FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 12: Cash Flow Estimation and Risk Analysis

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 31

Multiple Choice

Review LaterAdd Note

Review Later

Suppose Tapley Inc.uses a WACC of 8% for below-average risk projects,10% for average-risk projects,and 12% for above-average risk projects.Which of the following independent projects should Tapley accept,assuming that the company uses the NPV method when choosing projects?

A) Project A,which has average risk and an IRR = 9%.
B) Project B,which has below-average risk and an IRR = 8.5%.
C) Project C,which has above-average risk and an IRR = 11%.
D) Without information about the projects' NPVs we cannot determine which one or ones should be accepted.
E) All of these projects should be accepted as they will produce a positive NPV.

F) A) and B)
G) A) and C)

Correct Answer

verified

Show Answer

Question 32

Multiple Choice

Review LaterAdd Note

Review Later

A firm is considering a new project whose risk is greater than the risk of the firm's average project,based on all methods for assessing risk.In evaluating this project,it would be reasonable for management to do which of the following?

A) Increase the estimated IRR of the project to reflect its greater risk.
B) Increase the estimated NPV of the project to reflect its greater risk.
C) Reject the project,since its acceptance would increase the firm's risk.
D) Ignore the risk differential if the project would amount to only a small fraction of the firm's total assets.
E) Increase the cost of capital used to evaluate the project to reflect its higher-than-average risk.

F) A) and D)
G) All of the above

Correct Answer

verified

Show Answer

Question 33

Multiple Choice

Review LaterAdd Note

Which of the following statements is CORRECT?

Temple Corp.is considering a new project whose data are shown below.The equipment that would be used has a 3-year tax life,would be depreciated by the straight-line method over its 3-year life,and would have a zero salvage value.No change in net operating working capital would be required.Revenues and other operating costs are expected to be constant over the project's 3-year life.What is the project's NPV? Do not round the intermediate calculations and round the final answer to the nearest whole number. ? $\begin{array} { l r } \text { Risk-adjusted WACC } & 10.0 \% \\\text { Net investment cost (depreciable basis) } & \$ 65,000 \\\text { Straight-line depr. rate } & 33.3333 \% \\\text { Sales revenues, each year } & \$ 71,500 \\\text { Annual operating costs (excl. depr.) } & \$ 25,000 \\\text { Tax rate } & 35.0 \%\end{array}$ ?

Which of the following statements is CORRECT?

It is extremely difficult to estimate the revenues and costs associated with large,complex projects that take several years to develop.This is why subjective judgment is often used for such projects along with discounted cash flow analysis.

In cash flow estimation,the existence of externalities should be taken into account if those externalities have any effects on the firm's long-run cash flows.

Mulroney Corp.is considering two mutually exclusive projects.Both require an initial investment of $10,800 at t = 0.Project X has an expected life of 2 years with after-tax cash inflows of $6,600 and $7,400 at the end of Years 1 and 2,respectively.In addition,Project X can be repeated at the end of Year 2 with no changes in its cash flows.Project Y has an expected life of 4 years with after-tax cash inflows of $4,300 at the end of each of the next 4 years.Each project has a WACC of 8%.Using the replacement chain approach,what is the NPV of the most profitable project? Do not round the intermediate calculations and round the final answer to the nearest whole number.

The use of accelerated versus straight-line depreciation causes net income reported to stockholders to be lower,and cash flows higher,during every year of a project's life,other things held constant.

Which of the following factors should be included in the cash flows used to estimate a project's NPV?

Foley Systems is considering a new investment whose data are shown below.The equipment would be depreciated on a straight-line basis over the project's 3-year life,would have a zero salvage value,and would require additional net operating working capital that would be recovered at the end of the project's life.Revenues and other operating costs are expected to be constant over the project's life.What is the project's NPV? (Hint: Cash flows from operations are constant in Years 1 to 3. ) Do not round the intermediate calculations and round the final answer to the nearest whole number. $\begin{array}{lr}\text { WACC } & 10.0 \% \\\text { Net investment in fixed assets (basis) } & \$ 75,000 \\\text { Required net operating working capital } & \$ 15,000 \\\text { Straight-line depreciation rate } & 33.333 \% \\\text { Annual sales revenues } & \$ 56,000 \\\text { Annual operating costs (excl. depr.) } & \$ 25,000 \\\text { Tax rate } & 35.0 \%\end{array}$ ?

Which of the following statement completions is NOT CORRECT? For a profitable firm,when MACRS accelerated depreciation is compared to straight-line depreciation,MACRS accelerated allowances produce

Sensitivity analysis measures a project's stand-alone risk by showing how much the project's NPV (or IRR)is affected by a small change in one of the input variables,say sales.Other things held constant,with the size of the independent variable graphed on the horizontal axis and the NPV on the vertical axis,the steeper the graph of the relationship line,the more risky the project,other things held constant.

If a firm's projects differ in risk,then one way of handling this problem is to evaluate each project with the appropriate risk-adjusted discount rate.

Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?

Superior analytical techniques,such as NPV,used in combination with risk-adjusted cost of capital estimates,can overcome the problem of poor cash flow estimation and lead to generally correct accept/reject decisions for capital budgeting projects.

Which of the following statements is CORRECT?

The primary advantage to using accelerated rather than straight-line depreciation is that with accelerated depreciation the total amount of depreciation that can be taken,assuming the asset is used for its full tax life,is greater.

Any cash flows that can be classified as incremental to a particular project - i.e. ,results directly from the decision to undertake the project - should be reflected in the capital budgeting analysis.

Because of improvements in forecasting techniques,estimating the cash flows associated with a project has become the easiest step in the capital budgeting process.