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linda_us, Master's Degree
Category: Business and Finance Homework
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1. As a member of Midwest Corporations financial staff, you

Customer Question

1. As a member of Midwest Corporation's financial staff, you must estimate the Year 1 operating cash flow for a proposed project with the following data. What is the Year 1 operating cash flow?

(Points : 5)
$12,380
$13,032
$13,718
$14,440
$15,200


2. Which one of the following is an example of a "flexibility" option? (Points : 5)
A company has an option to invest in a project today or to wait a year.
A company has an option to close down an operation if it turns out to be unprofitable.
A company agrees to pay more to build a plant in order to be able to change the plant's inputs and/or outputs at a later date if conditions change.
A company invests in a project today to gain knowledge that may enable it to expand into different markets at a later date.
A company invests in a jet aircraft so that its CEO, who must travel frequently, can arrive for distant meetings feeling less tired than if he had to fly commercial.


3. Rowell Company spent $3 million two years ago to build a plant for a new product. It then decided not to go forward with the project, so the building is available for sale or for a new product. Rowell owns the building free and clear--there is no mortgage on it. Which of the following statements is CORRECT? (Points : 5)
Since the building has been paid for, it can be used by another project with no additional cost. Therefore, it should not be reflected in the cash flows for any new project.
If the building could be sold, then the after-tax proceeds that would be generated by any such sale should be charged as a cost to any new project that would use it.
This is an example of an externality, because the very existence of the building affects the cash flows for any new project that Rowell might consider.
Since the building was built in the past, its cost is a sunk cost and thus need not be considered when new projects are being evaluated, even if it would be used by those new projects.
If there is a mortgage loan on the building, then the interest on that loan would have to be charged to any new project that used the building.


4. The option to abandon a project is a real option, but a call option on a stock is not a real option. (Points : 5)
True
False


5. Which of the following statements is CORRECT? (Points : 5)
Since depreciation is a cash expense, the faster an asset is depreciated, the lower the projected NPV from investing in the asset.
Under current laws and regulations, corporations must use straight-line depreciation for all assets whose lives are 5 years or longer.
Corporations must use MACRS depreciation for both stockholder reporting and tax purposes.
Using MACRS depreciation rather than straight line normally has the effect of speeding up cash flows and thus increasing a project's forecasted NPV.
Using MACRS depreciation rather than straight line normally has the effect of slowing down cash flows and thus reducing a project's forecasted NPV.


6. Easy Payment Loan Company is thinking of opening a new office, and the key data are shown below. Easy Payment owns the building, free and clear, and it would sell it for $100,000 after taxes if it decides not to open the new office. The equipment that would be used would be depreciated by the straight-line method over the project's 3-year life, and would have a zero salvage value. No new working capital would be required, and revenues and other operating costs would be constant over the project's 3-year life. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.)

(Points : 5)
$47,940
$50,464
$53,120
$55,915
$58,711


7. Your company, Omega Corporation, is considering a new project which you must analyze. Based on the following data, what is the project's Year 1 operating cash flow?

(Points : 5)
$10,585
$10,913
$11,250
$11,588
$11,935


8. A firm is considering a new project whose risk is greater than the risk of the firm's average project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for management to do which of the following? (Points : 5)
Increase the estimated IRR of the project to reflect its greater risk.
Increase the estimated NPV of the project to reflect its greater risk.
Reject the project, since its acceptance would increase the firm's risk.
Ignore the risk differential if the project would amount to only a small fraction of the firm's total assets.
Increase the cost of capital used to evaluate the project to reflect the project's higher-than-average risk.


9. Which of the following factors should be included in the cash flows used to estimate a project's NPV? (Points : 5)
All costs associated with the project that have been incurred pri
Submitted: 6 years ago.
Category: Business and Finance Homework
Expert:  F. Naz replied 6 years ago.
Please complete your question
Customer: replied 6 years ago.

You didn't answer any of my questions

 

Expert:  F. Naz replied 6 years ago.
How may I answer if the questions are not complete look at number 9
Customer: replied 6 years ago.
Texas Wildcatters Inc. (TWI) is in the business of finding and developing oil properties, and then selling the successful ones to major oil refining companies. TWI is now considering a new potential field, and its geologists have developed the following data, in thousands of dollars. t = 0. A $400 feasibility study would be conducted at t = 0. The results of this study would determine if the company should commence drilling operations or make no further investment and abandon the project. t = 1. If the feasibility study indicates good potential, the firm would spend $1,000 at t = 1 to drill exploratory wells. The best estimate is that there is an 80% probability that the exploratory wells would indicate good potential and thus that further work would be done, and a 20% probability that the outlook would look bad and the project would be abandoned. t = 2. If the exploratory wells test positive, TWI would go ahead and spend $10,000 to obtain an accurate estimate of the amount of oil in the field at t = 2. The best estimate now is that there is a 60% probability that the results would be very good and a 40% probability that results would be poor and the field would be abandoned. t = 3. If the full drilling program is carried out, there is a 50% probability of finding a lot of oil and receiving a $25,000 cash inflow at t = 3, and a 50% probability of finding less oil and then only receiving a $10,000 inflow. Since the project is considered to be quite risky, a 20% cost of capital is used. What is the project's expected NPV, in thousands of dollars? (Points : 5)
$336.15
$373.50
$415.00
$461.11
$507.22

14. In the previous problem you were asked to find the expected NPV of a project TWI is considering. Use the same data to calculate the project's coefficient of variation. (Points : 5)
5.87
6.52
7.25
7.97
8.77

15. Nebraska Pharmaceuticals Company (NPC) is considering a project that has an up-front cost at t = 0 of $1,500. (All dollars in this problem are in thousands.) The project's subsequent cash flows are critically dependent on whether a competitor's product is approved by the Food and Drug Administration. If the FDA rejects the competitive product, NPC's product will have high sales and cash flows, but if the competitive product is approved, that will negatively impact NPC. There is a 75% chance that the competitive product will be rejected, in which case NPC's expected cash flows will be $500 at the end of each of the next seven years (t = 1 to 7). There is a 25% chance that the competitor's product will be approved, in which case the expected cash flows will be only $25 at the end of each of the next seven years (t = 1 to 7). NPC will know for sure one year from today whether the competitor's product has been approved. NPC is considering whether to make the investment today or to wait a year to find out about the FDA's decision. If it waits a year, the project's up-front cost at t = 1 will remain at $1,500, the subsequent cash flows will remain at $500 per year if the competitor's product is rejected and $25 per year if the alternative product is approved. However, if NPC decides to wait, the subsequent cash flows will be received only for six years (t = 2...7). Assuming that all cash flows are discounted at 10%, if NPC chooses to wait a year before proceeding, how much will this increase or decrease the project's expected NPV in today's dollars (i.e., at t = 0), relative to the NPV if it proceeds today? (Points : 5)
$77.23
$85.81
$95.34
$105.94
$116.53

16. In the previous problem you found the benefit from delaying an investment decision. Now use the same data to calculate the effect of waiting on the project's risk. By how much will delaying reduce the project's coefficient of variation? (Points : 5)
2.23
2.46
2.70
2.97
3.27
Forget of the ones listed before. Can you answer these?
Expert:  F. Naz replied 6 years ago.
Sorry too lengthy.