davenport finc620 week 2 quiz latest 2015

| June 11, 2016

Question
uestion 1

2 out of 2 points

Moerdyk & Co. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the project with the higher IRR will also have the higher NPV, i.e., no conflict will exist.

WACC: 10.00%

Year

0

1

2

3

4

CFS

-$1,025

$650

$450

$250

$ 50

CFL

-$1,025

$100

$300

$500

$700

Question 2

0 out of 2 points

Which of the following statements is CORRECT?

Selected Answer:

Question 3

2 out of 2 points

Taussig Technologies is considering two potential projects, X and Y. In assessing the projects’ risks, the company estimated the beta of each project versus both the company’s other assets and the stock market, and it also conducted thorough scenario and simulation analyses. This research produced the following data:

Project X

Project Y

Expected NPV

$350,000

$350,000

Standard deviation (sNPV)

$100,000

$150,000

Project beta (vs. market)

1.4

0.8

Correlation of the project cash flows with cash flows from currently existing projects. Cash flows are not correlated with the cash flows from existing projects. Cash flows are highly correlated with the cash flows from existing projects.

Which of the following statements is CORRECT?

Question 4

2 out of 2 points

Warnock Inc. is considering a project that has the following cash flow and WACC data. What is the project’s NPV? Note that a project’s expected NPV can be negative, in which case it will be rejected.

WACC: 10.00%

Year

0

1

2

3

Cash flows

-$950

$500

$400

$300

Selected Answer:

Question 5

2 out of 2 points

Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project?

Question 6

2 out of 2 points

Which of the following procedures does the text say is used most frequently by businesses when they do capital budgeting analyses?

Question 7

2 out of 2 points

Yonan Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the shorter payback, some value may be forgone. How much value will be lost in this instance? Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost.

WACC: 10.25%

Year

0

1

2

3

4

CFS

-$ 950

$500

$800

$ 0

$ 0

CFL

-$2,100

$400

$800

$800

$1,000

Question 8

2 out of 2 points

Aggarwal Enterprises is considering a new project that has a cost of $1,000,000, and the CFO set up the following simple decision tree to show its three most likely scenarios. The firm could arrange with its work force and suppliers to cease operations at the end of Year 1 should it choose to do so, but to obtain this abandonment option, it would have to make a payment to those parties. How much is the option to abandon worth to the firm?

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Question 9

2 out of 2 points

Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project?

Question 10

2 out of 2 points

Maxwell Feed & Seed is considering a project that has the following cash flow data. What is the project’s IRR? Note that a project’s IRR can be less than the WACC (and even negative), in which case it will be rejected.

Year

0

1

2

3

4

5

Cash flows

-$9,500

$2,000

$2,025

$2,050

$2,075

$2,100

Question 11

2 out of 2 points

Projects S and L both have normal cash flows, and the projects have the same risk, hence both are evaluated with the same WACC, 10%. However, S has a higher IRR than L. Which of the following statements is CORRECT?

Question 12

0 out of 2 points

Which of the following statements is CORRECT?

Question 13

2 out of 2 points

Marshall-Miller & Company is considering the purchase of a new machine for $50,000, installed. The machine has a tax life of 5 years, and it can be depreciated according to the following rates. The firm expects to operate the machine for 4 years and then to sell it for $12,500. If the marginal tax rate is 40%, what will the after-tax salvage value be when the machine is sold at the end of Year 4?

Depreciation

Year

Rate

1

0.20

2

0.32

3

0.19

4

0.12

5

0.11

6

0.06

Book value, end of Year 4

Question 14

2 out of 2 points

A company is considering a new project. The CFO plans to calculate the project’s NPV by estimating the relevant cash flows for each year of the project’s life (i.e., the initial investment cost, the annual operating cash flows, and the terminal cash flow), then discounting those cash flows at the company’s overall WACC. Which one of the following factors should the CFO be sure to INCLUDE in the cash flows when estimating the relevant cash flows?

.

Question 15

2 out of 2 points

Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project’s MIRR? Note that a project’s MIRR can be less than the WACC (and even negative), in which case it will be rejected.

WACC: 12.25%

Year

0

1

2

3

4

Cash flows

-$850

$300

$320

$340

$360

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