Exam 10: Project Cash Flows and Risk

A firm is evaluating a new machine to replace an existing, older machine.The old (existing) machine is being depreciated at R20,000 per year, whereas the new machine's depreciation will be R18,000.The firm's marginal tax rate is 30 percent.Everything else equal, if the new machine is purchased, what effect will the change in depreciation have on the firm's incremental operating cash flows?

In cash flow estimation, the presence of externalities has no direct cash flow effects.

If the firm is being operated so as to maximise shareholder wealth, and if our basic assumptions concerning the relationship between risk and return are true, then which of the following should be true?

Which of the following is not a cash flow that results from the decision to accept a project?

When evaluating the cash flows associated with a capital budgeting project, shipping and installation costs associated with the purchase of an asset, such as a lathe, are considered part of the

Cyrus Cypress evaluates all capital budgeting projects with its normal, or average, required rate of return (k), regardless of the risk associated with the projects.If Cyrus is currently examining projects that are significantly riskier than the existing assets of the firm, the capital budgeting decisions that the firm makes could be

Which of the following is not considered a relevant concern in determining incremental cash flows for a new product?

Which of the following items should not be considered when computing the terminal cash flow for an expansion project?

As a practical matter, it is much easier to use market risk analysis at the project level than at the divisional level because it is easier to estimate the beta of a single project such as a machine tool die maker than the beta of an entire division (or subsidiary) such as Phillip Morris' Kraft foods unit.

If a company uses the same discount rate for evaluating all projects, which of the following results is likely?

Meals on Wings Inc.supplies prepared meals for corporate aircraft (as opposed to public commercial airlines), and it needs to purchase new broilers.If the broilers are purchased, they will replace old broilers purchased 10 years ago for R105,000 and which are being depreciated on a straight line basis to a zero salvage value (15-year depreciable life).The old broilers can be sold for R60,000.The new broilers will cost R200,000 installed and will be depreciated using MACRS over their 5-year class life; they will be sold at their book value at the end of the 5th year.The firm expects to increase its revenues by R18,000 per year if the new broilers are purchased, but cash expenses will also increase by R2,500 per year.If the firm's required rate of return is 10 percent and its tax rate is 34 percent, what is the NPV of the broilers?

If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land.

An all-equity firm is analysing a potential project which will require an initial, after-tax cash outlay of R50,000 and after-tax cash inflows of R6,000 per year for 10 years.In addition, this project will have an after-tax salvage value of R10,000 at the end of Year 10.If the risk-free rate is 6 percent, the return on an average share is 10 percent, and the beta of this project is 1.50, then what is the project's NPV?

If a project is small relative to the total firm, and if its returns are not highly correlated with the returns on the firm's other assets, then the project may not be very risky in either the within-firm (corporate) or the market risk sense, even if the returns on the project are highly uncertain and thus the project has a high degree of stand-alone risk.

When evaluating a new project, the firm should consider all of the following factors except:

Which of the following statements is correct?

Exhibit 10-1 You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck.The truck's basic price is R50,000, and it will cost another R10,000 to modify it for special use by your firm.The truck falls into the MACRS three-year class, and it will be sold after three years for R20,000.Use of the truck will require an increase in net working capital (spare parts inventory) of R2,000.The truck will have no effect on revenues, but it is expected to save the firm R20,000 per year in before-tax operating costs, mainly labor.The firm's marginal tax rate is 40 percent. [MACRS table required] -Refer to Exhibit 10-1.What is the terminal (non-operating) cash flow at the end of Year 3?

Which of the following statements concerning cash flow evaluation in capital budgeting is incorrect?

If a firm uses its weighted average cost of capital (WACC) to evaluate all capital budgeting projects, which of the following could occur?

Klott Company encounters significant uncertainty with its sales volume and price in its primary product.The firm uses scenario analysis in order to determine an expected NPV, which it then uses in its budget.The base case, best case, and worst case scenarios and probabilities are provided in the table below.What is Klott's expected NPV, standard deviation of NPV, and coefficient of variation of NPV?