Capital Investments quiz

A company is considering a $10,000 project that will last 5 years.

Annual after tax cash flows are expected to be $3,000

Cost of capital = 9.7%

What is the project's net present value (NPV)?

Which of the following statements concerning the principles underlying the capital allocation process is most accurate ?

If the calculated net present value (NPV) is negative, which of the following must be correct.

The discount rate used is :

Kim Corporation is considering an investment of  750 million with expected after-tax cash inflows of  175 million per year for seven years. The required rate of return is 10 %. What is the investment’s :

An investment of $ 100 generates after-tax cash flows of $ 40 in Year 1, $ 80 in Year 2, and $ 120 in Year 3. The required rate of return is 20 %. The NPV is closest to :

The post-audit performed as part of the capital budgeting process is least likely to include the :

Bouchard Industries is a Canadian company that manufactures gutters for residential houses. Its management believes it has developed a new process that produces a superior product. The company must make an initial investment of CAD 190 million to begin production. If demand is high, cash flows are expected to be CAD 40 million per year. If demand is low, cash flows will be only CAD 20 million per year. Management believes there is an equal chance that demand will be high or low. The investment, which has an investment horizon of ten years, also gives the company a production-flexibility option allowing the company to add shifts at the end of the first year if demand turns out to be high. If the company exercises this option, net cash flows would increase by an additional CAD 5 million in Years 2–10. Bouchard’s opportunity cost of funds is 10%.

The internal auditor for Bouchard Industries has made two suggestions for improving capital allocation processes at the company. The internal auditor’s suggestions are as follows:

Suggestion 1: “In order to treat all capital allocation proposals in a fair manner, the investments should all use the risk-free rate for the required rate of return.”

Suggestion 2: “When rationing capital, it is better to choose the portfolio of investments that maximizes the company NPV than the portfolio that maximizes the company IRR.”

What is the NPV (CAD millions) of the original project for Bouchard Industries without considering the production-flexibility option ?

The incremental after-tax cash flows (in € thousands) and information on two mutually exclusive projects are as follows:

The appropriate hurdle rate to use in evaluating the projects is 15%. Which of the following statements is most accurate? The company should accept:

Erin Chou is reviewing a profitable investment that has a conventional cash flow pattern. If the cash flows for the initial outlay and future after-tax cash flows all double, Chou would predict that the IRR would :

A firm is considering a project that would require an initial investment of 270 million . The project will help increase the firm’s after-tax net cash flows by 30 million per year in perpetuity, and it is found to have a negative NPV of 20 million. The IRR (%) of the project is closest to:

Investments 1 and 2 have similar outlays, although the patterns of future cash flows are different. The cash flows, as well as the NPV and IRR, for the two investments are shown below. For both investments, the required rate of return is 10% .

The two projects are mutually exclusive. What is the appropriate investment decision ?

Which of the following steps is least likely to be a step in the capital allocation process ?

Fullen Machinery is investing $400 million in new industrial equipment. The present value of the future after-tax cash flows resulting from the equipment is $700 million. Fullen currently has 200 million shares of common stock outstanding, with a current market price of $36 per share. Assuming that this project is new information and is independent of other expectations about the company, what is the theoretical effect of the new equipment on Fullen’s stock price?

The stock price will :

Bouchard Industries is a Canadian company that manufactures gutters for residential houses. Its management believes it has developed a new process that produces a superior product. The company must make an initial investment of CAD190 million to begin production. If demand is high, cash flows are expected to be CAD40 million per year. If demand is low, cash flows will be only CAD20 million per year. Management believes there is an equal chance that demand will be high or low. The investment, which has an investment horizon of ten years, also gives the company a production-flexibility option allowing the company to add shifts at the end of the first year if demand turns out to be high. If the company exercises this option, net cash flows would increase by an additional CAD5 million in Years 2–10. Bouchard’s opportunity cost of funds is 10%.

The internal auditor for Bouchard Industries has made two suggestions for improving capital allocation processes at the company. The internal auditor’s suggestions are as follows:

Suggestion 1: “In order to treat all capital allocation proposals in a fair manner, the investments should all use the risk-free rate for the required rate of return.”

Suggestion 2: “When rationing capital, it is better to choose the portfolio of investments that maximizes the company NPV than the portfolio that maximizes the company IRR ” .

Should the capital allocation committee accept the internal auditor’s suggestions ?

A three-year investment requires an initial outlay of GBP1,000. It is expected to provide three year-end cash flows of GBP200 plus a net salvage value of GBP700 at the end of three years. Its IRR is closest to :

What type of project is most likely to yield new revenues for a company ?

When dealing with mutually exclusive projects, the most reliable decision rule is :

Consider the two investments below. The cash flows, as well as the NPV and IRR, for the two investments are given. For both investments, the required rate of return is 10% .

 What discount rate would result in the same NPV for both investments ?

Johnson's Jar Lids is deciding whether to begin producing jars. Johnson's pays a consultant $50,000 for market research that concludes Johnson's sales of jar lids will increase by 5% if it also produces jars. In choosing the cash flows to include when evaluating a project to begin producing jars, Johnson's should :

Should a company accept a project that has an IRR of 14% and an NPV of $2.8 million if the cost of capital is 12% ?

Which of the following types of capital investments are most likely to generate little to no revenue?

In the capital allocation process, a post-audit is used to :

An analyst is estimating the NPV of a project to introduce a new spicier version of its wellknown barbeque sauce into its product line. A cost that should most likely be excluded from his analysis is :

A firm is reviewing an investment opportunity that requires an initial cash outlay of $336,875 and promises to return the following irregular payments :

Year 1: $100,000

Year 2: $82,000

Year 3: $76,000

Year 4: $111,000

Year 5: $142,000

If the required rate of return for the firm is 8%, what is the net present value of the investment ?

The CFO of Axis Manufacturing is evaluating the introduction of a new product. The costs of a recently completed marketing study for the new product and the possible increase in the sales of a related product made by Axis are best described (respectively) as :

Catherine Ndereba is an energy analyst tasked with evaluating a crude oil exploration and production company. The company previously announced that it plans to embark on a new project to drill for oil offshore. As a result of this announcement, the stock price increased by 10%. After conducting her analysis, Ms. Ndereba concludes that the project does indeed have a positive NPV. Which statement is true ?

An investment of $ 150,000 is expected to generate an after-tax cash flow of $ 100,000 in one year and another $ 120,000 in two years. The COC is 10 %. What is the IRR ?

A manufacturer of clothes washing machines decides to add matching clothes dryers to its product line. In this case, it is most likely important in the project analysis to consider :

The financial manager at Genesis Company is looking into the purchase of an apartment complex for $550,000. Net after-tax cash flows are expected to be $65,000 for each of the next five years, then drop to $50,000 for four years. Genesis' required rate of return is 9% on projects of this nature. After nine years, Genesis Company expects to sell the property for after-tax proceeds of $300,000. What is the respective internal rate of return on this project ?

Which of the following is most likely a going concern project ?