Deck 14: Cash Flow Estimation and Capital Budgeting Decisions

Question 1

A real estate company started the exploration of buying a piece of land for condos.The company bought the land and started breaking ground.The housing market crashed,and the amount spent may not be recovered completely.What do we call the costs involved with the development of the land?

A) An opportunity cost.
B) A sunk cost.
C) An incremental cost
D) A financing cost

Answer 1

B

Question 2

A company is considering taking over a firm that has a very good company image.The company image cannot be assessed in financial terms and has no direct link to the change in cash flows.How can we categorize the company's image?

A) Opportunity cost
B) Sunk Cost
C) Externality
D) Intangible

Answer 2

D

Question 3

A Canadian oil company is considering whether or not to develop a site it has been exploring for the past six months.One of the arguments for developing the site is that considerable time and money have already been expended.This cost should not be included in the capital budgeting decision because it is:

A) an opportunity cost.
B) a sunk cost.
C) an operating cost
D) a financing cost

Answer 3

B

Question 4

Which of the following is NOT relevant to the cash flow estimates that are associated with a project?

A) The associated financing costs.
B) The economic life of the project.
C) The effect of inflation.
D) The terminal cash flow.

Question 5

Which of the following would NOT be included in a capital budgeting evaluation?

A) Incremental cash flows
B) External benefits
C) Effects of price level changes
D) Taxes

Question 6

Which of the following statements is correct?

A) Investment in net working capital is not depreciated because it is a sunk cost:
B) Investment in net working capital is not depreciated because it is not a depreciable asset.
C) Investment in net working capital is not depreciated because it is not an operating cash flow.
D) all of the above.

Question 7

Which of the following should be ignored in the capital budgeting decision?

A) The effect of all project interdependencies.
B) Social investments required by law.
C) Inflation.
D) Externalities.

Question 8

A pharmaceutical company has discovered a new drug that treats gastrointestinal disorders.The R&D costs for the drug were $3 million.In the testing phase of this new drug,the company further discovered that there is a possibility that the drug would be effective against migraine headaches if they invest another 10% in R&D.When evaluating the capital budgeting decision for the migraine remedy,what portion of the R&D costs for the drug should be attributed to the migraine budget?

A) 0 percent of the R&D costs.
B) $300,000 of the R&D costs.
C) $1.65 million of the R&D costs.
D) It cannot be determined until the drug is further tested. There may be more uses for this drug and further testing is required.

Question 9

Which of the following is NOT an example of cannibalization?

A) Kellogg's introduces a new type of cereal.
B) Ford rolls out a new model of car.
C) Molson brings out a new beer.
D) Canadian Tire allows Tim Horton's to operate a concession stand in their retail outlets.

Question 10

Which of the following should be accounted for in the capital budgeting decision?

A) Externalities.
B) Intangible considerations that cannot be measured.
C) Opportunity costs.
D) Sunk costs.

Question 11

Incremental cash flows are of primary interest in capital budgeting decisions because:

A) they are more relevant than intangible costs and benefits.
B) they are able to correct for a portion of the uncertainty due to the long time horizon.
C) the change in the company's future cash flows is what is being estimated.
D) they are the easiest cash flows to identify.

Question 12

The incremental cash flows for a project are estimated as:

A) accounting profit before taxes.
B) cash flows before taxes.
C) cash flows after taxes.

Question 13

A firm is considering a project that has cash flows indexed to the consumer price index.What discount rate should be chosen?

A) Nominal discount rate
B) Yield to maturity
C) Change in consumer price index
D) A rate that uses the consumer price index in its measure

Question 14

A real estate company started the exploration of buying a piece of land for condos.The company bought the land and started breaking ground.The housing market crashed,and the amount spent may not be recovered completely.What do we call the costs involved with the purchase of the land?

A) An opportunity cost.
B) A sunk cost.
C) An incremental cost
D) A financing cost

Question 15

Which of the following is NOT an incremental cash flow?

A) Research and development costs for the new product, which have already been undertaken.
B) Reduction in sales of an existing product line as a result of the introduction of the new product line.
C) Cannibalization
D) Proceeds from the sale of old equipment.

Question 16

Which of the following is NOT appropriate for estimating the cash flows associated with capital expenditure decisions?

A) Discount nominal cash flows with nominal discount rates, and real cash flows with real discount rates.
B) Include associated interest and dividend payments.
C) Use after-tax cash flows with an after-tax discount rate.
D) Use the marginal or incremental cash flows arising from capital budgeting decisions.

Question 17

Which of the following should NOT be considered in the capital budgeting decision?

A) Working capital requirements.
B) Initial cash outlay.
C) Opportunity costs.
D) Sunk costs.

Question 18

Use the following statements to answer this question:
I)When we are dealing with cannibalization of a project,we should ignore the old product.
II)Increases in incremental cash flows can be gained from decreases in expenses.

A) I and II are correct.
B) I and II are incorrect.
C) I is correct and II is incorrect.
D) I is incorrect and II is correct.

Question 19

Which of the following would be considered relevant cash flows in a capital budgeting evaluation?
I)Increased after-tax income.
II)Tax savings due to increased depreciation expense.
III)Increased expenditures on inventory for the new project.
IV)Benefits that accrue to the local community.

A) I, II, and III.
B) I, II, and IV.
C) I, III, and IV.
D) I, II, III, and IV.

Question 20

A pharmaceutical company has discovered a new drug that treats gastrointestinal disorders.In the testing phase of this new drug,the company further discovered that the drug is effective against migraine headaches.The R&D costs for the drug were $3 million.When evaluating the capital budgeting decision for the migraine remedy,what portion of the R&D costs for the drug should be attributed to the migraine budget?

A) 0 percent of the R&D costs.
B) 50 percent of the R&D costs.
C) 100 percent of the R&D costs.
D) It cannot be determined until the drug is further tested. There may be more uses for this drug and further testing is required.

Question 21

According to Canada Revenue Agency:
I)The purchase cost of a capital asset is to be capitalized and its value expensed as depreciation expense over future periods.
II)The modification costs of a capital asset have to be expensed immediately.

A) I and II are correct.
B) I and II are incorrect.
C) I is correct, II is incorrect.
D) I is incorrect, II is correct.

Question 22

The following equation is:

A) Present value of the salvage value.
B) Present value of the terminal value of the asset.
C) Present value of the taxes owed on the gain resulting from the sale of an asset.
D) The present value of the depreciation.

Question 23

Montreal Sun Printing is looking at an opportunity of setting up a new production facility,which requires the purchase of a new printing press that costs $1 million.The costs to install the machine are $60,000.The new facility is to be built on a piece of land that the company bought for $150,000 five years ago.The market value of the land is $250,000.The R&D costs associated with the investment opportunity were $50,000.In addition,the company will need to purchase $40,000 additional inventory for the project use.How much of these costs can be categorized as a sunk cost?

A) $250,000
B) $60,000
C) $50,000
D) None of the above

Question 24

Given the following information on a project: initial capital cost = $500,000; installation costs associated with the capital asset = $25,000; R&D costs associated with the project = $50,000; associated opportunity costs = $80,000; increase in raw materials inventory = $10,000,which of these amounts is included with working capital?

A) $500,000
B) $80,000
C) $10,000
D) $25,000

Question 25

Because CCA is a non-cash expense,in estimating the annual after-tax cash flows,we have to deal with it using one of the following two approaches:
I)Deduct CCA from operating income,then deduct the associated taxes payable,and finally add the amount of the CCA tax savings back.
II)Multiply the CCA by the company's effective tax rate and add this amount to the after-tax operating income.

A) I and II are correct.
B) I and II are incorrect.
C) I is correct, II is incorrect.
D) I is incorrect, II is correct.

Question 26

La Poutine Cheese Products Inc.is considering a project that requires an initial cash outlay of $290,000,comprised of $235,000 for the purchase of new equipment,$13,000 for the installation costs,and $42,000 for additional inventory.In addition,the R&D associated with the project was $5,000 and its opportunity costs are $28,000.What is the capital cost associated with the investment opportunity?
a) $235,000
b) $248,000
c) $290,000
d) $318,000

Question 27

Which one of the following represents the change in net working capital?

A) The level of inventory in the project.
B) The difference between the account receivables at the end and beginning of the project.
C) The difference between the account payables at the end and beginning of the project.
D) The difference between current assets and current liabilities.

Question 28

Which of the following is NOT a component of the initial after-tax cash flow?

A) The change in the net working capital requirements.
B) The initial capital cost of the asset.
C) The original cost of a capital asset that was incurred several years ago.
D) The opportunity costs associated with the project.

Question 29

Which of the following is correct with respect to working capital and capital budgeting?

A) Working capital is ignored in the capital budget.
B) Working capital has a different discount rate.
C) Working capital is assumed to be recuperated at the end of the life of the project.
D) Working capital does not affect cash flow.

Question 30

Given the following information on a project: initial capital cost = $500,000; installation costs associated with the capital asset = $25,000; R&D costs associated with the project = $50,000; associated opportunity costs = $80,000; increase in raw materials inventory = $10,000,what is the initial cash outlay of the project?
a) $535,000
b) $590,000
c) $615,000
d) $665,000

Question 31

If the asset is depreciated completely before the end of the life of the project,what happens to the salvage value?

A) The salvage value is ignored in the capital budget.
B) The salvage value is amortized further.
C) The after-tax salvage value is discounted at the date of the disposal of the asset.
D) The asset's life is extended.

Question 32

La Montrealaise Transportation Company is considering a project,which requires the purchase of a fleet of trucks costing $500,000.It will need to spend $65,000 to modify the trucks before they can be put into operation.The associated opportunity costs are $35,000.In addition,the company will need to spend $10,000 on additional spare parts inventory.What is the initial capital cost associated with the investment opportunity?
a) $500,000
b) $565,000
c) $575,000
d) $610,000

Question 33

Which of the following is NOT a true statement?

A) A capital loss arises when the selling price of a depreciable asset is lower than the original purchase price.
B) A capital gain arises when the selling price of an asset is greater than the original capital cost.
C) CCA recapture occurs when the salvage value of an asset exceeds the UCC and selling the asset terminates the CCA asset class.
D) A terminal loss occurs when the salvage value of an asset is less than the ending UCC and selling the asset terminates the CCA asset class.

Question 34

Which of the following is most likely to occur upon termination of a project?

A) Capital gains
B) CCA recapture
C) Terminal losses
D) Working capital recapture

Question 35

Use the following two statements to answer this question:
I)The initial after-tax cash flow refers to the total cash outlay that is required to initiate an investment project and can be depreciated for tax purposes.
II)The capital cost of an investment refers to all costs incurred to make an investment operational,which includes the additional working capital requirements.

A) I and II are correct.
B) I and II are incorrect.
C) I is correct, II is incorrect.
D) I is incorrect, II is correct.

Question 36

Which of the following is NOT a component of the expected annual after-tax cash flows?

A) The additional depreciation expense that results from the capital cost of the investment.
B) The additional taxes paid that result from the capital budgeting decision.
C) The incremental increase in after-tax operating income of the project.
D) The incremental tax savings that result from the initial investment outlay.

Question 37

Montreal Sun Printing is looking at an opportunity of setting up a new production facility,which requires the purchase of a new printing press that costs $1 million.The costs to install the machine are $60,000.The new facility is to be built on a piece of land that the company bought for $150,000 five years ago.The market value of the land is $250,000.The R&D costs associated with the investment opportunity were $50,000.In addition,the company will need to purchase $40,000 additional inventory for the project use.What is the initial after-tax cash flow associated with the investment opportunity?
a) $1,250,000
b) $1,300,000
c) $1,350,000
d) $1,400,000

Question 38

Use the following two statements to answer this question:
I)The use of declining balance CCA means that the tax deductions last forever and the asset is never fully depreciated.
II)The half-year rule results in CCA expense that is lower in year 1 and highest in year 2.

A) I and II are correct.
B) I and II are incorrect.
C) I is correct, II is incorrect.
D) I is incorrect, II is correct.

Question 39

What is the difference between the initial cash flow and the purchase price of an asset?

A) Set up costs only
B) Capital costs
C) Other capital costs and net working capital
D) None of the above

Question 40

Why do we add the present value of the CCA tax shield to the NPV?

A) Tax shield is a cost.
B) The CAA tax shield arises from depreciating the asset.
C) The CCA tax shield arises from expensing the interest.
D) None of the above

Question 41

Monteregie Auto Services is considering an opportunity to invest $550,000 in a capital asset that will generate additional after-tax operating income of $200,000 per year.The asset has a six-year life,a CCA rate of 20 percent,and an expected salvage value of $60,000.The project has a beta of 1.5.The company's cost of capital is 12 percent and marginal tax rate is 35 percent.The risk-free rate is 4.5 percent and the market risk premium is 6 percent.What is the present value of the after-tax operating cash flows?
a) $512,526
b) $534,483
c) $788,501
d) $822,281

Question 42

Canadian Donuts is looking at a new investment opportunity,which will require the purchase of a capital asset of $1 million and additional raw materials inventory of $50,000.The project is expected to generate operating revenue of $750,000 per year,and the associated operating expenses are estimated at $350,000 per year.The project has a five-year economic life.This capital asset belongs to asset class 8,which has a CCA rate of 20 percent.What is the CCA expense for year 3?
a) $115,200
b) $128,000
c) $144,000
d) $180,000

Question 43

Hull Small Business is considering an expansion project that requires $135,000 for the purchase of capital assets and $35,000 for additional inventory.The project will generate after-tax operating income of $50,000 per year.The project has a five-year economic life and a CCA rate of 20 percent.What is the ending UCC upon termination of the project?
a) $44,237
b) $49,766
c) $55,706
d) $62,669

Question 44

Ontario Courier Service is considering investing in a capital asset that costs $64,000.The project also requires an investment in net working capital of $8,000.The project will generate annual after-tax operating income of $20,800 for the next four years.The asset has a CCA rate of 20 percent and is expected to sell for $7,200 at the end of four years.The firm's cost of capital is 15 percent and marginal tax rate is 35 percent.Assume the asset class remains open after the asset is sold.What is the ending after-tax cash flow?
a) $7,398
b) $15,200
c) $21,855
d) $23,002

Question 45

The following information was reported last year:

What was the effect of the change in net working capital on cash flow for the year?
a) -$19,138
b) -$15,338
c) $19,138
d) $15,338

Question 46

Canadian Auto Shop Services has an opportunity to invest $550,000 in a new project that will generate additional operating profit of $200,000 per year.The asset has a six-year life,a CCA rate of 30 percent,and an expected salvage value of $60,000.The project has a beta of 1.5.The company's cost of capital is 12 percent and marginal tax rate is 35 percent.The risk-free rate is 4.5 percent and the market risk premium is 6 percent.Assume the asset class remains open after the asset is sold.What is the project's NPV?
a) $108,680
b) $137,415
c) $384,655
d) $425,214

Question 47

Unique Style Inc.is considering a five-year expansion project that requires an initial investment of $500,000 for the purchase of a new machine with a CCA rate of 30 percent.The projected sales revenue and related costs are $450,000 and $180,000 per year,respectively.The project's fixed costs are an additional $48,000 per year.The appropriate discount rate is 8 percent.The firm's marginal tax rate is 40 percent.What is the after-tax cash flow in year three?
a) $162,600
b) $168,900
c) $191,400
d) $197,700

Question 48

Bugs Buster is considering investing in a new risky project that requires $100,000 for the purchase of new equipment and $20,000 for additional net working capital.The equipment has a five-year life and a CCA rate of 30 percent.The equipment is expected to sell for $8,500 at the end of the project.Assume the asset class remains open after the asset is sold.The firm's cost of capital is 12 percent and marginal tax rate is 35 percent.The risk premium for the project is 3 percent.What is the present value of the terminal after-tax cash flow?
a) $14,169.54
b) $16,171.67
c) $16,241.76
d) $18,536.69

Question 49

Queue de Castor Foods is considering the purchase of a new capital asset for $35,000.The asset has an economic life of three years,a CCA rate of 20 percent,and expected salvage value of $5,000.The project also requires an investment in net working capital of $4,500.Assume the asset class remains open after the asset is sold.The firm's cost of capital is 14 percent and marginal tax rate is 40 percent.What is the present value of the terminal after-tax cash flow?
a) $2,319.20
b) $6,412.23
c) $9,900.48
d) $10,505.26

Question 50

The Beer Brewing Company is interested in a new eight-year project.The project calls for an initial cash outlay of $1,000,000: $850,000 for new equipment,$100,000 for installation costs,and $50,000 for additional net working capital.The asset has a CCA rate of 30 percent and an expected salvage value of $75,000.The project will generate additional operating profit of $325,000 per year.What is the UCC at the end of year 3?
a) $395,675
b) $325,850
c) $354,025
d) $416,500

Question 51

Laurentide Resort Corporation is considering a seven-year project that requires an initial investment of $525,000 and generates annual after-tax operating cash flow of $225,000.The asset has a CCA rate of 30 percent and an expected salvage value of $65,000.The firm's marginal tax rate is 40 percent.What is the CCA tax savings for year 5?
a) $15,126
b) $18,368
c) $37,816
d) $45,919

Question 52

Toronto Skates Corp.is considering a five-year project that requires an initial investment of $250,000.The project is expected to generate operating incomes of $60,000 in year 1,$90,000 in year 2,$150,000 in year 3,$100,000 in year 4,and $80,000 in year 5.The asset belongs to asset class 7,which has a CCA rate of 15 percent.The firm's marginal tax rate is 35 percent and cost of capital is 10 percent.What is the present value of the after-tax operating cash flows?
a) $205,272
b) $233,739
c) $315,804
d) $359,598

Question 53

Maple Syrup Food is considering a six-year expansion project that requires an initial investment of $350,000 for the purchase of a new capital asset with a CCA rate of 20 percent.The costs to install the asset are $25,000.The projected annual sales revenue and costs are $200,000 and $90,000 per year,respectively.The appropriate discount rate is 10 percent.The firm's marginal tax rate is 40 percent.What is the fourth year CCA expense?
a) $35,840
b) $38,400
c) $40,320
d) $43,200

Question 54

BC Travel Services is considering a new ten-year project that will generate additional sales revenue of $200,000 per year.The associated costs are $120,000 per year.The project is somewhat riskier than the company's current operations,and hence requires a risk premium of 2 percent.The company's cost of capital is 12 percent and marginal tax rate is 40 percent.What is the present value of the after-tax operating cash flows?
a) $250,374
b) $271,211
c) $417,289
d) $452,018

Question 55

The following information was reported last year:

What was the change in net working capital for the year?
a) $2,674
b) -$22,850
c) -$2,674
d) $-$22,850

Question 56

Champlain Transportation Inc.is considering a five-year project that requires an initial capital investment of $1 million.The project is expected to generate operating revenue of $500,000 per year,and the associated operating expenses are estimated at $250,000 per year.The capital asset belongs to asset class 9,which has a CCA rate of 30 percent.The firm's marginal tax rate is 35 percent.What is the after-tax cash flow for year 1?
a) $215,000
b) $267,500
c) $302,500
d) $312,500

Question 57

Champlain Transportation Inc.is considering a six-year project that requires $800,000 for the purchase of a capital asset with a CCA rate of 30 percent.The project is expected to generate sales revenue of $600,000 per year.The project's variable and fixed costs are estimated at $240,000 and $50,000 per year,respectively.The firm's marginal tax rate is 35 percent and cost of capital is 12 percent.What is the present value of the after-tax operating cash flows?
a) $828,449
b) $962,069
c) $1,274,536
d) $1,480,107

Question 58

Amazing Lace has an opportunity to invest in a ten-year project that requires an initial investment of $2 million in a capital asset with a CCA rate of 20 percent.The initial net working capital requirement is $200,000,which will remain unchanged throughout the life of the project.The capital asset is expected to sell for $75,000 when the project terminates.Assume the asset class is closed upon termination of the project.The firm's cost of capital is 10.5 percent and marginal tax rate is 40 percent.What is the ending after-tax cash flow?
a) $208,363.24
b) $275,000.00
c) $330,899.35
d) $341,636.76

Question 59

The following information is from last year's financial statements:

What was the net cash flow if the reported sales revenue and costs for the same period were $582,366 and $437,265,respectively?
a) $113,980
b) $140,132
c) $150,070
d) $176,222

Question 60

Suppose a project requires a capital investment of $300,000.The project will last for six years,at which time the asset will be sold for $90,000.The asset will be depreciated on a declining balance basis at a CCA rate of 20 percent.The firm's marginal tax rate is 40 percent.The firm's required rate of return is 8 percent.Assume the asset class remains open after the asset is sold.What is the present value of the CCA tax savings for the project?
a) $63,472.64
b) $65,950.56
c) $66,335.32
d) $66,720.08

Question 61

Use the following statements to answer this question:
I)The break-even NPV is the same as finding the IRR of the project
II)By assessing the break-even NPV,managers estimate the break-even level of operating cash flows required for the project.

A) I and II are correct.
B) I and II are incorrect.
C) I is correct, II is incorrect.
D) I is incorrect, II is correct.

Question 62

A manufacturing company is considering purchasing a new machine to replace the existing one to improve production efficiency.The new machine will cost the company $200,000 and is expected to sell for $15,000 in ten years.The old machine has a market value of $50,000 today and could be sold for $5,000 in ten years.Both machines have a CCA rate of 30 percent and the asset class will remain open.With the new machine,the company expects $50,000 savings in operating expenses per year.The company's tax rate is 40 percent and the cost of capital is 15 percent.What is the present value of the incremental CCA tax savings generated by the replacement decision?
a) $36,402.57
b) $36,732.15
c) $48,866.33
d) $49,195.91

Question 63

A firm is considering the purchase of a new computer system at $180,000 to replace the existing system.The existing system has a market value of $50,000 today and an expected salvage value of $10,000 at the end of five years.The new system will have a life of five years and is expected to sell for $50,000 at the end of five years.The new system will save the firm $60,000 per year in operating expenses over the life of the system.Both computer systems belong to asset class 45,which has a CCA rate of 45 percent,and the asset class will remain open.The firm's marginal tax rate is 40 percent and its cost of capital is 10 percent.What is the NPV of the replacement decision?
a) $63,788.32
b) $69,997.54
c) $77,376.05
d) $83,585.26

Question 64

Which of the following is the purpose of providing a sensitivity analysis?

A) To determine which variable is most critical to the success or failure of a project.
B) To develop a probability distribution for a project.
C) To evaluate the worst-case scenarios.
D) To examine all possible outcomes of a project.

Question 65

Toronto Skaters is considering the purchase of a new computer system for $150,000.The asset has an economic life of four years,a CCA rate of 45 percent,and expected salvage value of $10,000.The project also requires an investment in net working capital of $7,500,which will be recovered at the end of the project.The project is expected to generate after-tax operating income of $80,000 per year.Assume the asset class remains open after the asset is sold.The firm's cost of capital is 18 percent and marginal tax rate is 40 percent.What is the NPV of the project?
a) $104,845.95
b) $18,763.97
c) $105,330.16
d) $108,477.53

Question 66

Use the following two statements to answer this question:
I)Sensitivity analysis examines how an investment's NPV changes as we change the values of more than one input variable at a time.
II)Scenario analysis examines how an investment's NPV changes as we change the value of one input variable at a time.

A) I and II are correct.
B) I and II are incorrect.
C) I is correct, II is incorrect.
D) I is incorrect, II is correct.

Question 67

You are looking to replace an old machine X with a new machine Y.
The two machines,X and Y,which perform the same functions,have the following costs and lives.
PV Costs Life
Machine X $10,000 5
Machine Y $11,500 7
Which machine would you choose? Assume an opportunity cost of capital of 15%.
a) Keep the old machine X.
b) Buy the new machine Y.
c) Indifferent

Question 68

Break-even sales based on NPV is:

A) higher than the accounting break-even sales.
B) lower than the accounting break-even sales.
C) equal to the accounting break-even sales.
D) none of the above.

Question 69

Replace the old machine with a new machine if:

A) the cash flows of the old machine are greater than the cash flows of the new machine.
B) the cash flows of the new machine are greater than the cash flows of the old machine.
C) the NPV of replacement is negative.
D) none of the above.

Question 70

Mont Royal Lighting Corporation is considering investing $100,000 in machinery that would generate operating cash flows of $30,000 in year 1,$60,000 in year 2,$10,000 in year 3,$50,000 in year 4,and $40,000 in year 5.The equipment has a CCA rate of 30 percent and is expected to have no salvage value at the end of five years.Assume the asset class remains open after the asset is sold.The firm's marginal tax rate is 38 percent.If the appropriate discount rate is 10 percent,what is the project's NPV?
a) $16,087.86
b) $20,903.24
c) $70,564.72
d) $75,380.11

Question 71

In which of the following do we change one variable while holding the other variables constant to examine the impact on the NPV of a project?

A) NPV break-even analysis
B) Real option valuation
C) Scenario analysis
D) Sensitivity analysis

Question 72

Which of the following is FALSE about scenario analysis?

A) It can provide important information because estimates will rarely be completely accurate and can often be very wrong.
B) It is often conducted in the form of a "what if" analysis.
C) It allows firms to determine which of their estimates is the most critical in the final decision.
D) It allows firms to account for interactions among the variables and for the fact that many variables can be related to external variables.

Question 73

A large printing company is considering purchasing a new printing press to replace the existing one that cost the company $1 million five years ago.The new machine will cost the company $1.8 million,has an economic life of ten years,and an expected salvage value of $150,000.The old machine can be sold for $200,000 today or could be sold for $10,000 in ten years.Both machines have a CCA rate of 30 percent and the asset class will remain open.The company projects that operating profit will increase by $400,000 per year.The company's tax rate is 40 percent and the cost of capital is 12 percent.What is the NPV of the replacement decision?
a) $220,903.91
b) $224,123.64
c) $274,065.62
d) $277,285.35

Question 74

A manager is considering taking a project this fiscal year or waiting for a few years before committing.What method should she use to take this decision?

A) Break-even analysis
B) Scenario analysis
C) Real option analysis
D) Sensitivity analysis

Question 75

Which of the following is (are)useful in examining the relationship between the sales and profitability of an investment project?
I)Scenario analysis
II)Sensitivity analysis
III)Real option analysis

A) II only.
B) I and II only.
C) I and III only.
D) II and III only.

Question 76

Use the following statements to answer this question:
I)Replacement projects are projects that involve the replacement of an existing project.The incremental cash flows are the difference between the costs and the revenues of the two projects.
II)The discount rate of the two projects must be the same.

A) I and II are correct.
B) I and II are incorrect.
C) I is correct, II is incorrect.
D) I is incorrect, II is correct.

Question 77

Which of the following cash flows should be treated as incremental flows when deciding whether to go ahead with a new pharmaceutical drug?

A) The cost of research and development undertaken for developing the new drug in the past five years
B) The annual accounting depreciation charge
C) The increase in taxes resulting from the depreciation charges
D) None of the above

Question 78

Use the following two statements to answer this question:
I)Expansion projects are projects that would add something extra to the firm in terms of sales or cost savings.The incremental cash flows arising from such investment decisions are the new cash flows.
II)Replacement projects are projects that involve the replacement of an existing asset with a new one.The incremental cash flows arising from such investment decisions are the new operating expenses.

A) I and II are correct.
B) I and II are incorrect.
C) I is correct, II is incorrect.
D) I is incorrect, II is correct.

Question 79

Maritimes Toy Corporation (MTC)is considering investing in a piece of new equipment worth $50,000.The equipment will increase operating revenue by $10,000 per year for ten years.The equipment is expected to have no salvage value at the end of ten years,and capital cost allowance is claimed at 20 percent on a declining balance.The corporate tax rate is 38 percent,and MTC's opportunity cost of capital is 9 percent.Assume the asset class remains open after the asset is sold.The project's NPV is closest to:
a) $2,351.96
b) $3,321.44
c) $26,739.06
d) $27,708.54

Question 80

Investment in net working capital is included in the cash flows:

A) to reflect the cash flows from buying and selling on credit
B) to reflect the financing decisions
C) to reflect opportunity costs
D) all of the above