Fin 534 week 6 homework chapter 11Document Transcript
FIN 534 Week 6 Homework Chapter 11 PLEASE DOWNLOAD HEREFIN 534 Week 6 Homework Chapter 111. Which of the following statements is CORRECT?a. An externality is a situation where a project would have an adverse effect onsome other part of the firm’s overall operations. If the project would have afavorable effect on other operations, then this is not an externality.b. An example of an externality is a situation where a bank opens a new office,and that new office causes deposits in the bank’s other offices to decline.c. The NPV method automatically deals correctly with externalities, even if theexternalities are not specifically identified, but the IRR method does not. This isanother reason to favor the NPV.d. Both the NPV and IRR methods deal correctly with externalities, even if theexternalities are not specifically identified. However, the payback method doesnot.e. Identifying an externality can never lead to an increase in the calculated NPV.2. Taussig Technologies is considering two potential projects, X and Y. Inassessing the projects’ risks, the company estimated the beta of eachproject versus both the company’s other assets and the stock market, andit also conducted thorough scenario and simulation analyses. This researchproduced the following data:Project X Project YExpected NPV $350,000 $350,000Standard deviation (σNPV) $100,000 $150,000Project beta (vs. market) 1.4 0.8Correlation of the project cash flows with cash flows from currently existingprojects. Cash flows are not correlated with the cash flows from existing projects.Cash flows are highly correlated with the cash flows from existing projects.Which of the following statements is CORRECT?
a. Project X has more stand-alone risk than Project Y.b. Project X has more corporate (or within-firm) risk than Project Y.c. Project X has more market risk than Project Y.d. Project X has the same level of corporate risk as Project Y.e. Project X has less market risk than Project Y.3. Which of the following statements is CORRECT?a. If an asset is sold for less than its book value at the end of a project’s life, it willgenerate a loss for the firm, hence its terminal cash flow will be negative.b. Only incremental cash flows are relevant in project analysis, the properincremental cash flows are the reported accounting profits, and thus reportedaccounting income should be used as the basis for investor and managerialdecisions.c. It is unrealistic to believe that any increases in net working capital required atthe start of an expansion project can be recovered at the project’s completion.Working capital like inventory is almost always used up in operations. Thus, cashflows associated with working capital should be included only at the start of aproject’s life.d. If equipment is expected to be sold for more than its book value at the end of aproject’s life, this will result in a profit. In this case, despite taxes on the profit, theend-of-project cash flow will be greater than if the asset had been sold at bookvalue, other things held constant.e. Changes in net working capital refer to changes in current assets and currentliabilities, not to changes in long-term assets and liabilities. Therefore, changes innet working capital should not be considered in a capital budgeting analysis.4. Temple Corp. is considering a new project whose data are shown below.The equipment that would be used has a 3-year tax life, would bedepreciated by the straight-line method over its 3- year life, and would havea zero salvage value. No new working capital would be required. Revenuesand other operating costs are expected to be constant over the project’s 3-year life. What is the project’s NPV?Risk-adjusted WACC 10.0%Net investment cost (depreciable basis) $65,000Straight-line deprec.rate 33.3333%
Sales revenues, each year $65,500Operating costs (excl. deprec.), each year $25,000Tax rate 35.0%a. $15,740b. $16,569c. $17,441d. $18,359e. $19,3255. Florida Car Wash is considering a new project whose data are shownbelow. The equipment to be used has a 3-year tax life, would be depreciatedon a straight-line basis over the project’s 3- year life, and would have a zerosalvage value after Year 3. No new working capital would be required.Revenues and other operating costs will be constant over the project’s life,and this is just one of the firm’s many projects, so any losses on it can beused to offset profits in other units. If the number of cars washed declinedby 40% from the expected level, by how much would the project’s NPVdecline? (Hint: Note that cash flows are constant at the Year 1 level,whatever that level is.)WACC 10.0%Net investment cost (depreciable basis) $60,000Number of cars washed 2,800Average price per car $25.00Fixed op. cost (excl. deprec.) $10,000Variable op. cost/unit (i.e., VC per car washed) $5.375Annualdepreciation $20,000Taxrate 35.0%a. $28,939b. $30,462c. $32,066