Question : Exhibit 9-1 A project requires an initial investment in equipment and : 1325707

 

 

Exhibit 9-1

A project requires an initial investment in equipment and machinery of $10 million. The equipment is expected to have a 5-year lifetime with no salvage value and will be depreciated on a straight-line basis. The project is expected to generate revenues of $5.1 million each year for the 5 years and have operating expenses (not including depreciation) amounting to 1/3 of revenues.

 

14.Refer to Exhibit 9-1. The tax rate is 40%. What is the net cash flow in year 1?

a.2.84m

b.3.40m

c.0.84m

d.2.04m

 

 

 

 

 

15.Refer to Exhibit 9-1. Assume the tax rate is 40%, and the cost of capital is 10%. What is the present value of cash inflows from year 1 to year 5? What percentage of this present value is attributed to the tax benefits accruing from depreciation?

a.$12.89m; 24%

b.$10.77m; 28%

c.3.18m; 95%

d.7.73m; 39%

e.$10.77m; 24%

 

 

 

16.Refer to Exhibit 9-1. Assume the tax rate is 40%, and the cost of capital is 10%. What is the net present value of the project?

a.$2.89m

b.$0.77m

c.-$6.82m

d.-$2.27m

 

 

 

17.Johnson Chemicals is considering an investment project. The project requires an initial $3 million outlay for equipment and machinery. Sales are projected to be $1.5 million per year for the next four years. The equipment will be fully depreciated straight-line by the end of year 4. Cost of goods sold and operating expense (not including depreciation) are predicted to be 30% of sales. The equipment can be sold for $400,000 at the end of year 4. Johnson Chemicals also needs to add net working capital of $100,000 immediately. The net working capital will be recovered in full at the end of the fourth year. Assume the tax rate is 40% and the cost of capital is 10%.

 

What is the NPV of this investment?

a.$89,290

b.$80,199

c.$189,482

d.$72,909

 

 

 

18.Which of the following items will lead to a rise in net working capital?

 

A.Raw materials are purchased prior to the sale of finished goods

B.The firm increases its cash balance

C.The firm makes a sale on credit

D.The firm buys inventory on credit

E.Short-term interest rates fall

 

a.A,B,C

b.A,B,D,E

c.A,C

d.A,B,C,D

 

 

 

19.A project will generate a real cash flow three years from now of $100,000. If the nominal discount rate is 10% and expected inflation is 3%, what is the nominal cash flow for year 3?

a.$112,551

b.$106,090

c.$109,273

d.$122,504

 

 

 

20.Paul earns $60,000 as an engineer, and he is considering quitting his job and going to graduate school. This $60,000 should be treated as a ____ if Paul runs an NPV analysis of his graduate degree.

a.sunk cost

b.opportunity cost

c.fixed cost

d.cannibalization cost

 

 

 

21.Fox Entertainment is evaluating the NPV of launching a new iPet product. Fox paid a market research firm $120,000 last year to test the market viability of iPet. Fox Entertainment should treat this $120,000 as a ____ for the capital budgeting decision now confronting the firm.

a.fixed cost

b.opportunity cost

c.sunk cost

d.cannibalization cost