Capital Budgeting Paper 32

A firm, with an 18% cost of capital, is considering the following projects (on January 1, 2011):
Jan. 1, 2011, Cash outflow (000’s omitted)
Dec. 31, 2015, Cash inflow (000’s omitted)
Project internal rate of return
Project A $3,500 $7,400 15%
Project B 4,000 9,950 ?
Present Value of $1 Due at End of "N" Periods
N 12% 14% 15% 16% 18% 20% 22%
4 .6355 .5921 .5718 .5523 .5158 .4823 .4230
5 .5674 .5194 .4972 .4761 .4371 .4019 .3411
6 .5066 .4556 .4323 .4104 .3704 .3349 .2751
Project B’s internal rate of return is closest to

The following selected data pertain to a 4-year project being considered by Metro Industries:
• A depreciable asset that costs $1,200,000 will be acquired on January 1. The asset, which is expected to have a $200,000 salvage value at the end of 4 years, qualifies as 3-year property under the Modified Accelerated Cost Recovery System (MACRS).
• The new asset will replace an existing asset that has a tax basis of $150,000 and can be sold on the same January 1 for $180,000.
• The project is expected to provide added annual sales of 30,000 units at $20. Additional cash operating costs are: variable, $12 per unit; and fixed, $90,000 per year.
• A $50,000 working capital investment, fully recoverable at the end of the fourth year, is required at the beginning of the project.
Metro is subject to a 40% income tax rate and rounds all computations to the nearest dollar. Assume that any gain or loss affects the taxes paid at the end of the year in which it occurred. The company uses the net present value method to analyze investments and will employ the following factors and rates.

Period	PV of $1 at 12%	PV of $1 Annuity at 12%	MACRS
1	0.89	0.89	33%
2	0.80	1.69	45%
3	0.71	2.40	15%
4	0.64	3.04	7%

The discounted cash flow for the fourth year MACRS depreciation on the new asset is:

The following selected data pertain to a 4-year project being considered by Metro Industries:
• A depreciable asset that costs $1,200,000 will be acquired on January 1. The asset, which is expected to have a $200,000 salvage value at the end of 4 years, qualifies as 3-year property under the Modified Accelerated Cost Recovery System (MACRS).
• The new asset will replace an existing asset that has a tax basis of $150,000 and can be sold on the same January 1 for $180,000.
• The project is expected to provide added annual sales of 30,000 units at $20. Additional cash operating costs are: variable, $12 per unit; and fixed, $90,000 per year.
• A $50,000 working capital investment, fully recoverable at the end of the fourth year, is required at the beginning of the project.
Metro is subject to a 40% income tax rate and rounds all computations to the nearest dollar. Assume that any gain or loss affects the taxes paid at the end of the year in which it occurred. The company uses the net present value method to analyze investments and will employ the following factors and rates.

Period	PV of $1 at 12%	PV of $1 Annuity at 12%	MACRS
1	0.89	0.89	33%
2	0.80	1.69	45%
3	0.71	2.40	15%
4	0.64	3.04	7%

The discounted, net-of-tax amount that relates to disposal of the existing asset is:

The following selected data pertain to a 4-year project being considered by Metro Industries:
• A depreciable asset that costs $1,200,000 will be acquired on January 1. The asset, which is expected to have a $200,000 salvage value at the end of 4 years, qualifies as 3-year property under the Modified Accelerated Cost Recovery System (MACRS).
• The new asset will replace an existing asset that has a tax basis of $150,000 and can be sold on the same January 1 for $180,000.
• The project is expected to provide added annual sales of 30,000 units at $20. Additional cash operating costs are: variable, $12 per unit; and fixed, $90,000 per year.
• A $50,000 working capital investment, fully recoverable at the end of the fourth year, is required at the beginning of the project.
Metro is subject to a 40% income tax rate and rounds all computations to the nearest dollar. Assume that any gain or loss affects the taxes paid at the end of the year in which it occurred. The company uses the net present value method to analyze investments and will employ the following factors and rates.

Period	PV of $1 at 12%	PV of $1 Annuity at 12%	MACRS
1	0.89	0.89	33%
2	0.80	1.69	45%
3	0.71	2.40	15%
4	0.64	3.04	7%

The expected incremental sales will provide a discounted, net-of-tax contribution margin over 4 years of:

The following selected data pertain to a 4-year project being considered by Metro Industries:
• A depreciable asset that costs $1,200,000 will be acquired on January 1. The asset, which is expected to have a $200,000 salvage value at the end of 4 years, qualifies as 3-year property under the Modified Accelerated Cost Recovery System (MACRS).
• The new asset will replace an existing asset that has a tax basis of $150,000 and can be sold on the same January 1 for $180,000.
• The project is expected to provide added annual sales of 30,000 units at $20. Additional cash operating costs are: variable, $12 per unit; and fixed, $90,000 per year.
• A $50,000 working capital investment, fully recoverable at the end of the fourth year, is required at the beginning of the project.
Metro is subject to a 40% income tax rate and rounds all computations to the nearest dollar. Assume that any gain or loss affects the taxes paid at the end of the year in which it occurred. The company uses the net present value method to analyze investments and will employ the following factors and rates.

Period	PV of $1 at 12%	PV of $1 Annuity at 12%	MACRS
1	0.89	0.89	33%
2	0.80	1.69	45%
3	0.71	2.40	15%
4	0.64	3.04	7%

The expected incremental sales will provide a discounted, net-of-tax contribution margin over 4 years of:

A company is considering two investments. Both have an estimated useful life of 5 years and require an initial cash outflow of $15,000. The cash inflow for each project is shown below.

	Project A	Project Z
Year 1	$7,000	$ 0
Year 2	$8,000	$ 5,000
Year 3	$9,000	$ 5,000
Year 4	$ 0	$ 5,000
Year 5	$ 0	$25,000

The company requires an 8% rate of return and uses straight-line depreciation.
Present value factors at a rate of 8% are as follows:

	PV of $1	PV of Annuity
1 year	0.926	0.926
2 year	0.857	1.783
3 year	0.794	2.577
4 year	0.857	1.783
5 year	0.794	2.577

Which one of the following capital budgeting evaluation methods would result in an initial recommendation of the less profitable project as the better choice?

When simulating with the Monte Carlo technique, the average simulated demand over the long run should approximate the

The modeling technique that should be used in a complex situation involving uncertainty is a(n)

All of the following are advantages of a simulation model except that it

The fair value of debt securities not regularly traded can be most reasonably approximated by: