Capital Investments quiz

The Bearing Corp. invests only in positive NPV projects. Which of the following statements is true ?

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 :

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

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 :

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

Jack Smith, CFA, is analyzing independent investment projects X and Y. Smith has calculated the net present value (NPV) and internal rate of return (IRR) for each project:

Project X ⇒ NPV = $250; IRR = 15%

Project Y ⇒ NPV = $5,000; IRR = 8%

Smith should make which of the following recommendations concerning the two projects ?

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

Which of the following ismost likelya going concern project ?

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

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

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 ?

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

Financing costs for a capital project are :

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 ?

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 :

The IRR is best described as the :

If two projects are mutually exclusive, a company :

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

Given a discount rate of 10%, the net present value (NPV) of the following investment is closest to :

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

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

Given the following cash flows for a capital investment, calculate the NPV and IRR. The required rate of return is 8 % .

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:

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

One of the basic principles of capital allocation is that :

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 :

The effect of a company announcement that they have begun a project with a current cost of $10 million that will generate future cash flows with a present value of $20 million is most likely to :

Lincoln Coal is planning a new coal mine, which will cost $430,000 to build. The mine will bring cash inflows of $200,000 annually over the next seven years. It will then cost $170,000 to close down the mine in the following year. Assume all cash flows occur at the end of the year. Alternatively, Lincoln Coal may choose to sell the site today. If Lincoln has a 16% required rate of return, the minimum price they should accept for the property is closest to :

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 ?