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TexMex Food Company is considering a new salsa whose data are shown below.The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value,and 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.However,this project would compete with other TexMex products and would reduce their pre-tax annual cash flows.What is the project's NPV? (Hint: Cash flows are constant in Years 1-3. ) Do not round the intermediate calculations and round the final answer to the nearest whole number. TexMex Food Company is considering a new salsa whose data are shown below.The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value,and 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.However,this project would compete with other TexMex products and would reduce their pre-tax annual cash flows.What is the project's NPV? (Hint: Cash flows are constant in Years 1-3. ) Do not round the intermediate calculations and round the final answer to the nearest whole number. A) 2,477 B) ​1,680 C) ​2,211 D) ​2,101 E) ​2,742


A) 2,477
B) ​1,680
C) ​2,211
D) ​2,101
E) ​2,742

F) B) and C)
G) C) and D)

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Currently,Powell Products has a beta of 1.0,and its sales and profits are positively correlated with the overall economy.The company estimates that a proposed new project would have a higher standard deviation and coefficient of variation than an average company project.Also,the new project's sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong.On the basis of this information,which of the following statements is CORRECT?


A) The proposed new project would have more stand-alone risk than the firm's typical project.
B) The proposed new project would increase the firm's corporate risk.
C) The proposed new project would increase the firm's market risk.
D) The proposed new project would not affect the firm's risk at all.
E) The proposed new project would have less stand-alone risk than the firm's typical project.

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

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Since the focus of capital budgeting is on cash flows rather than on net income,changes in noncash balance sheet accounts such as inventory are not included in a capital budgeting analysis.

A) True
B) False

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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.

A) True
B) False

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Changes in net operating working capital should not be reflected in a capital budgeting cash flow analysis because capital budgeting relates to fixed assets,not working capital.

A) True
B) False

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Desai Industries is analyzing an average-risk project,and the following data have been developed.Unit sales will be constant,but the sales price should increase with inflation.Fixed costs will also be constant,but variable costs should rise with inflation.The project should last for 3 years,it will be depreciated on a straight-line basis,and there will be no salvage value.No change in net operating working capital would be required.This is just one of many projects for the firm,so any losses on this project can be used to offset gains on other firm projects.What is the project's expected NPV? Do not round the intermediate calculations and round the final answer to the nearest whole number. Desai Industries is analyzing an average-risk project,and the following data have been developed.Unit sales will be constant,but the sales price should increase with inflation.Fixed costs will also be constant,but variable costs should rise with inflation.The project should last for 3 years,it will be depreciated on a straight-line basis,and there will be no salvage value.No change in net operating working capital would be required.This is just one of many projects for the firm,so any losses on this project can be used to offset gains on other firm projects.What is the project's expected NPV? Do not round the intermediate calculations and round the final answer to the nearest whole number. A) 0$66,796 B) 0$75,339 C) 0$92,426 D) 0$77,669 E) 0$61,359


A) 0$66,796
B) 0$75,339
C) 0$92,426
D) 0$77,669
E) 0$61,359

F) A) and E)
G) A) and D)

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You work for Whittenerg Inc. ,which is considering a new project whose data are shown below.What is the project's Year 1 cash flow? You work for Whittenerg Inc. ,which is considering a new project whose data are shown below.What is the project's Year 1 cash flow? A) $27,229 B) $24,573 C) $22,138 D) $21,473 E) $26,122


A) $27,229
B) $24,573
C) $22,138
D) $21,473
E) $26,122

F) None of the above
G) A) and D)

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A firm that bases its capital budgeting decisions on either NPV or IRR will be more likely to accept a given project if it uses accelerated depreciation than if it uses straight-line depreciation,other things being equal.

A) True
B) False

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Estimating project cash flows is generally the most important,but also the most difficult,step in the capital budgeting process.Methodology,such as the use of NPV versus IRR,is important,but less so than obtaining a reasonably accurate estimate of projects' cash flows.

A) True
B) False

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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) D) and E)

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Which of the following is NOT a relevant cash flow and thus should NOT be reflected in the analysis of a capital budgeting project?


A) Changes in net operating working capital.
B) Shipping and installation costs for machinery acquired.
C) Cannibalization effects.
D) Opportunity costs.
E) Sunk costs that have been expensed for tax purposes.

F) D) and E)
G) A) and B)

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Liberty Services is now at the end of the final year of a project.The equipment originally cost $19,000,of which 75% has been depreciated.The firm can sell the used equipment today for $6,000,and its tax rate is 40%.What is the equipment's after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment's final market value is less than its book value,the firm will receive a tax credit as a result of the sale.


A) $5,500
B) $4,345
C) $5,995
D) $5,885
E) $6,710

F) A) and D)
G) B) and E)

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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.

A) True
B) False

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Sub-Prime Loan Company is thinking of opening a new office,and the key data are shown below.The company owns the building that would be used,and it could sell it for $100,000 after taxes if it decides not to open the new office.The equipment for the project would be depreciated by the straight-line method over the project's 3-year life,after which it would be worth nothing and thus it would have a zero salvage value.No change in net operating working capital would be required,and revenues and other operating costs would be constant over the project's 3-year life.What is the project's NPV? (Hint: Cash flows are constant in Years 1-3. ) Do not round the intermediate calculations and round the final answer to the nearest whole number. Sub-Prime Loan Company is thinking of opening a new office,and the key data are shown below.The company owns the building that would be used,and it could sell it for $100,000 after taxes if it decides not to open the new office.The equipment for the project would be depreciated by the straight-line method over the project's 3-year life,after which it would be worth nothing and thus it would have a zero salvage value.No change in net operating working capital would be required,and revenues and other operating costs would be constant over the project's 3-year life.What is the project's NPV? (Hint: Cash flows are constant in Years 1-3. ) Do not round the intermediate calculations and round the final answer to the nearest whole number. A) 55,915 B) 061,507 C) 054,238 D) 048,087 E) 043,614


A) 55,915
B) 061,507
C) 054,238
D) 048,087
E) 043,614

F) B) and D)
G) B) and C)

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Which of the following statements is CORRECT?


A) In a capital budgeting analysis where part of the funds used to finance the project would be raised as debt,failure to include interest expense as a cost when determining the project's cash flows will lead to an upward bias in the NPV.
B) In a capital budgeting analysis where part of the funds used to finance the project would be raised as debt,failure to include interest expense as a cost when determining the project's cash flows will lead to a downward bias in the NPV.
C) The existence of any type of "externality" will reduce the calculated NPV versus the NPV that would exist without the externality.
D) If one of the assets to be used by a potential project is already owned by the firm,and if that asset could be sold or leased to another firm if the new project were not undertaken,then the net proceeds that could be obtained should be charged as a cost to the project under consideration.
E) If one of the assets to be used by a potential project is already owned by the firm but is not being used,then any costs associated with that asset is a sunk cost and should be ignored.

F) A) and C)
G) D) and E)

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Your company,RMU Inc. ,is considering a new project whose data are shown below.What is the project's Year 1 cash flow? Your company,RMU Inc. ,is considering a new project whose data are shown below.What is the project's Year 1 cash flow? A) $10,329 B) $10,681 C) $13,029 D) $11,738 E) $11,151


A) $10,329
B) $10,681
C) $13,029
D) $11,738
E) $11,151

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

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Which of the following statements is CORRECT?


A) Sensitivity analysis is a good way to measure market risk because it explicitly takes into account diversification effects.
B) One advantage of sensitivity analysis relative to scenario analysis is that it explicitly takes into account the probability of specific effects occurring,whereas scenario analysis cannot account for probabilities.
C) Well-diversified stockholders do not need to consider market risk when determining required rates of return.
D) Market risk is important,but it does not have a direct effect on stock prices because it only affects beta.
E) Simulation analysis is a computerized version of scenario analysis where input variables are selected randomly on the basis of their probability distributions.

F) A) and D)
G) A) and C)

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Florida Car Wash is considering a new project whose data are shown below.The equipment to be used has a 3-year tax life,would be depreciated on a straight-line basis over the project's 3-year life,and would have a zero salvage value after Year 3.No change in net operating working capital would be required.Revenues and other operating costs will be constant over the project's life,and this is just one of the firm's many projects,so any losses on it can be used to offset profits in other units.If the number of cars washed declined by 40% from the expected level,by how much would the project's NPV change? (Hint: Note that cash flows are constant at the Year 1 level,whatever that level is. ) Do not round the intermediate calculations and round the final answer to the nearest whole number. Florida Car Wash is considering a new project whose data are shown below.The equipment to be used has a 3-year tax life,would be depreciated on a straight-line basis over the project's 3-year life,and would have a zero salvage value after Year 3.No change in net operating working capital would be required.Revenues and other operating costs will be constant over the project's life,and this is just one of the firm's many projects,so any losses on it can be used to offset profits in other units.If the number of cars washed declined by 40% from the expected level,by how much would the project's NPV change? (Hint: Note that cash flows are constant at the Year 1 level,whatever that level is. ) Do not round the intermediate calculations and round the final answer to the nearest whole number. A) -$35,149 B) -$34,446 C) -$28,119 D) -$33,040 E) -$41,827


A) -$35,149
B) -$34,446
C) -$28,119
D) -$33,040
E) -$41,827

F) B) and D)
G) A) and B)

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Which of the following procedures does the text say is used most frequently by businesses when they do capital budgeting analyses?


A) The firm's corporate,or overall,WACC is used to discount all project cash flows to find the projects' NPVs.Then,depending on how risky different projects are judged to be,the calculated NPVs are scaled up or down to adjust for differential risk.
B) Differential project risk cannot be accounted for by using "risk-adjusted discount rates" because it is highly subjective and difficult to justify.It is better to not risk adjust at all.
C) Other things held constant,if returns on a project are thought to be positively correlated with the returns on other firms in the economy,then the project's NPV will be found using a lower discount rate than would be appropriate if the project's returns were negatively correlated.
D) Monte Carlo simulation uses a computer to generate random sets of inputs,those inputs are then used to determine a trial NPV,and a number of trial NPVs are averaged to find the project's expected NPV.Sensitivity and scenario analyses,on the other hand,require much more information regarding the input variables,including probability distributions and correlations among those variables.This makes it easier to implement a simulation analysis than a scenario or sensitivity analysis,hence simulation is the most frequently used procedure.
E) DCF techniques were originally developed to value passive investments (stocks and bonds) .However,capital budgeting projects are not passive investments - managers can often take positive actions after the investment has been made that alter the cash flow stream.Opportunities for such actions are called real options.Real options are valuable,but this value is not captured by conventional NPV analysis.Therefore,a project's real options must be considered separately.

F) A) and B)
G) A) and D)

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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?


A) Using some of the firm's high-quality factory floor space that is currently unused to produce the proposed new product.This space could be used for other products if it is not used for the project under consideration.
B) Revenues from an existing product would be lost as a result of customers switching to the new product.
C) Shipping and installation costs associated with a machine that would be used to produce the new product.
D) The cost of a study relating to the market for the new product that was completed last year.The results of this research were positive,and they led to the tentative decision to go ahead with the new product.The cost of the research was incurred and expensed for tax purposes last year.
E) It is learned that land the company owns and would use for the new project,if it is accepted,could be sold to another firm.

F) B) and E)
G) A) and D)

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