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Exam 11: Cash Flows and Other Topics in Capital Budgeting

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Question 1

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If an old asset is sold for less than its book value the resulting loss will save the company taxes,hence lowering the cost of the project.

A) True
B) False

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Question 2

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According to the CAPM,systematic risk is the only relevant risk for capital budgeting purposes.

A) True
B) False

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Question 3

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Alloy Corp.is considering the acquisition of a new processing line.The processor can be purchased for $4,550,000.It will cost $65,000 to ship and $190,500 to install the processor.A recently completed feasibility study that was performed at a cost of $45,000 indicated that the processor would produce a positive NPV.Studies have shown that employee-training expenses will be $150,000.What is the total investment in the processing line for capital budgeting purposes?

Which of the following statements about project standing alone risk is true?

Which of the following expenses associated with a project should NOT be included in a capital budgeting analysis?

A new project is expected to generate $800,000 in revenues,$250,000 in cash operating expenses,and depreciation expense of $150,000 in each year of its 10-year life.The corporation's tax rate is 35%.The project will require an increase in net working capital of $85,000 in year one and a decrease in net working capital of $75,000 in year ten.What is the free cash flow from the project in year one?

J.B.Enterprises purchased a new molding machine for $85,000.The company paid $8,000 for shipping and another $7,000 to get the machine integrated with the company's existing assets.J.B.must maintain a supply of special lubricating oil just in case the machine breaks down.The company purchased a supply of oil for $4,000.The machine is to be depreciated on a straight-line basis over its expected useful life of 8 years.Which of the following statements concerning the change in working capital is most accurate?

Depreciation expense produces a cash inflow equal to the depreciation expense multiplied by the firm's marginal tax rate.

Synergistic benefits from an investment project include cannibalism.

As part of its expansion project,A.J.Industries Equipment Division has expanded its office space by 200 square feet.The company's administrative overhead is allocated based on the square footage of each business segment.Although the total administrative overhead for the company will remain the same,the Equipment Division will be charged more for administrative overhead.For the Equipment Division expansion project,the administrative overhead is an example of a(n)

It is important to consider a new project's affect on the cash flows of existing projects because of

The less-risky investment is always the more desirable choice.

Your company is considering the replacement of an old delivery van with a new one that is more efficient.The old van cost $40,000 when it was purchased 5 years ago.The old van is being depreciated using the simplified straight-line method over a useful life of 8 years.The old van could be sold today for $7,000.The new van has an invoice price of $80,000,and it will cost $6,000 to modify the van to carry the company's products.Cost savings from use of the new van are expected to be $28,000 per year for 5 years,at which time the van will be sold for its estimated salvage value of $18,000.The new van will be depreciated using the simplified straight-line method over its 5-year useful life.The company's tax rate is 35%.Working capital is expected to increase by $5,000 at the inception of the project,but this amount will be recaptured at the end of year five.What is the tax effect of selling the old machine?

Adding gourmet coffee stations to my convenience store is expected to increase sales of my breakfast sandwiches; however,the sales of breakfast sandwiches should not be included in the evaluation of the gourmet coffee project because only relevant,incremental cash flows should be considered.

Solar Confectionary develops a new candy bar and plans to sell each bar for $1.Solar predicts that 1 million candy bars will be sold in the first year if the new candy bar is produced and sold,and includes $1 million of incremental revenues in its capital budgeting analysis.A senior executive in the company believes that 1 million candy bars will be sold,but lowers the estimate of incremental revenue to $700,000.What would explain this change?

Increased depreciation expenses affect tax-related cash flows by

What method is used for calculation of the accounting beta?

A weakness in the capital budgeting process is the funds for an investment proposal obtained by issuing bonds,and the respective interest payments,are not considered in the capital budgeting process.

In general,a project's free cash flows will fall in one of the following three categories: initial outlay,differential cash flows over the project's life,and the terminal cash flow.

Capital budgeting projects that expand sales are more likely to involve increases in working capital than are projects that involve the replacement of existing assets.