Fina CH 10 quizes

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Jan 9, 2024

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10.1 quiz i dentify which of these are the relevant cash flows when considering a capital budgeting project. lost rent from retail facility remodeling expenses for new store increase in inventory expected salvage value of manufacturing equipment 2) A corporation is contemplating an expansion project. The CFO plans to calculate the project’s NPV by discounting the relevant cash flows (which include the initial up-front costs, the operating cash flows, and the terminal cash flows) at the corporation's cost of capital (WACC). Which of the following factors should the CFO include when estimating the relevant cash flows?  Any opportunity costs associated with the project. 10.2 quiz 3) According to the article, "Sunk cost fallacy: Throwing good money after bad," how can banks limit losses from bad loans?  increase bank executive turnover 10.3 4) Aero Motorcycles is considering opening a new manufacturing facility in Fort Worth to meet demand for a new line of solar charged motorcycles (who wants to ride on a cloudy day anyway?) The proposed project has the following features; • The firm just spent $300,000 for marketing study to determine consumer demand (@ t=0). • Aero Motorcycles purchased the land the factory will be built on 5 years ago for $2,000,000 and owns it outright (that is, it does not have a mortgage). The land has a current market value of $2,600,000. • The project has an initial cost of $26,724,758 (excluding land, hint: land is not subject to depreciation). • If the project is undertaken, the company will realize an additional $8,000,000 in sales over each of the next ten years. (i.e. sales in each year are $8,000,000)

• The company’s operating cost (not including depreciation) will equal 50% of sales. • The company’s tax rate is 35 percent. • Use a 10-year straight-line depreciation schedule. • At t = 10, the project is expected to cease being economically viable and the factory (including land) will be sold for $4,500,000 (assume land has a book value equal to the original purchase price). • The project’s WACC = 10 percent • Assume the firm is profitable and able to use any tax credits (i.e. negative taxes) . 0 What is the project's outflow at t=0? Answer to the nearest whole dollar value. 2,600,000+ 26,724,758 =29324758.00 10.4 5) What is the net effect on a firm's working capital if a new project requires: $45,808 increase in inventory, $40,466 increase in accounts receivable, $35,000.00 increase in machinery, and a $46,003 increase in accounts payable? Round to nearest dollar amount. Increase in Inventory: 45,808 Increase in A/R: 40,466 Increase in A/P: 46003 45808+40,466-46003 =40271 10.5 6) Revenues generated by a new fad product are forecast as follows: Year Revenues 1 $53,589

2 40,000 3 20,000 4 10,000 Thereafter 0 Expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $40,000 in plant and equipment that will be depreciated using the straight-line method over 5 years. The firm recently spent $2,000 on a study to estimate the revenues of the new product. The tax rate is 20%. What is the operating cash flow in year 1? Answer to nearest whole dollar amount. Revenue: 53,589 -Expense: 26,794.5 (0.5*53589) -Depreciation: 8,000.00 (40,000/5) =EBIT 18,794.50 -Tax 3,758.90(0.2*18,794.5) =Net Income 15,035.60 (18,794.5-3,758.90) +Depreciation 8,000.00 =OCF 23035.60 (15035.60+8000) Answer: 23035.60 7) What is the amount of the operating cash flow for a firm with $371,416 profit before tax, $100,000 depreciation expense, and a 35% marginal tax rate

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10.6 8) A company just paid $10 million for a feasibility study. If the company goes ahead with the project, it must immediately spend another $97,201,248 now, and then spend $20 million in one year. In two years it will receive $80 million, and in three years it will receive $90 million. If the cost of capital for the project is 11 percent, what is the project’s NPV? NPV = -97,201,248 - 20,000,000/(1 + 0.11)^1 + 80,000,000/(1 + 0.11)^2 + 90,000,000/(1 + 0.11)^3 NPV = -97201248 - 18,018,018.01801802 + 64,929,794.65952439 + 65,807,224.31708553 Npv=15,517,752.96 9) A company just paid $10 million for a feasibility study. If the company goes ahead with the project, it must immediately spend another $100 million now, and then spend $20 million in one year. In two years it will receive $80 million, and in three years it will receive $90 million. If the cost of capital for the project is 11 percent, what is the project’s IRR? % terms to 2 decimal places and without the % sign. Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period) =80/1.11^2+90/1.11^3 =$130.737million Present value of outflows=$100+20/1.11 =$118.018million. Hence NPV=Present value of inflows-Present value of outflows =$130.737million-$118.018million =$12.72 million(Approx). Let irr be x% At irr,present value of inflows=present value of outflows.

Hence 100+20/1.0x=80/1.0x^2+90/1.0x^3 Hence x=IRR=15.945%(Approx). 10.7 10) If a 20% reduction in forecast sales would not extinguish a project's profitability, then sensitivity analysis would suggest:  deemphasizing that variable as a critical factor 11) Which of the following changes, if of a sufficient magnitude, could turn a negative NPV project into a positive NPV project?  A decrease in the fixed costs 10.8 12 What types of projects does the BNSF strategic studies team evaluate?  discretionary 13. What types of analyses do the BNSF strategic studies team conduct? -discounted cash flow -sensitivity 14. Jon Stevens, BNSF Vice President and Controlle r describes the capital spending process primarily as -a means to ensure regulatory compliance -a balancing act that requires careful evaluation of the costs and benefits of each project

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