FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 9: Fundamentals of Capital Budgeting

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 41

Multiple Choice

Review LaterAdd Note

Review Later

A brewer is launching a new product-brewed ginger beer with low alcohol content. The brewer plans to spend $4 million promoting this product this year, which is expected to expand its sales of this product to $10 million this year and $8 million next year. They do expect there will be loss of sales of $1 million this year and next year in their other products as customers switch to drinking the new ginger beer. The gross profit margin for the new ginger beer is 40%, the gross profit margin of all of the brewer's other products is 30%, and the brewer's marginal corporate tax rate is 30%. What are incremental earnings arising from the promotional campaign this year?

A) $4.68 million
B) $3.29 million
C) $5.28 million
D) $2.10 million

E) All of the above
F) B) and C)

Correct Answer

verified

Show Answer

Question 42

True/False

Review LaterAdd Note

Review Later

The fact that a new product typically has its highest sales immediately after release as customers are attracted by the novelty of the product is a factor that a manager should bear in mind when estimating a project's revenues and costs.

A) True
B) False

Correct Answer

verified

Show Answer

Question 43

Multiple Choice

Review LaterAdd Note

Use the information for the question(s) below. Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects: -A firm is considering changing their credit terms. It is estimated that this change would result in sales increasing by $1 000 000. This in turn would cause inventory to increase by $150 000, accounts receivable to increase by $100 000, and accounts payable to increase by $75 000. What is the firm's expected change in net working capital?

Use the information for the question(s) below. Temporary Housing Services (THS) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a cyclone. THS will lease space in this facility to various agencies and groups providing relief services to the area. THS estimates that this project will initially cost $6 million to set up and will generate $22 million in revenues during its first and only year of operation (paid in one year) . Operating expenses are expected to total $13 million during this year and depreciation expense will be another $4 million. THS will require no working capital for this investment. THS's marginal tax rate is 30%. -Ignoring the original investment of $6 million, what is THS's free cash flow for the first and only year of operation?

When evaluating the effectiveness of an improved manufacturing process, we should evaluate the total sales and costs generated by this process.

How do we handle interest expense when making a capital budgeting decision?

Capital budgeting decisions use the Net Present Value rule so that those decisions maximise net present value (NPV).

Why does the option to abandon a project have value?

Use the information for the question(s) below. The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30 000 and the machine will be depreciated by the straight-line method over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2 000 canes in year 1. Sales are estimated to grow by 10% per year for each of the three years. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 30% tax bracket and has a cost of capital of 10%. -Which of the following would you NOT consider when making a capital budgeting decision?

Vernon-Nelson Chemicals is planning to release a new brand of insecticide, Bee-Safe, that will kill many insect pests but not harm useful pollinators. Buying new equipment to manufacture the product will cost $20 million and there will be an additional $2 million cost to reconfigure the existing plant. The equipment is expected to have a lifetime of eight years and will be depreciated by the straight-line method over its lifetime. The firm expects that they should be able to sell 1 500 000 litres per year at a price of $52 per litre. It will take $38 per litre to manufacture and support the product. If Vernon-Nelson's marginal tax rate is 30%, what are the incremental earnings in year 3 of this project?

Use the information for the question(s) below. The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30 000 and the machine will be depreciated by the straight-line method over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2 000 canes in year 1. Sales are estimated to grow by 10% per year for each of the three years. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 30% tax bracket and has a cost of capital of 10%. -Cameron Industries is purchasing a new chemical vapour depositor in order to make silicon chips. It will cost $6 million to buy the machine and $10 000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to raise gross profits by $4 million per year, starting at the end of the first year, with associated costs of $1 million for each of those years. The machine is expected to have a working life of six years and will be depreciated over those six years. The marginal tax rate is 30%. What are the incremental free cash flows associated with the new machine in year 2?

Which of the following is usually NOT a factor that must be considered when estimating the revenues and costs arising from a new product?

Use the information for the question(s) below. Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects: -Luther Industries has outstanding tax loss carryforwards of $70 million from losses over the past four years. If Luther earns $15 million per year in pre-tax income from now on, in how many years will Luther first pay taxes?

A manufacturer of peripheral devices for PCs decides to try and capture some of the PC gaming market by creating gaming versions of its traditional peripheral devices. It decides to start with a gaming version of its standard keyboard, increasing the number of macro keys, adding a small LCD screen to display game data, and giving the user the ability to backlight keys in different colours. If this device is a success, the manufacturer plans to release gaming versions of its trackballs and other peripherals. What option is the manufacturer gaining by the release of the new keyboard?

Which of the following best defines 'incremental earnings'?

Use the information for the question(s) below. The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30 000 and the machine will be depreciated by the straight-line method over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2 000 canes in year 1. Sales are estimated to grow by 10% per year for each of the three years. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 30% tax bracket and has a cost of capital of 10%. -Which of the following formulas will correctly calculate Net Working Capital?

Use the table for the question(s) below. -Visby Rides, a limousine hire company, is considering buying some new luxury cars. After extensive research, they come up with the above estimates of free cash flow from this project. Visby learns that a competitor is thinking of offering similar services, thus reducing Visby's sales. By how much could sales fall before the net present value (NPV) was zero, given that the cost of capital is 10%, and that cost of goods sold is 45% of revenues?

Use the information for the question(s) below. The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30 000 and the machine will be depreciated using the straight-line method over its three-year life to a residual value of $0. The cane manufacturing machine will result in sales of 2 000 canes in year 1. Sales are estimated to grow by 10% per year for each of the three years. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each. Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 30% tax bracket and has a cost of capital of 10%. -The required net working capital in the second year for the Sisyphean Corporation's project is closest to:

A capital budget lists the projects and investments that a company plans to undertake during future years.

An oil company is buying a semi-submersible oil rig for $25 million. Additionally, it will cost $2.5 million to move the oil rig to the oil-field and to prepare it for operations. If it is depreciated over five years using straight-line depreciation, what are the annual depreciation expenses in this case?