Deck 9: Fundamentals of Capital Budgeting

Question 1

How does the capital budgeting process begin?

A) by analyzing alternate projects
B) by evaluating the net present value (NPV) of each project's cash flows
C) by compiling a list of potential projects
D) by forecasting the future consequences for the firm of each potential project
E) by calculating the incremental earnings of a project

Answer 1

by compiling a list of potential projects

Question 2

Capital budgeting is the process of allocating funds to the firm's investment projects.

Answer 2

False

Question 3

A small manufacturer that makes clothespins and other household products buys new injection moulding equipment for a cost of $500,000.This will allow the manufacturer to make more clothespins in the same amount of time with an estimated increase in sales of 15%.If the manufacturer currently makes 75 tons of clothespins per year,which sell at $18,000 per ton,what will be the increase in revenue next year from the new equipment?

A) $20,700
B) $80,500
C) $202,500
D) $857,000
E) $1,350,000

Answer 3

$202,500

Question 4

When evaluating the effectiveness of an improved manufacturing process we should evaluate the total sales and costs generated by this process.

Question 5

A stationery company plans to launch a new type of indelible ink pen.Advertising for the new product will be heavy and will cost the company $10 million,although the company expects general revenues of $280 million next year from sources other than sales of the new pen.If the company has a corporate tax of 40% on its pretax income,what effect will the advertising for the new pen have on its taxes?

A) increase taxes by $10 million
B) increase taxes by $4 million
C) It will have no effect on taxes.
D) reduce taxes by $4 million
E) reduce taxes by $10 million

Question 6

Which of the following best describes why the predicted incremental earnings arising from a given decision are not sufficient in and of themselves to determine whether that decision is worthwhile?

A) They do not tell how the decision affects the firm's reported profits from an accounting perspective.
B) They are not easily predicted from historical financial statements of a firm and its competitors.
C) These earnings are not actual cash flows.
D) They do not show how the firm's earnings are expected to change as the result of a particular decision.
E) They do not tell us how profits change from an accounting perspective.

Question 7

Cameron Industries is purchasing a new chemical vapour depositor in order to make silicon chips.It will cost $6 million to buy the machine and $10,000 to have it delivered and installed.Building a clean room in the plant for the machine will cost an additional $3 million.The machine is expected to have a working life of six years.Which of these activities will be reported as an operating expense?

A) the delivery and install cost only
B) the cost of the depositor only
C) the redesign of the plant only
D) the delivery and install cost and the cost of the depositor
E) the install cost only

Question 8

What is the ultimate goal of capital budgeting?

Question 9

What is the ultimate goal of the capital budgeting process?

A) to determine how the consequences of making a particular decision affects the firms revenues and costs
B) to list the projects and investments that a company plans to undertake in the future
C) to forecast the consequences of a list of future projects to the firm
D) to determine the effect of the decision to accept or reject a project on the firms cash flows
E) to calculate the incremental earnings of a project

Question 10

The ultimate goal of capital budgeting is to determine the effect of a project on the firm's cash flows and the consequences of accepting or rejecting a project for the firm's value.

Question 11

Which of the following best defines incremental earnings?

A) cash flows arising from a particular investment decision
B) the amount by which a firm's earnings are expected to change as the result of an investment decision
C) the earnings arising from all projects that a company plans to undertake in a fixed timespan
D) the net present value (NPV) of earnings that a firm is expected to receive as the result of an investment decision
E) the increase in cash flows resulting from a new product

Question 12

A brewer is launching a new product:: brewed ginger ale with a low alcohol content.The brewer plans to spend $4 million promoting this product this year,which is expected to expand its sales of this product to $10 million this year and $8 million next year.They do expect there will be loss of sales of $1 million this year and next year in their other products as customers switch to drinking the new ginger ale.The gross profit margin for the new ginger ale is 40%,the gross profit margin of all of the brewer's other products is 30%,and the brewer's marginal corporate tax rate is 35%.What are incremental earnings arising from the promotional campaign this year?

A) $1.95 million
B) $4.290 million
C) $4.68 million
D) $5.28 million
E) $8.00 million

Question 13

Longbow Lumber is purchasing a new horizontal resaw at a cost of $375,000.There is an additional $10,000 delivery and installation cost.The machine has a capital cost allowance (CCA)rate of 20%.What is the incremental undepreciated capital cost (UCC)for year 2?

A) $375,000
B) $337,500
C) $385,000
D) $346,500
E) $192,500

Question 14

Athabasca Ag is purchasing 1,000 grain bins at a cost of $40,000 each.Each bin also has a $5,000 delivery and installation cost,and the bins have a capital cost allowance (CCA)rate of 25%.What is the total incremental undepreciated capital cost (UCC)for year 1?

A) $40 million
B) $45 million
C) $22.5 million
D) $20 million
E) $15 million

Question 15

Longbow Lumber is purchasing a new horizontal resaw at a cost of $390,000.There is an additional $20,000 delivery and installation cost.The machine has a capital cost allowance (CCA)rate of 15%.What will be the CCA deduction for year 1?

A) $195,000
B) $205,000
C) $61,500
D) $29,250
E) $30,750

Question 16

The capital cost allowance (CCA)is only used for financial reporting purposes,and usually not for tax purposes.

Question 17

Athabasca Ag is purchasing 1,000 grain bins at a cost of $40,000 each.Each bin also has a $5,000 delivery and installation cost,and the bins have a capital cost allowance (CCA)rate of 25%.What will be the incremental undepreciated capital cost (UCC)for year 2?

A) $39,375,000
B) $45,000,000
C) $16,875,000
D) $22,500,000
E) $5,625,000

Question 18

Longbow Lumber is purchasing a new horizontal resaw at a cost of $450,000.There is an additional $15,000 delivery and installation cost.The machine has a capital cost allowance (CCA)rate of 25%.What is the incremental undepreciated capital cost (UCC)for year 1?

A) $232,500
B) $450,000
C) $225,000
D) $465,000
E) $435,000

Question 19

Interest and other financing-related expenses are excluded when determining a project's unlevered net income.

Question 20

Athabasca Ag is purchasing 1,000 grain bins at a cost of $40,000 each.Each bin also has a $5,000 delivery and installation cost,and the bins have a capital cost allowance (CCA)rate of 25%.What will be the CCA deduction for year 1?

A) $11,250,000
B) $5,625,000
C) $5,000,000
D) $10,000,000
E) $7,750,000

Question 21

Use the information for the question(s) below.
Ford Motor Company is considering launching a new line of hybrid diesel-electric SUVs. The heavy advertising expenses associated with the new SUV launch would generate operating losses of $35 million next year. Without the new SUV, Ford expects to earn pretax income of $80 million from operations next year. Ford pays a 30% tax rate on its pretax income.
The amount that Ford Motor Company owes in taxes next year with the launch of the new SUV is closest to:

A) $13.5 million
B) $31.5 million
C) $56.0 million
D) $24.0 million
E) $10.5 million

Question 22

Use the table for the question(s) below.

A company buys tracking software for its warehouse which,along with the computer system and ancillaries to run it,will cost $1.8 million.The new equipment and software falls under asset class 50 and has a capital cost allowance (CCA)rate of 55%.It is expected that the software will reduce inventory by $10.5 million at the end of the first year after it is installed,though there will be an annual cost of $120,000 per year to run the system.If the company's marginal tax rate is 40%,how will the purchase of this item change the company's free cash flows in the first year?

A) $10,020,000
B) $10,278,000
C) $10,422,000
D) $10,566,000
E) $10,578,000

Question 23

To evaluate a capital budgeting decision,it is sufficient to determine its consequences for the firms earnings.

Question 24

Why does capital budgeting focus on incremental revenues and costs,instead of the projected total revenues and costs of the firm?

Question 25

Use the table for the question(s) below.

A firm reports that in a certain year it had unlevered net income of $4.5 million,a capital cost allowance (CCA)deduction of $2.8 million,capital expenditures of $2.3 million,and net working capital decreased by $1.5 million.What is the firm's free cash flow for that year?

A) $2.4 million
B) $6.5 million
C) $8.1 million
D) $11.1 million
E) $5.5 million

Question 26

How do we handle interest expense when making a capital budgeting decision?

Question 27

Use the table for the question(s) below.


A garage is installing a new "bubble-wash" car wash.It will promote the car wash as a fun activity for the family,and it is expected that the novelty of this approach will boost sales in the medium term.If the cost of capital is 10%,what is the net present value (NPV)of this project?

A) -$214,525
B) -$145,283
C) $76,607
D) $108,306
E) $86,167

Question 28

Why does the Canada Revenue Agency (CRA)have a half-year rule for capital cost allowance (CCA)calculations?

Question 29

Use the information for the question(s) below.
The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine falls under asset class 43 and has a capital cost allowance (CCA) rate of 30%.
The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are estimated to grow by 10% per year each year through year 3. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each.
Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 35% tax bracket and has a cost of capital of 10%.
The CCA tax shield for the Sisyphean Corporation's project in the first year is closest to:

A) $8000
B) $1575
C) $2800
D) $5200
E) $4500

Question 30

Use the information for the question(s) below.
The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine falls under asset class 43 and has a capital cost allowance (CCA) rate of 30%.
The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are estimated to grow by 10% per year each year through year 3. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each.
Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 35% tax bracket and has a cost of capital of 10%.
The CCA tax shield for the Sisyphean Corporation's project in the second year is closest to:

A) $4230
B) $3150
C) $7650
D) $1575
E) $2678

Question 31

Which of the following formulas will correctly calculate Net Working Capital?

A) Cash + Inventory + Receivables + Payables
B) Cash + Inventory + Receivables - Payables
C) Cash + Inventory - Receivables + Payables
D) Cash - Inventory + Receivables + Payables
E) Cash - Inventory + Receivables - Payables

Question 32

CathFoods will release a new range of candies which contain antioxidants.New equipment to manufacture the candy will cost $2 million.The new equipment falls under asset class 43 and has a capital cost allowance (CCA)rate of 30%.It is expected that the range of candies will bring in revenues of $4 million per year for five years with production and support costs of $1.5 million per year.If CathFood's marginal tax rate is 35%,what are the incremental free cash flows in the first year of this project?

A) -$0.27 million
B) $1.43 million
C) $1.46 million
D) $2.50 million
E) $4.0 million

Question 33

The cash flow effect from a change in Net Working Capital is always equal in size and opposite in sign to the changes in Net Working Capital.

Question 34

Use the information for the question(s) below.
Ford Motor Company is considering launching a new line of hybrid diesel-electric SUVs. The heavy advertising expenses associated with the new SUV launch would generate operating losses of $35 million next year. Without the new SUV, Ford expects to earn pretax income of $80 million from operations next year. Ford pays a 30% tax rate on its pretax income.
The amount that Ford Motor Company owes in taxes next year without the launch of the new SUV is closest to:

A) $24.0 million
B) $56.0 million
C) $31.5 million
D) $13.5 million
E) $10.5 million

Question 35

Athabasca Ag is purchasing 1,000 grain bins at a cost of $40,000 each.Each bin also has a $5,000 delivery and installation cost,and the bins have a capital cost allowance (CCA)rate of 25%.The bins are expected to increase gross profit by $12 million per year,starting at the end of the first year,with annual associated costs of $1.5 million per year.Athabasca has a marginal tax rate of 30%.What are the incremental free cash flows associated with the new bins in year 1?

A) -34.5 million
B) -$32.8 million
C) -$45 million
D) -$43.3 million
E) -$22.5 million

Question 36

An announcement by the government that they will decrease corporate marginal tax rates in the future would increase the capital cost allowance (CCA)tax shield.

Question 37

Athabasca Ag is purchasing 1,000 grain bins at a cost of $40,000 each.Each bin also has a $5,000 delivery and installation cost,and the bins have a capital cost allowance (CCA)rate of 25%.The bins are expected to increase gross profit by $12 million per year,starting at the end of the first year,with annual associated costs of $1.5 million per year.Athabasca has a marginal tax rate of 30%.What are the incremental free cash flows associated with the new bins in year 2?

A) $7.35 million
B) $10.3 million
C) $9.04 million
D) $12 million
E) $9.5 million

Question 38

Use the table for the question(s) below.

The balance sheet for a small firm is shown above.All amounts are in thousands of dollars.What is this firm's Net Working Capital?

A) $30,000
B) $40,000
C) $47,000
D) $89,000
E) $42,000

Question 39

Use the table for the question(s) below.


Cromwell Industries is considering a new project which will have costs,revenues,etc.as shown by the data above.If the cost of capital is 8.5%,what is the net present value (NPV)of this project?

A) -$278,832
B) -$153,046
C) $199,300
D) $300,691
E) $313,154

Question 40

Use the table for the question(s) below.

A firm reports that in a certain year it had revenues of $4.5 million,costs of $1.2 million,a capital cost allowance (CCA)deduction of $2.8 million,capital expenditures of $2.3 million,and net working capital decreased by $1.5 million.If the firm's marginal corporate tax rate is 30%,what is the firm's free cash flow for that year?

A) $5.3 million
B) -$0.65 million
C) $1.75 million
D) $2.15 million
E) $2.35 million

Question 41

Use the information for the question(s) below.
The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine falls under asset class 43 and has a capital cost allowance (CCA) rate of 30%.
The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are estimated to grow by 10% per year each year through year 3. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each.
Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 35% tax bracket and has a cost of capital of 10%.
The required net working capital in the first year for the Sisyphean Corporation's project is closest to:

A) $3600
B) $3960
C) $2880
D) $5400
E) $2160

Question 42

A firm is considering changing their credit terms.It is estimated that this change would result in sales increasing by $1,000,000.This in turn would cause inventory to increase by $150,000,accounts receivable to increase by $100,000,and accounts payable to increase by $75,000.What is the firm's expected change in net working capital?

A) $1,175,000
B) $325,000
C) $250,000
D) $175,000
E) $150,000

Question 43

Use the information for the question(s) below.
The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine falls under asset class 43 and has a capital cost allowance (CCA) rate of 30%.
The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are estimated to grow by 10% per year each year through year 3. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each.
Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 35% tax bracket and has a cost of capital of 10%.
Bubba Ho-Tep Company reported net income of $300 million for the most recent fiscal year.The firm had a capital cost allowance (CCA)of $125 million and capital expenditures of $150 million.Although it had no interest expense,the firm did have an increase in net working capital of $20 million.What is Bubba Ho-Tep's free cash flow?

A) $170 million
B) $255 million
C) $150 million
D) $5 million
E) $25 million

Question 44

Use the information for the question(s) below.
The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine falls under asset class 43 and has a capital cost allowance (CCA) rate of 30%.
The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are estimated to grow by 10% per year each year through year 3. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each.
Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 35% tax bracket and has a cost of capital of 10%.
The required net working capital in the second year for the Sisyphean Corporation's project is closest to:

A) $3960
B) $4360
C) $3190
D) $5940
E) $2160

Question 45

Use the information for the question(s) below.
Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $5 million to set up and will generate $20 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $12 million during this year and the capital cost allowance will be another $3 million. THSI will require no working capital for this investment. THSI's marginal tax rate is 35%.
Assume that THSI's cost of capital for this project is 15%.The net present value (NPV)of this temporary housing project is closest to:

A) $435,000
B) -$650,000
C) $1,960,000
D) -$435,000
E) $1,250,000

Question 46

Use the table for the question(s) below.

You are considering adding a microbrewery onto one of your firm's existing restaurants.This will entail an investment of $40,000 in new equipment.The new equipment falls under asset class 43 and has a capital cost allowance (CCA)rate of 30%.If your firm's marginal corporate tax rate is 35%,then what is the value of the microbrewery's CCA tax shield in the first year of operation?

A) $2100
B) $14,000
C) $5200
D) $26,000
E) $6000

Question 47

Use the information for the question(s) below.
Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane. THSI will lease space in this facility to various agencies and groups providing relief services to the area. THSI estimates that this project will initially cost $5 million to set up and will generate $20 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $12 million during this year and the capital cost allowance will be another $3 million. THSI will require no working capital for this investment. THSI's marginal tax rate is 35%.
Ignoring the original investment of $5 million,what is THSI's free cash flow for the first and only year of operation?

A) $5.0 million
B) $3.75 million
C) $8.0 million
D) $6.25 million
E) $7.5 million

Question 48

Use the information for the question(s) below.
The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine falls under asset class 43 and has a capital cost allowance (CCA) rate of 30%.
The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are estimated to grow by 10% per year each year through year 3. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each.
Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 35% tax bracket and has a cost of capital of 10%.
The change in net working capital from year 1 to year 2 is closest to:

A) a decrease of $360
B) an increase of $360
C) an increase of $396
D) a decrease of $396
E) an increase of $756

Question 49

Use the information for the question(s) below.
Shepard Industries is evaluating a proposal to expand its current distribution facilities. Management has projected the project will produce the following cash flows for the first two years (in millions).

The CCA tax shield for Shepard Industries project in year 1 is closest to:

A) $84
B) $168
C) $96
D) $72
E) $100

Question 50

A company spends $20 million researching whether it is possible to create a durable plastic from the process waste from feedstock preparation.How should the $20 million best be considered?

A) as a sunk cost
B) as an opportunity cost
C) as a fixed overhead expense
D) as a capital cost
E) as a project externality

Question 51

Use the information for the question(s) below.
Shepard Industries is evaluating a proposal to expand its current distribution facilities. Management has projected the project will produce the following cash flows for the first two years (in millions).

The CCA tax shield for Shepard Industries project in year 2 is closest to:

A) $84
B) $196
C) $72
D) $96
E) $100

Question 52

Use the table for the question(s) below.

The Sisyphean Company is considering a new project that will have a CCA deduction of $2.5 million in the first year.If Sisyphean's marginal corporate tax rate is 40% and its average corporate tax rate is 30%,then what is the value of the CCA tax shield on the company's new project in year 1?

A) $750,000
B) $1,000,000
C) $1,500,000
D) $1,750,000
E) $2,500,000

Question 53

Use the table for the question(s) below.

You are considering adding a microbrewery onto one of your firm's existing restaurants.This will entail an increase in inventory of $8000,an increase in accounts payable of $2500,and an increase in property,plant,and equipment of $40,000.All other accounts will remain unchanged.The change in net working capital resulting from the addition of the microbrewery is:

A) $45,500
B) $10,500
C) $6,500
D) $5,500
E) $0

Question 54

The net present value (NPV)for Epiphany's Project is closest to:

A) $4825
B) $28,772
C) $1351
D) -$4825
E) $0

Question 55

A firm is considering investing in a new machine that will cost $600,000 and will be be under asset class 43 with a CCA rate of 30%.If the firm's marginal tax rate is 39%,what is the CCA tax shield in the first year?

A) $120,000
B) $35,100
C) $300,000
D) $234,000
E) $90,000

Question 56

Use the information for the question(s) below.
Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects:

The free cash flow for the first year of Epiphany's project is closest to:

A) $43,000
B) $25,000
C) $32,225
D) $45,000
E) $35,532

Question 57

Use the information for the question(s) below.
Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects:

The free cash flow for the last year of Epiphany's project is closest to:

A) $48,123
B) $35,532
C) $32,225
D) $43,000
E) $34,253

Question 58

A firm is considering a new project that will generate cash revenue of $1,000,000 and cash expenses of $700,000 per year for five years.The equipment necessary for the project will cost $200,000 and will fall under asset class 43 with a CCA rate of 30%.What is the expected free cash flow in the second year of the project if the firm's marginal tax rate is 35%?

A) $195,000
B) $162,500
C) $212,850
D) $245,000
E) $161,850

Question 59

Which of the following costs would you consider when making a capital budgeting decision?

A) sunk cost
B) opportunity cost
C) interest expense
D) fixed overhead cost
E) past research and development expenditures

Question 60

A decrease in the sales of a current project because of the launching of a new project is

A) cannibalization.
B) a sunk cost.
C) an overhead expense.
D) a past research and development expenditure.
E) an opportunity cost.

Question 61

Use the information for the question(s) below.
Food For Less (FFL), a grocery store, is considering offering one-hour photo developing in their store. The firm expects that sales from the new one-hour machine will be $150,000 per year. FFL currently offers overnight film processing with annual sales of $100,000. While many of the one-hour photo sales will be to new customers, FFL estimates that 60% of their current overnight photo customers will switch and use the one-hour service.
A textile company invests $12 million in an open-end spinning machine.The machine belongs to asset class 43 and has a capital cost allowance (CCA)rate of 30%.If the company sold it immediately after the end of year 3 for $8 million,what would be the present value of the lost CCA tax shields from the sale of this asset,given a tax rate of 40%,and a cost of capital of 12%?

A) $654,336
B) $928,910
C) $1,452,613
D) $1,626,926
E) $2,285,714

Question 62

Use the table for the question(s) below.

Visby Rides,a livery car company,is considering buying some new luxury cars.After extensive research,they come up with the above estimates of free cash flow from this project.The cars belong to asset class 10 and have a capital cost allowance (CCA)rate of 30%.What is the present value of the overall CCA tax shields,given that the cost of capital is 10%,and the company faces a marginal tax rate of 25%?

A) $32,562
B) $53,693
C) $93,465
D) $150,000
E) $162,452

Question 63

Use the table for the question(s) below.

Visby Rides,a livery car company,is considering buying some new luxury cars.After extensive research,they come up with the above estimates of free cash flow from this project.The cars belong to asset class 10 and have a capital cost allowance (CCA)rate of 30%.What is the net present value (NPV)of the project,given that the cost of capital is 10%,and the company faces a marginal tax rate of 25%?

A) $66,373
B) $78,564
C) $118,580
D) $151,142
E) $167,549

Question 64

Use the information for the question(s) below.
Food For Less (FFL), a grocery store, is considering offering one-hour photo developing in their store. The firm expects that sales from the new one-hour machine will be $150,000 per year. FFL currently offers overnight film processing with annual sales of $100,000. While many of the one-hour photo sales will be to new customers, FFL estimates that 60% of their current overnight photo customers will switch and use the one-hour service.
A textile company invests $12 million in an open-end spinning machine.The machine belongs to asset class 43 and has a capital cost allowance (CCA)rate of 30%.It is expected that the new machine will increase revenues by $9 million per year with production and support costs of $0.5 million per year.If the company sold it immediately after the end of year 3 for $8 million,what would be the net present value (NPV)of owning the asset,given a tax rate of 40%,and a cost of capital of 12%?

A) $7,561,553
B) $5,231,801
C) $1,867,311
D) $249,339
E) -$152,244

Question 65

Use the information for the question(s) below.
Food For Less (FFL), a grocery store, is considering offering one-hour photo developing in their store. The firm expects that sales from the new one-hour machine will be $150,000 per year. FFL currently offers overnight film processing with annual sales of $100,000. While many of the one-hour photo sales will be to new customers, FFL estimates that 60% of their current overnight photo customers will switch and use the one-hour service.
Joe pre-orders a non-refundable movie ticket.He then reads a number of reviews of the movie in question that make him realize that he will not enjoy it.He goes to see it anyway,rationalizing that otherwise his money will have been wasted.Is Joe succumbing to the Sunk Cost Fallacy,and why?

A) Yes, since he invested a valuable asset, his time, in a project based on its previous costs.
B) No, because the cost of the movie was not recoverable and would have been lost whatever action he took.
C) No, because going to see the movie means that the product of his initial investment was realized as originally planned.
D) No, because he incurred no further costs by going to see the movie.
E) No, because he won't know for sure if he enjoys the movie until he sees it.

Question 66

Use the information for the question(s) below.
Food For Less (FFL), a grocery store, is considering offering one-hour photo developing in their store. The firm expects that sales from the new one-hour machine will be $150,000 per year. FFL currently offers overnight film processing with annual sales of $100,000. While many of the one-hour photo sales will be to new customers, FFL estimates that 60% of their current overnight photo customers will switch and use the one-hour service.
A construction company spends $1.4 million to purchase a new crane.The crane will have a capital cost allowance (CCA)rate of 25%.If the opportunity cost of capital is 7%,and the company's marginal tax rate is 20%,what is the present value of the CCA tax shield?

A) $70,000
B) $350,000
C) $211,595
D) $250,779
E) $218,750

Question 67

Use the information for the question(s) below.
Food For Less (FFL), a grocery store, is considering offering one-hour photo developing in their store. The firm expects that sales from the new one-hour machine will be $150,000 per year. FFL currently offers overnight film processing with annual sales of $100,000. While many of the one-hour photo sales will be to new customers, FFL estimates that 60% of their current overnight photo customers will switch and use the one-hour service.
A bakery invests $30,000 in a light delivery truck.The truck belongs to asset class 10 and has a capital cost allowance (CCA)rate of 30%.If the company sold it immediately after the end of year 2 for $22,000,what would be the present value of the lost CCA tax shields,given a tax rate of 40% and a cost of capital of 8%?

A) $5,184
B) $8,122
C) $9,474
D) $5,956
E) $6,947

Question 68

A machine is purchased for $500,000 and is used through the end of Year 2.The machine falls under asset class 43 with a capital cost allowance (CCA)rate of 30%.At the end of Year 2,the machine is sold for $75,000.What is the present value of the lost CCA tax shields if the firm's marginal tax rate is 40% and its cost of capital is 5%?

A) $37,050
B) $15,180
C) $37,950
D) $23,324
E) $25,714

Question 69

Which of the following is an example of cannibalization?

A) A toothpaste manufacturer adds a new line of toothpaste (that contains baking soda) to its product line.
B) A grocery store begins selling T-shirts featuring the local university's mascot.
C) A basketball manufacturer adds basketball hoops to its product line.
D) A convenience store begins selling pre-paid cell phones.
E) A gas station starts selling diesel fuel.

Question 70

What are project externalities?

Question 71

What are sunk costs?

Question 72

Use the information for the question(s) below.
Food For Less (FFL), a grocery store, is considering offering one-hour photo developing in their store. The firm expects that sales from the new one-hour machine will be $150,000 per year. FFL currently offers overnight film processing with annual sales of $100,000. While many of the one-hour photo sales will be to new customers, FFL estimates that 60% of their current overnight photo customers will switch and use the one-hour service.
Luther Industries has outstanding tax loss carryforwards of $70 million from losses over the past four years.If Luther earns $15 million per year in pretax income from now on,in how many years will Luther first pay taxes?

A) 7 years
B) 2 years
C) 4 years
D) 5 years
E) 6 years

Question 73

Use the information for the question(s) below.
Food For Less (FFL), a grocery store, is considering offering one-hour photo developing in their store. The firm expects that sales from the new one-hour machine will be $150,000 per year. FFL currently offers overnight film processing with annual sales of $100,000. While many of the one-hour photo sales will be to new customers, FFL estimates that 60% of their current overnight photo customers will switch and use the one-hour service.
A restaurant invests $240,000 in a new food truck for mobile lunch sales.The truck will have a capital cost allowance (CCA)rate of 20%.If the opportunity cost of capital is 8.5%,and the restaurant's marginal tax rate is 30%,what is the present value of the CCA tax shield?

A) $48,547
B) $48,000
C) $50,526
D) $35,938
E) $14,400

Question 74

Use the information for the question(s) below.
Food For Less (FFL), a grocery store, is considering offering one-hour photo developing in their store. The firm expects that sales from the new one-hour machine will be $150,000 per year. FFL currently offers overnight film processing with annual sales of $100,000. While many of the one-hour photo sales will be to new customers, FFL estimates that 60% of their current overnight photo customers will switch and use the one-hour service.
A textile company invests $12 million in an open-end spinning machine.The machine belongs to asset class 43 and has a capital cost allowance (CCA)rate of 30%.If the company sold it immediately after the end of year 3 for $8 million,what would be the overall present value of the CCA tax shields from this asset,given a tax rate of 40%,and a cost of capital of 12%?

A) $912,310
B) $1,076,346
C) $1,617,972
D) $2,432,211
E) $3,244,898

Question 75

A machine is purchased for $500,000 and is used through the end of Year 2.The machine falls under asset class 43 with a capital cost allowance (CCA)rate of 30%.At the end of Year 2,the machine is sold for $75,000.What is the present value of the overall CCA tax shields if the firm's marginal tax rate is 40% and its cost of capital is 5%?

A) $232,128
B) $201,334
C) $175,997
D) $167,347
E) $144,023

Question 76

Use the table for the question(s) below.

Visby Rides,a livery car company,is considering buying some new luxury cars.After extensive research,they come up with the above estimates of free cash flow from this project.The cars belong to asset class 10 and have a capital cost allowance (CCA)rate of 30%.The cars will be sold at the end of 3 years for $150,000.What is the present value of the lost CCA tax shields of the project,given that the cost of capital is 10%,and the company faces a marginal tax rate of 25%?

A) $8342
B) $21,131
C) $10,112
D) $25,912
E) $28,125

Question 77

Use the information for the question(s) below.
Food For Less (FFL), a grocery store, is considering offering one-hour photo developing in their store. The firm expects that sales from the new one-hour machine will be $150,000 per year. FFL currently offers overnight film processing with annual sales of $100,000. While many of the one-hour photo sales will be to new customers, FFL estimates that 60% of their current overnight photo customers will switch and use the one-hour service.
The level of incremental sales associated with introducing the new one hour photo service is closest to:

A) $90,000
B) $150,000
C) $60,000
D) $120,000
E) $0

Question 78

Use the information for the question(s) below.
Food For Less (FFL), a grocery store, is considering offering one-hour photo developing in their store. The firm expects that sales from the new one-hour machine will be $150,000 per year. FFL currently offers overnight film processing with annual sales of $100,000. While many of the one-hour photo sales will be to new customers, FFL estimates that 60% of their current overnight photo customers will switch and use the one-hour service.
A restaurant invests $240,000 in a new food truck for mobile lunch sales.The truck will have a capital cost allowance (CCA)rate of 20%.The opportunity cost of capital is 8.5%,and the restaurant's marginal tax rate is 30%.If the company sells the truck at the end of 5 years for $120,000,what is the present value of the lost CCA tax shields from the sale of the asset?

A) $12,437
B) $16,801
C) $33,602
D) $35,938
E) $24,874

Question 79

Use the information for the question(s) below.
Food For Less (FFL), a grocery store, is considering offering one-hour photo developing in their store. The firm expects that sales from the new one-hour machine will be $150,000 per year. FFL currently offers overnight film processing with annual sales of $100,000. While many of the one-hour photo sales will be to new customers, FFL estimates that 60% of their current overnight photo customers will switch and use the one-hour service.
A bakery invests $30,000 in a light delivery truck.The truck belongs to asset class 10 and has a capital cost allowance (CCA)rate of 30%.If the company sold it immediately after the end of year 2 for $22,000,what would be the present value of the overall CCA tax shields,given a tax rate of 40% and a cost of capital of 8%?

A) $5,184
B) $8,122
C) $9,123
D) $3,167
E) $6,947

Question 80

If a business owner is using the extra space at home for his business,does it imply a zero opportunity cost for the space?