Capital Investments quiz

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 ?

If two projects are mutually exclusive, a company :

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

The effects that the acceptance of a project may have on other firm cash flows are best described as:

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 project has the following annual cash flows :

Which of the following discount rates most likely produces the highest net present value (NPV) ?

Garner Corporation is investing $30 million in new capital equipment. The present value of future after-tax cash flows generated by the equipment is estimated to be $50 million. Currently, Garner has a stock price of $28.00 per share with 8 million shares outstanding. Assuming that this project represents new information and is independent of other expectations about the company, what should the effect of the project theoretically be on the firm's stock price ?

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 shouldmost likelybe excluded from his analysis is :

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

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

An investment is purchased at a cost of $775,000 and returns $300,000 at the end of years 2 and 3. At the end of year 4 the investment receives a final payment of $400,000. The IRR of this investment is closest to :

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 :

A company is considering the purchase of a copier that costs $5,000. Assume a required rate of return of 10% and the following cash flow schedule :

Year 1: $3,000

Year 2: $2,000

Year 3: $2,000

The project’s NPV isclosestto:

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 ?

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 :

A company is considering building a distribution center that will allow it to expand sales into a new region comprising three provinces. John Parker, a firm analyst, has argued that the current analysis fails to incorporate the amount they could get from selling the distribution center at the end of year 2, rather than operating it to the end of the project’s assumed economic life. Parker is suggesting that :

The NPV of an investment is equal to the sum of the expected cash flows discounted at the :

Which of the following is least relevant in determining project cash flow for a capital investment ?

Wilson Flannery is concerned that the following investment has multiple IRRs .

How many discount rates produce a zero NPV for this investment ?

With regard to capital allocation, an appropriate estimate of the incremental cash flows from an investment is least likely to include :

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 ?

Which of the following ismost likelya going concern project ?

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:

Financing costs for a capital project are :

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 :

When a new project reduces the cash flows of an existing project of the same firm, it is best described as a(n) :

As the director of capital budgeting for Denver Corporation, an analyst is evaluating two mutually exclusive projects with the following net cash flows :

If Denver's cost of capital is 15%, which project should be chosen ?

An analyst has gathered the following data about a company with a 12% cost of capital :

If the projects are independent, what should the company do?

A company is considering moving its manufacturing facilities to either Texas or South Carolina to decrease taxes and labor costs. After estimating all the relevant incremental after-tax cash flows of each move, an analyst estimates the IRR of a move to Texas to be 13% and the IRR of a move to South Carolina to be 15%. If the appropriate discount rate to evaluate the moves is 14%, the analyst :

The estimated annual after-tax cash flows of a proposed investment are shown below :

Year 1: $10,000

Year 2: $15,000

Year 3: $18,000

After-tax cash flow from sale of investment at the end of year 3 is $120,000 The initial cost of the investment is $100,000, and the required rate of return is 12%. The net present value (NPV) of the project is closest to :