Corporate finance

Top of Form1.The difference between the present value of an investment?s future cash flows and its initial cost is the:net present value.internal rate of return.payback period.profitability index.discounted payback period.ReferencesMultiple ChoiceSection: 5.1 Net Present Value and Other Investment Rules2.Which statement concerning the net present value (NPV) of an investment or a financing project is correct?A financing project should be accepted if, and only if, the NPV is exactly equal to zero.An investment project should be accepted only if the NPV is equal to the initial cash flow.Any type of project should be accepted if the NPV is positive and rejected if it is negative.Any type of project with greater total cash inflows than total cash outflows, should always be accepted.An investment project that has positive cash flows for every time period after the initial investment should be accepted.ReferencesMultiple ChoiceSection: 5.1 Net Present Value and Other Investment Rules3.The primary reason that company projects with positive net present values are considered acceptable is that:they create value for the owners of the firm.the project’s rate of return exceeds the rate of inflation.they return the initial cash outlay within three years or less.the required cash inflows exceed the actual cash inflows.the investment’s cost exceeds the present value of the cash inflows.ReferencesMultiple ChoiceSection: 5.1 Net Present Value and Other Investment Rules4.Accepting a positive net present value (NPV) project:indicates the project will pay back within the required period of time.means the present value of the expected cash flows is equal to the project’s cost.ignores the inherent risks within the project.guarantees all cash flow assumptions will be realized.is expected to increase the stockholders’ value by the amount of the NPV.ReferencesMultiple ChoiceSection: 5.1 Net Present Value and Other Investment Rules5.The net present value method of capital budgeting analysis does all of the following except:incorporate risk into the analysis.consider all relevant cash flow information.use all of a project’s cash flows.discount all future cash flows.provide a specific anticipated rate of return.ReferencesMultiple ChoiceSection: 5.1 Net Present Value and Other Investment Rules6.What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent.−$287.22−$1,195.12−$1,350.49$204.36$797.22ReferencesMultiple ChoiceSection: 5.1 Net Present Value and Other Investment Rules7.Maxwell Software, Inc., has the following mutually exclusive projects.YearProject AProject B0–$29,000–$32,000116,50017,500213,00011,50033,80013,000a-1.Calculate the payback period for each project. (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.)Payback periodProject AProject Ba-2.Which, if either, of these projects should be chosen?b-1.What is the NPV for each project if the appropriate discount rate is 14 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)NPVProject AProject Bb-2.Which, if either, of these projects should be chosen if the appropriate discount rate is 14 percent?ReferencesWorksheetSection: 5.2 The Payback Period MethodMaxwell Software, Inc., has the following mutually exclusive projects.YearProject AProject B0–$29,000–$32,000116,50017,500213,00011,50033,80013,000a-1.Calculate the payback period for each project. (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.)Payback periodProject A[removed] yearsProject B[removed] yearsa-2.Which, if either, of these projects should be chosen?b-1.What is the NPV for each project if the appropriate discount rate is 14 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)NPVProject A$ [removed]Project B$ [removed]b-2.Which, if either, of these projects should be chosen if the appropriate discount rate is 14 percent?8.Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.61 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which it will be worthless. The project is estimated to generate $2,050,000 in annual sales, with costs of $745,000. The tax rate is 30 percent and the required return is 15 percent.What is the project’s NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)NPVReferencesWorksheetSection: 6.2 The Baldwin Company: An ExampleDown Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.61 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which it will be worthless. The project is estimated to generate $2,050,000 in annual sales, with costs of $745,000. The tax rate is 30 percent and the required return is 15 percent.What is the project’s NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)NPV$ [removed]9.The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 40 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project.Year 0Year 1Year 2Year 3Year 4Investment$34,000Sales revenue$17,500$18,000$18,500$15,500Operating costs3,7003,8003,9003,100Depreciation8,5008,5008,5008,500Net working capital spending400450500400?a.Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.)Year 1Year 2Year 3Year 4Net incomeb.Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.)Year 0Year 1Year 2Year 3Year 4Cash flowc.Suppose the appropriate discount rate is 10 percent. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)NPVReferencesWorksheetSection: 6.1 Incremental Cash Flows: The Key to Capital BudgetingSection: 6.2 The Baldwin Company: An ExampleThe Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 40 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project.Year 0Year 1Year 2Year 3Year 4Investment$34,000Sales revenue$17,500$18,000$18,500$15,500Operating costs3,7003,8003,9003,100Depreciation8,5008,5008,5008,500Net working capital spending400450500400?a.Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.)Year 1Year 2Year 3Year 4Net income$ [removed]$ [removed]$ [removed]$ [removed]b.Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.)Year 0Year 1Year 2Year 3Year 4Cash flow$ [removed]$ [removed]$ [removed]$ [removed]$ [removed]c.Suppose the appropriate discount rate is 10 percent. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)NPV$ [removed]