Question 1

In 2013,Sunny Electronics expects to sell 100,000 3-D television sets for an average price of $1,000.Expected production costs are $600 per unit.In 2014,volume is expected to increase by 10%,while inflation will increase both the sales price and the cost per unit by 3%.In real dollars,expected gross profit for 2014 is
A)$40 million.
B)$45.32 million.
C)$48.2 0 million.
D)$50 million.

Accepted Answer

In 2014, the volume increases by 10% to 110,000 units. The sales price and cost per unit increase by 3% due to inflation, making the sales price $1,030 and the cost $618. The gross profit per unit in real dollars is $1,030 - $618 = $412. The total gross profit is 110,000 units * $412 = $45.32 million. However, in real dollars (adjusted for inflation), the gross profit remains $40 million, as the inflation adjustment cancels out the nominal increase.

Question 2

LaVigne Wineries is purchasing a new wine press.The equipment will cost $250,000.Transportation and installation will cost another $35,000.Because of increased production,inventories will increase by $15,000.The press will be depreciated using the straight line method to a book value of $0.00 over its useful life of 7 years.Compute depreciation for each year of the project.

Accepted Answer

The answer of LaVigne Wineries is purchasing a new wine...

Question 3

In 2013,Sunny Electronics expects to sell 100,000 3-D television sets for an average price of $1,000.Expected production costs are $600 per unit.In 2014,volume is expected to increase by 10%,while inflation will increase both the sales price and the cost per unit by 3%.In nominal dollars,expected gross profit for 2014 is
A)$40 million.
B)$45.32 million.
C)$48.20 million.
D)$50 million.

Accepted Answer

In 2013, expected gross profit is $100,000 * ($1,000 - $600) = $40 million. In 2014, volume is expected to increase by 10%, so sales will be 110,000 units. The sales price and cost per unit will both increase by 3%, so the new sales price will be $1,000 * 1.03 = $1,030 and the new cost per unit will be $600 * 1.03 = $618. Therefore, expected gross profit for 2014 is 110,000 * ($1,030 - $618) = $45.32 million.

Question 4

By examining cash flows,we are correctly able to analyze the timing of the benefits.

Accepted Answer

Cash flows help us understand when money will be received or paid out, allowing us to analyze the timing of benefits.

Question 5

Clean-up and restoration costs required by government regulations are negative cash flows associated with a project's termination.

Accepted Answer

Clean-up and restoration costs required by government regulations are expenses that must be paid as part of terminating a project and are therefore considered negative cash flows.

Question 6

Accounting profits represents free cash flows that are available for reinvestment.

Accepted Answer

Accounting profits only consider revenues and expenses reported on a company's financial statements and do not take into account cash flows related to investments, working capital, or financing activities. Therefore, accounting profits may not fully represent the free cash flows available for reinvestment.

Question 7

Additional cash needed to fill increased working capital requirements should be included in the initial cost of a product when analyzing an investment.

Accepted Answer

Increased working capital requirements, such as higher inventory or accounts receivable, will tie up additional cash that could otherwise be used for other investments or operational expenses. Therefore, it is important to include this additional cash as part of the initial cost analysis to understand the true cost and potential return of the investment.

Question 8

What is the advantage,if any,to using MACRS rather than straight line depreciation?

Accepted Answer

The answer of What is the advantage,if any,to using MACRS...

Question 9

Greenspan Inc.discounts cash flows at a nominal rate of 10%.Inflation over the next few years is expected to average 3%.Which of the following would be a correct adjustment for inflation when computing net present value?
A)Discount cash flows at 10%;increase revenues and expenses by 3% each year.
B)Discount cash flows at 13%;increase revenues and expenses by 3% each year.
C)Discount cash flows at 7%;ignore inflation when forecasting revenues and expenses.
D)Either A or C would be acceptable.

Accepted Answer

The correct adjustments for inflation when computing net present value can be either to discount cash flows at the nominal rate (which includes inflation) and adjust revenues and expenses for inflation (Option A), or to discount cash flows at the real rate (nominal rate minus inflation rate) and not adjust revenues and expenses for inflation (Option C). Both methods should theoretically yield the same result.

Question 10

Working capital for a project includes investment in fixed assets.

Accepted Answer

Working capital only includes the funds required for day-to-day operations of a project, such as inventory, accounts receivable, and accounts payable. Investment in fixed assets is typically considered a separate capital expenditure.

Question 11

The depreciation method used in capital budgeting is irrelevant because any depreciation not taken during the life of the project will add to the book value when assets are sold.

Accepted Answer

The depreciation method used in capital budgeting is relevant as it influences the timing and amount of taxable income, which ultimately affects the cash flows generated by the project. The book value of assets after the project ends is not relevant in capital budgeting decisions.

Question 12

Cape Cod Cranberry Products is evaluating the introduction of a new line of juice drinks consisting of cranberry juice blended with sweeter juices such as apple or grape.In the first year the product line is introduced,sales are forecasted at $2,000,000,Cost of Goods Sold at $1,200,000,other cash expenses at $300,000,depreciation expense at $800,000.The company has many other profitable product lines.It's marginal tax rate is 35%.Compute operating cash flow for the first year.

Accepted Answer

The answer of Cape Cod Cranberry Products is evaluating the...

Question 13

In 2013,Sunny Electronics expects to sell 100,000 3-D television sets for an average price of $1,000.Expected production costs are $600 per unit.In 2014,volume is expected to increase by 10%,Inflation will increase the cost per unit by 3%,but to attract more buyers,Sunny will reduce the price to $950.In nominal dollars,expected gross profit for 2014 is
A)$45.32 million.
B)$40 million.
C)$38 million.
D)$36.52 million.

Accepted Answer

In 2014, the expected sales volume is 110,000 units (10% increase from 100,000 units). The cost per unit will increase by 3% from $600 to $618 (3% of $600 is $18, so $600 + $18 = $618). The selling price is reduced to $950. The gross profit per unit is $950 - $618 = $332. The total expected gross profit for 2014 is 110,000 units * $332 = $36.52 million.

Question 14

It is possible for after-tax operating cash flows to be positive when accounting income is negative.

Accepted Answer

After-tax operating cash flows represent the cash inflows and outflows from operating activities, regardless of whether the company is reporting a profit or loss on its income statement. It is possible for a company to have negative accounting income due to non-cash expenses such as depreciation, but still generate positive operating cash flows.

Question 15

The initial outlay of an asset does not include installation costs.

Accepted Answer

The initial outlay of an asset includes not only the purchase price but also any installation costs incurred to make the asset functional for intended use.

Question 16

Sales captured from the firm's competitors can be relevant to the capital-budgeting decision.

Accepted Answer

If a capital investment results in capturing sales from competitors, it can generate additional cash flows and potentially increase the project's net present value (NPV), making it a more attractive investment option. Therefore, considering the potential impact of capturing sales from competitors is important in making capital-budgeting decisions.

Question 17

It is not necessary to consider depreciation in estimating cash flows for a new capital project.

Accepted Answer

Depreciation is a non-cash expense that reflects the decrease in the value of an asset over time. It is important to consider depreciation in estimating cash flows for a new capital project because it affects the taxes that the company will pay. Depreciation expense reduces taxable income, which in turn reduces the amount of taxes that need to be paid. Therefore, ignoring depreciation can lead to an inaccurate estimation of cash flows.

Question 18

A marketing survey completed last year to determine a project's feasibility would be included as part of the project's initial cash outflow.

Accepted Answer

A marketing survey completed last year would not be included in the initial cash outflow as it was already completed and the costs associated with it would have already been incurred. Initial cash outflow refers to the costs that will be incurred in the current period to start the project.

Question 19

Marguerite's Florist is considering the purchase of a new delivery van.It will cost $25,000 plus another $3,000 to have it painted in the company's characteristic floral motif.The van will be depreciated over 5 years using MACRS percentages and a half year convention.Compute depreciation for the second year in the life of the van.

Accepted Answer

The answer of Marguerite's Florist is considering the purchase of...

Question 20

The hardest step in capital budgeting analysis is estimating the cash flows of a project.

Accepted Answer

Estimating cash flows involves predicting future revenues and expenses, considering factors such as market demand, production costs, and inflation. This can be challenging and requires a thorough understanding of the project and its environment. Other steps in capital budgeting analysis include calculating the project's net present value, internal rate of return, and payback period, which rely on accurate cash flow estimates.

Quiz 12: Analyzing Project Cash Flows