Exam 13: Fundamentals of Project Evaluation

Ye Olde Antique Stock Certificate Company ,Inc. Olde) has recently determined that the optimal capital structure for the firm is 40% debt and 60% equity. The current interest rate for borrowing for Olde is 12 1/2% while its stockholders expect a 20% return on their equity. The company's corporate income tax rate is 40% and interest is a deductible expense for tax purposes. A) What is Olde's cost of capital? B) Olde is considering a project to expand to the Europe. The project will cost $200,000, have no salvage value, have an estimated life of 15 years, and have net cash flow benefits of $30,000. Should Olde accept the project? Why or Why not?

A project should be accepted as long as the present value of the expected net receipts it generates equals or exceeds its price the net outlay required).

The net present value NPV) of an investment is the present value of its net cash inflows minus the present value of its cost outlays.

The interest rate which is used in the determination of the present value is called the:

The marginal cost of capital MCC) is the discount rate which represents the average cost of investment funds to the firm, and is calculated as a weighted average of the after-tax cost of all funds used in the capital budget.

A project has an anticipated stream of annual net receipts of $20,000. Its life is 6 years. No salvage value is expected at the end of the 6 years. Compute the net present value of the project, if its price is $80,000 and the applicable discount rate is 8%.

The amount received today that would be equivalent in value to a future payment or series of payments represents the:

If the internal rate of return project evaluation method is utilized an individual project would be accepted if it had:

A constant amount payable at the end of each year for a specified number of years is:

Any increase in revenues brought about by a project less any increase in operating expenses and depreciation brought about by the project, multiplied by 1 - T), where T is the firm's marginal income tax rate, plus the incremental depreciation associated with the project is called the:

The future value of a sum of money held today is the amount that would be accumulated at some future date if we invested that sum of money now at a particular rate of interest.

The proposition that discounted future amounts are equal to a specific present amount is known as:

A project has an anticipated stream of annual net receipts of $25,000. Its life is 10 years. No salvage value is expected at the end of the 10 years. Compute the net present value of the project, if its price is $150,000 and the applicable discount rate is 8%.

The Always Late Construction Co. is about to sell some used equipment to Early Leasing. Always Late has offered the following two payment schemes: a. $50,000 now and $300,000 at the end of ten years. b. $50,000 now, $25,000 at the end of each of the next six years. If the applicable discount rate for either transaction is 12%, which would be the better alternative for Early? Why?

The discount rate that will result in a net present value of zero for the project is called the:

A project has an anticipated stream of annual net receipts of $1,000. Its life is 12 years. No salvage value is expected. What is the net present value of the project, if its price is $6,000 and the applicable discount rate is 12%?

The marginal cost of capital MCC) is the discount rate which represents the marginal cost of investment funds to the firm, and:

An investment project is acceptable if its NPV is less than or equal to zero.

All of the following projects have an initial cost of $10,000. Which are acceptable at a discount rate of 9%? A) Purchase an oil painting which can be sold in 3 years for $12,000? B) Purchase a delivery vehicle which will generate net inflows of $2,000 per year for five years and which will have a salvage value of $3,000 at the end of the 5th year? C) Invest in a video store that will generate net inflows of $3,000 per year for 4 years and which can be sold at the end of the 4th year for $2,000?

Capital budgeting is the analysis of alternative investment opportunities by a firm.