Fin Chapter 11 Homework

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  • Topic: Net present value, Depreciation, Cash flow
  • Pages : 14 (531 words )
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  • Published : April 17, 2012
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Chapter 10

1. D -The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects

2. A -More of Project A’s cash flows occur in the later years.

3. E - If the 4-year payback results in accepting just the right set of projects under average economic conditions, then this payback will result in too few long-term projects when the economy is weak

4. C - You should recommend that the project be accepted because (1) its NPV is positive and (2) although it has two IRRs, in this case it would be better to focus on the MIRR, which exceeds the WACC. You should explain this to the president and tell him that the firm’s value will increase if the project is accepted.

5. C - $209.0

Chapter 11

1. B - An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank’s other offices to decline.?

2. C - Project X has more market risk than Project Y.

3. D - If equipment is expected to be sold for more than its book value at the end of a project’s life, this will result in a profit. In this case, despite taxes on the profit, the end-of-project cash flow will be greater than if the asset had been sold at book value, other things held constant.

4. E - $19,325

WACC10.0%Years0123

Investment cost-$65,000

Sales revenues$65,500$65,500$65,500

Operating costs 25,00025,00025,000

Depreciation rate = 33.333% 21,667 21,667 21,667

Operating income $18,833$18,833$18,833

TaxesRate = 35% 6,592 6,592 6,592

After-tax EBIT$12,242$12,242$12,242

Depreciation 21,667 21,667 21,667

Cash flow-$65,000$33,908$33,908$33,908

NPV$19,325

5. E - $35,530

|Current NPV | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |Year | | | | | |0 | | | | | |1 | | | | | |2 | | | | | |3 | | | | | | | | | | | |Sales | | | | | | | | | | | |70000...
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