Making Capital Investment Decisions

In the context of capital budgeting, what is the correct way to define an incremental cash flow?

A company paid a consulting firm $100,000 last year for a marketing analysis of a new product line. When evaluating the NPV of establishing this new line, how should this $100,000 cost be treated?

If a company uses a warehouse it already owns for a new project, thereby forgoing the opportunity to sell it for $200,000, this $200,000 is considered what type of cost in the project analysis?

When a new project increases the cash flows of a firm's existing projects, this side effect is known as what?

For capital budgeting analysis, which set of financial records is considered more relevant for determining a project's cash flows?

According to the consistency principle of capital budgeting, how should nominal and real cash flows be treated?

Using the top-down approach, how is a project's operating cash flow (OCF) calculated?

What is the key assumption of the bottom-up approach for calculating operating cash flow (OCF = Net Income + Depreciation)?

What does the depreciation tax shield represent in the context of capital budgeting?

A project is estimated to have sales of $1,500, cash costs of $700, and depreciation of $600. If the corporate tax rate is 34 percent, what is the operating cash flow (OCF) for the project?

A firm is considering an investment in equipment that costs $80,000. It will be depreciated straight-line to zero over its five-year life. It is expected to save $22,000 per year in pretax operating costs. The tax rate is 34 percent. What is the annual operating cash flow (OCF) from this cost-cutting proposal?

When comparing two machines with unequal lives, what is the purpose of the Equivalent Annual Cost (EAC) method?

A firm must choose between two machines. Machine A has total costs with a present value of $798.42 and a 3-year life. Machine B has total costs with a present value of $916.99 and a 4-year life. The discount rate is 10 percent. The 3-year annuity factor is 2.4869 and the 4-year annuity factor is 3.1699. Which machine should be chosen and why?

If a project has sales of $2,090, fixed costs of $1,791, and variable costs of $1,045, what is its Earnings Before Taxes (EBT) if the depreciation is $605?

If a project has sales of $1,500, cash costs of $700, and depreciation of $600, what are its Earnings Before Taxes (EBT)?

If a project's nominal discount rate is 14 percent and the inflation rate is 5 percent, what is the exact real discount rate?

A project has nominal cash flows of $600 in Year 1 and $650 in Year 2. If the nominal discount rate is 14 percent, what is the present value of these cash flows?

What is the primary reason that depreciation is added back to net income when calculating operating cash flow using the bottom-up approach?

When setting a bid price for a contract, what is the target Net Present Value (NPV) that the bidding firm should aim for?

A firm plans to bid on a four-year contract. The initial investment is $100,000. At the end of year 4, there will be a non-operating cash inflow of $43,050. If the required return is 20 percent, what is the annual operating cash flow (OCF) needed for the project to have an NPV of zero?

If investors require a 10 percent real rate of return and the inflation rate is 8 percent, what is the exact nominal rate of return?

Which of the following describes a situation of synergy in capital budgeting?

In the Baldwin Company example, the test marketing cost of $250,000 was not included in the project evaluation. What is the correct reason for this exclusion?

In the Baldwin Company example, the firm must maintain an investment in net working capital, which is projected to change each year. How is a yearly increase in net working capital treated in the cash flow analysis?

A machine with an initial cost of $100,000 is depreciated using the 5-year MACRS schedule. According to Table 6.3, the depreciation percentage for Year 2 is 32 percent. What is the depreciation expense for Year 2?

A machine is sold for $30,000 at the end of its life. Its book value at that time is $5,760. If the corporate tax rate is 34 percent, what is the after-tax salvage value?

Which of the three main approaches to calculating operating cash flow (OCF) starts with net income and adds back non-cash expenses?

A project requires an initial investment of $1,500 million and is expected to generate a cash flow of $900 million per year for 5 years. At a discount rate of 15 percent, the 5-year annuity factor is 3.352. What is the Net Present Value (NPV) of this project?

In capital budgeting, how should interest expense be treated when calculating a project's cash flows?

What is the primary reason the accounting break-even point differs from the financial break-even point (in terms of NPV)?

A project has an initial investment of $1,500 million. The discount rate is 15 percent, and the project life is 5 years. The 5-year annuity factor at 15 percent is 3.3522. What is the Equivalent Annual Cost (EAC) of this investment?

Which of the following describes a key element of sensitivity analysis in capital budgeting?

What is a primary advantage of using sensitivity analysis for a capital budgeting project?

What is the primary difference between sensitivity analysis and scenario analysis?

In the Solar Electronics example, if the sales price is $2 million per engine and the variable cost is $1 million per engine, what is the pretax contribution margin per engine?

A project has annual fixed costs plus depreciation totaling $2,091 million. The contribution margin per unit is $1 million. What is the accounting profit break-even point in units?

What is the primary purpose of using a decision tree in capital budgeting analysis?

When using a decision tree to analyze a project with multiple decision points over time, in what order are the decisions analyzed?

In the ice hotel example, the initial project has an NPV of negative $2 million. However, if the optimistic forecast is correct (50 percent probability), the firm can expand to 10 locations, each with an NPV of $3 million. If the pessimistic forecast is correct (50 percent probability), the NPV is negative $7 million. What is the true NPV of the venture including the option to expand?

A project has a 50 percent chance of yielding a perpetual cash flow of $6 million (optimistic) and a 50 percent chance of yielding a perpetual cash flow of negative $2 million (pessimistic). The initial investment is $12 million and the discount rate is 20 percent. If the firm can abandon the project after one year if the pessimistic outcome occurs, what is the NPV of the project?

If a project has sales of $1,500, total cash costs of $700, and a tax rate of 34 percent, what is its after-tax cash flow assuming no depreciation?

A firm is considering a project with an initial investment of $80,000. It is expected to generate a constant operating cash flow (OCF) of $19,960 for 5 years. At the end of year 5, it will have an after-tax salvage value of $13,200. If the discount rate is 10 percent, what is the project's NPV?

What is the primary flaw of using simple Net Present Value (NPV) analysis that the concept of real options aims to address?

A company is considering investing in a vacant lot of land that currently generates no revenue. An NPV analysis of constructing an office building today yields a negative result. Why might this land still have a positive market value?

Why is the accounting profit break-even quantity generally lower than the financial (NPV) break-even quantity?

If investors require a real rate of return of 2 percent and expect inflation to be 5 percent, what is the nominal interest rate according to the Fisher effect?

Which of the following would be considered an incremental cash outflow for a project?

Why does Monte Carlo simulation represent a potential improvement over standard sensitivity and scenario analysis?

A project requires an investment of $100,000. It is expected to generate an operating cash flow of $30,609 per year for 4 years. The discount rate is 20 percent. What is the approximate NPV?

A firm has an asset with a book value of $4,000. If the firm sells the asset for $5,760, and the tax rate is 34 percent, what is the tax effect of this sale?

Which of the following capital budgeting evaluation techniques explicitly addresses managerial flexibility, such as the ability to delay, expand, or abandon a project?