF =100,000 - 70,000 FCF = 30,000 N=5 I/Y=10 PV =772 = 113,723.60 PMT = 30,000 FV=0 NPV =113,723.60 - 50,000.00 = 63,723.60

Question 18 5/5pts You are the CFO of SlimBody, Inc., a retailer of the exercise machine Slimbody Six and related accessories. Your firm is considering opening up a new store in Tempe. 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 USD 2,500. The annual sales of accessories will be USD 600,000, and the operating expenses of running the store, including labor and rent, will amount to 50 percent of the revenues from the exercise machines. The initial investment in the store will equal USD 30,000,000 and will be fully depreciated on a straight-line basis over the 20-year life of the store. Your firm will need to invest USD 2,000,000 in additional working capital immediately, and recover it at the end of the investment. Your firm's marginal tax rate is 30 percent. The cost of capital is 10 percent. What is the NPV for the new store? ’ 12,950,929 5 12,950,929 (with margin: 5) Revenues $12,500,000 + Other income 600,000 - Cost of goods sold 6,250,000 - Depreciation 1,500,000 = EBIT 5,350,000 - Tax 30% 1,605,000 = NOPAT 3,745,000 + Depreciation 1,500,000 CFFO $5,245,000 FCF 0 =-32,000,000 FCF 1-19 = 5,245,000 FCF 20 = 5,245,000 + 2,000,000 = 7,245,000 PV(FCF 0) is -32,000,000 PV(FCF 1-19) is 43,874,006 PV(FCF 20) is 1,076,923 Sum is 12,950,929

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