Exam 9: Using Discounted Cash-Flow Analysis to Make Investment Decisions

Class 10 asset purchased for $150,000 at the start of Year 1; Sold at the end of year 4 for $60,000.Analyze what will transpire at the end of year 4.

Your forecast shows $500,000 annually in sales for each of the next three years.If your second and third year predictions have failed to incorporate 5 percent expected annual inflation, how far off in total dollars is your three-year forecast?

Recalculate the NPV for the proposal in question 94, now assuming that the $45,000 in annual revenues will grow at a 6 percent annual rate and that the $15,000 in annual expenses will grow at a 5 percent annual rate.Does this change your decision on the project? Explain the implications of the difference between the two questions' results.

Sunk costs remain the same whether or not you accept the project.

The "recovery" of an additional investment in working capital is assumed to:

When additional funds must be committed to working capital, those funds are assumed to be recovered at the end of the project's life.

When an asset class is terminated, there will be recaptured depreciation when the adjusted cost of disposal from UCC of the asset class is a negative balance.

When assets are sold from a CCA pool:

The statement "We've got too much invested in that project to pull out now" possibly illustrates the need to:

Which of the following changes in working capital is least likely, given an increase in the overall level of sales?

CumChan manufactures and sells 10 million bags to its international market at a cost of $20.00 each.It is about to introduce a new line of bags due to past success and forecast sales to be 12 million bags at a new price of $25 each.Sales on the old bags are anticipated to fall to 3 million.The old bags cost $6 each to manufacture, and the new ones will cost $8 each.What will be the cash flow used to evaluate the present value of the introduction of the new bag?

If a project's cash flows include those triggered outside the project's incremental cash flows, it is likely that the:

Calculate the NPV for the following capital budgeting proposal: $100,000 initial cost, to be depreciated straight-line over five years to an expected salvage value of $5,000, 35 percent tax rate, $45,000 additional annual revenues, $15,000 additional annual expense, $8,000 additional investment in working capital, 11 percent cost of capital.

Assuming that an asset has been fully depreciated according to its straight line CCA class, which of the following statements is correct concerning the value of the asset:

Which of the following is not accurate in depicting cash flows from operations?

A project that increased sales was accompanied by a $50,000 increase in inventory, a $20,000 increase in accounts receivable, and a $25,000 increase in accounts payable.Assuming these amounts remain constant, by how much has net working capital increased?

Which of the following is least likely to influence the opportunity cost of an asset?

A bank can purchase an ATM (automated teller machine) for $110,000 that has an estimated life of six years.Maintenance over that period will begin at $2,500 annually and increase at a 10 percent rate.If the ATM is purchased the bank will not be required to hire one additional (human) teller.Including fringe benefits, the teller costs $18,000 per year, and this amount is expected to increase 5 percent annually.If the bank's cost of capital is 10 percent, which alternative should be selected?

What are the three methods to calculate cash flow from operations?

How can the cash flows of a project be computed from standard financial statements?