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# Capital Budgeting

### Finance: Practice exam questions

Which of the following statements related to the internal rate of return (IRR) are correct? I. The IRR method of analysis can be adapted to handle non-conventional cash flows. II. The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the crossover rate. III. T

### Capital investment decision making

1. A company makes an investment of \$150,000 with a useful life of 10 years and expects to use this investment to generate \$300,000 in sales with \$280,000 in incremental operating costs. If the company operates in an environment with a 30 % tax rate, what are the expected after tax cash flows that the company will use to evalua

### Cash Flows vs. Accounting Profits for Capital-Budgeting Focus

Mini Case : It's been 2 months since you took a position as an assistant financial analyst at Caledonia Products. Although your boss has been pleased with your work, he is still a bit hesitant about unleashing you without supervision. Your next assignment involves both the calculation of the cash flows associated with a new i

### Which Type of Company Might give the Most Accurate NPV

Net Present Value How accurate do you think a company's estimates of the net present value of a proposed project are? Refer to both the initial investment and to the components of the cash flow: revenues, operating expenses, depreciation, taxes, and the cost of capital to use for the computation of the present value. Keep

### NPV, IRR, and Sensitivity Analysis

Crumbly Cookie Company is considering expanding by buying a new (additional) machine that costs \$42,000, has zero terminal disposal value and a 10-year useful life. It expects the annual increase in cash revenues from the expansion to be \$23,000 per year. It expects additional annual cash costs to be \$16,000 per year. Its cos

### DCF, sensitivity analysis, no income taxes

Landom Corporation is an international manufacturer of fragrances for women. Management at Landom is considering expanding the product line to men's fragrances. From the best estimates of the marketing and production managers, annual sales (all for cash) for this new line is 1,000,000 units at \$25 per unit; cash variable cost

### Expected Annual Profits: Beautician Example

The new owner of a beauty shop is trying to decide whether to hire one, two or three beauticians. She estimates that profits next year (in thousands of dollars) will vary with demand for her services and has estimated demand in three categories, low medium and high: # of Beauticians Low Demand Medium Demand High Demand

### (a). Describe the precise steps ABT must take to create an ADR issue meeting HGC's preferences. (b). Assume that HGC's stock price declines from SF25.00 to SF22.50 per share. If the exchange rate does not also change, what will happen to HGC's ADR price? (c). If the Swiss franc depreciates from \$0.8000/SF to \$0.7500/SF, but the price of HGC's shares remains unchanged in Swiss francs, how will HGC's ADR price change?

Problem One: Assume that Home Grown Company (HGC) wishes to create a sponsored ADR program worth \$75 million to trade on the NASDAQ stock market. Assume that HGC is currently selling on the SWX Swiss Exchange for SF25.00 per share, and the current dollar/Swiss franc exchange rate is \$0.8000/SF. American Bank and Trust (ABT) is

### The Sunny Company is considering two different capital budgeting projects with the following data regarding projections: Project A Project B Investment required immediately \$20,000 \$50,000 Annual cash inflow expected \$10,000 over 4 yrs \$10,000 over 10 yrs Depreciation over specified number of years with no salvage value expected 4 years 10 years The company requires a 12% hurdle rate. Use the PV tables in Appendix I. Required: 1. Calculate the payback period for both projects. 2. Calculate the simple rate of return for both projects. 3. Calculate the NPV for both projects. 4. Calculate the project profitability index for both projects. 5. Indicate which project you would choose if there were funds for only one project.

The Sunny Company is considering two different capital budgeting projects with the following data regarding projections: Project A Project B Investment required immediately \$20,000 \$50,000 Annual cash inflow expec

### Net Present Value, Return on Investment, and Profitability Index

You have been hired in the finance department at a large, metropolitan for-profit hospital. Your duties are very important to the entire hospital in terms of financing operating costs. Additionally, you are also in charge of 3 employees who work under you to help with the day-to-day accounting activities. Your role includes budg

### Simple Finance Problems

Please provide step-by-step solutions so I can know how to do it. Problem One: a. A project requires a net investment of \$100,000. At the firm's cost of capital of 10%, the project's profitability index is 1.15. Determine the net present value of the project. b. Using the profitability index, which of the following projec

### Activities Important in the Budgeting Process

How does the understanding of the ties in the production budgets help individuals manage more effectively? Why are activities important in the budgeting process? Can you give some examples?

### Present Value Example Problem

Assignment: Part I: This part of the assignments tests your ability to calculate present value. A. Suppose your bank account will be worth \$7,000.00 in one year. The interest rate (discount rate) that the bank pays is 8%. What is the present value of your bank account today? What would the present value of the account be i

### Which is Better, NPV or IRR? Why?

Write a brief memorandum that discusses whether you would use NPV, IRR or both in determining whether a large acquisition is in the best interest of a company. Provide your reasoning and the positives and negatives of the above listed capital budgeting techniques.

### NPV, Investment Outlays, and Capital Budgeting

(10-1) NPV A project has an initial cost of \$52,125, expected net cash inflows of \$12,000 per year for 8 years, and a cost of capital of 12%. What is the projectâ??s NPV? (Hint: Begin by constructing a time line). (10-2) IRR Refer to Problem 10-1. What is the project's IRR? (10-3) MIRR Refer to Problem 10-1. What is the pr

### Budgeting & Activity Based budgeting

1. Which of the following is a TRUE statement? The direct materials purchases budget is determined from the direct labor budget. The selling and administrative expense budget is input into the forecasted cost of goods sold. The direct materials purchases budget and the capital expenditures budget are

### IRR and unequal cash flows

Newport Department Store is considering development of an e-commerce business. The company estimates that development will require an initial outlay of \$1,470,000.Other cash flows will be as follows: Year 1 (\$700,000) Year 2 \$221,000 Year 3 \$750,000 Year 4 \$850,000 Year 5 \$940,000 Required Assuming the company limits

### Calculate the Internal Rate of Return

An investment that costs \$100,000 will reduce operating costs by \$20,000 per year for 10 years.Determine the internal rate of return of the investment (ignore taxes).Should the investment be undertaken if the required rate of return is 18 percent?

### A review of five non profit organizations that were honored through Social Capitalist Awards.

Each year, the magazine Fast Company sponsors the Social Capitalist Awards (http://www.fastcompany.com/social/2008/index.html). First, look at the methodology section (http://www.fastcompany.com/social.2008/articles/methodology.html) that describes the criteria that Fast Company uses to select award winners. Using these cr

### Finance: Capital budgeting task, Book values, APR, EAR, Value of deposit

31. Which of the these activities is a capital budgeting task? determining the amount of cash needed on a daily basis to operate a firm . identifying assets that produce value in excess of the cost to acquire those assets establishing the inventory level establishing a new credit policy

### Finance: WACC, Cash flow, Cost of preferred stock, bankruptcy

25. Which of the following is not true regarding the cost of retained earnings? it is relevant to the WACC does not require new funds to be raised has associated flotation costs has a cost, which is the opportunity cost associated with stockholder funds 26. A project has the followin

### Present value of FCFE

Office Equipment industry: Calculate required rate of return on equity using CAPM 7. At the end of the year 2004 the Office Equipment Industry had free cash flow to equity (FCFE) of \$2.50 per share. The following annual growth rates in FCFE are projected Year Growth Rate 2005 10% 2006 15%

### Computing Internal Rate of Return and Net Present Value

Henn Corp, Ltd. is examining two investment projects as a part of its expansion plan for the coming year. These two projects are not mutually exclusive. The cost of Project A is \$12,950 while the second project (B) is expected to cost \$18,625. Henn's cost of capital (required rate of return) is 11.5 %. Expected annual cash flows

### Use of profitability index

You are asked to evaluate two projects for Adventures Club, Inc. Using the net present value method combined with the profitability index approach whereas profitability index = present value of the inflows divided by Present value of the outflows. Discount rate is 12% Which would be best to select? Project X or Project

### NPV, IRR and payback for the project

See attached files. Calculate NPV, IRR and payback for the project and then a brief summary about whether or not it should be a project or - should losses be cut and everyone move on.

### Whitaker Company budgets payroll at \$3,000 per month plus a percentage of monthly sales

1. Whitaker Company budgets payroll at \$3,000 per month plus a percentage of monthly sales. The June operating expense budget includes total payroll of \$10,500 with budgeted sales of \$150,000. Sales for July are budgeted at \$165,000, while purchases of inventory for July are budgeted at \$85,000. Depreciation and insura

### Planning Capital Investments: Partnership of Lou and Bud; Tot Lot Day Care Center Calculate Payback period, NPV, IRR, net cash flows

Please see file attached for P12-1B and P12-2B

### Managerial Finance Questions

Allied Components Company You recently went to work for Allied Components Company, a supplier of auto repair parts used in the after-market with products from DaimlerChrysler, Ford, and other auto makers. Your boss, the chief financial officer (CFO), has just handed you the estimated cash flows for two proposed projects. Projec

### Cost Accounting Problems for Skanda, Inc.

Problem 1 Skanda, Inc. sells clothing, shoes, and accessories at a suburban location in Boston. Here is information for the year ended June 30, 2009: Clothing Shoes Accessories Departmental Sales \$850,000 \$320,000 \$230,000 Subtract: Departmental Costs Variable Costs \$510,000 \$256,000 \$ 126,500 Fixed Costs 29