Question: Why do we use forecasted incremental after-

> Calculate the pretax operating cash flow break-even point for both factory choices for Dandle’s Candles? Use the following information below: Dandle’s Candles will be producing a new line of dripless candles in the coming years and has the choice of pro

> Describe the role that the mix of variable versus fixed costs has in the variation of earnings before interest and taxes (EBIT) for the firm?

> Calculate the number of candles for which the accounting operating profit at Dandle's Candles is the same regardless of the factory choice? Use the following information below: Dandle’s Candles will be producing a new line of dripless candles in the com

> Calculate the accounting operating profit break-even point for both factory choices for Dandle’s Candles? Use the following information below: Dandle’s Candles will be producing a new line of dripless candles in the coming years and has the choice of pr

> For the Vinyl CD Co. in Self-Study Problem 12.3, what percentage increase in pretax operating cash flow will be driven by the additional revenue?

> What do the degree of pretax cash flow operating leverage (Cash Flow DOL) and the degree of accounting operating leverage (Accounting DOL) tell us?

> The pretax operating cash flow of Memphis Motors declined so much during the recession of 2008 and 2009 that the company almost defaulted on its debt. The owner of the company wants to change the cost structure of his business so that this does not happe

> Specialty Light Bulbs anticipates selling 3,000 light bulbs this year at a price of $15 per bulb. It costs Specialty $10 in variable costs to produce each light bulb, and the fixed costs for the firm are $10,000. Specialty has an opportunity to sell an a

> Duplicate Footballs, Inc., expects to sell 15,000 balls this year. The balls sell for $110 each and have a variable cost per unit of $80. Fixed costs, including depreciation and amortization, are currently $220,000 per year. How much can either the fixed

> What is simulation analysis, and how is it used?

> The accounting operating profit break-even point tells us the number of units that must be sold for a firm to break-even in a given year from an accounting operating profit perspective. What measure tells us the number of units that must be sold each yea

> Calculate the accounting operating profit break-even point and pretax operating cash flow break-even point for each of the three production choices outlined below?

> Define variable costs and fixed costs, and give an example of each?

> Zippy Corporation just purchased computing equipment for $20,000. The equipment will be depreciated using a five-year MACRS depreciation schedule. If the equipment is sold at the end of its fourth year for $12,000, what are the after-tax proceeds from th

> When forecasting operating expenses, explain the difference between a fixed cost and a variable cost?

> What are variable costs and fixed costs? What are some examples of each? How are these costs estimated in forecasting operating expenses?

> Why do analysts care about how sensitive EBITDA and EBIT are to changes in revenue?

> Healthy Potions, Inc., a pharmaceutical company, bought a machine at a cost of $2 million five years ago that produces pain-reliever medicine. The machine has been depreciated over the past five years, and the current book value is $800,000. The company

> What is the difference between average tax rate and the marginal tax rate? Which one should we use in calculating incremental after-tax cash flows?

> What is the difference between nominal and real cash flows? Which rate of return should we use to discount each type of cash flow?

> After estimating a project’s NPV, the analyst is advised that the fixed capital outlay will be revised upward by $100,000. The fixed capital outlay is depreciated straight-line over an eight-year life. The tax rate is 40 percent, and the required rate of

> FITCO is considering the purchase of new equipment. The equipment costs $350,000, and an additional $110,000 is needed to install it. The equipment will be depreciated straight-line to zero over a five-year life. The equipment will generate additional an

> The alternative to investing in the new production line in Problem 11.36 is to overhaul the existing line, which currently has both a book value and a salvage value of $0. It would cost $300,000 to overhaul the existing line, but this expenditure would e

> ACME Manufacturing is considering replacing an existing production line with a new line that has a greater output capacity and operates with less labor than the existing line. The new line would cost $1 million, have a five-year life, and be depreciated

> Biotech Partners LLC has been farming a new strain of radioactive-material-eating bacteria that the electrical utility industry can use to help dispose of its nuclear waste. Two opposing factors affect Biotech’s decision of when to harvest the bacteria.

> Great Fit, Inc., is a company that manufactures clothing. The company has a production line that produces women’s tops of regular sizes. The same machine could be used to produce petite sizes as well. However, the remaining life of the machines will be r

> A beauty product company is developing a new fragrance named Happy Forever. There is a probability of 0.5 that consumers will love Happy Forever, and in this case, annual sales will be 1 million bottles; a probability of 0.4 that consumers will find the

> How do we decide when to harvest an asset?

> List the major stock market indexes, and explain what they tell us?

> Rocky Mountain Lumber, Inc., is considering purchasing a new wood saw that costs $50,000. The saw will generate revenues of $100,000 per year for five years. The cost of materials and labor needed to generate these revenues will total $60,000 per year, a

> Merton Shovel Corporation has decided to bid for a contract to supply shovels to the Honduran Army. The Honduran Army intends to buy 1,000 shovels per year for the next three years. To supply these shovels, Merton will have to acquire manufacturing equip

> You are the CFO of SlimBody, Inc., a retailer of the exercise machine Slimbody6 and related accessories. Your firm is considering opening up a new store in Los Angeles. The store will have a life of 20 years. It will generate annual sales of 5,000 exerci

> How do we adjust for depreciation when we calculate incremental after-tax free cash flow from EBITDA? What is the intuition for the adjustment?

> You are thinking about delivering pizzas in your spare time. Since you must use your own car to deliver the pizzas, you will wear out your current car one year earlier, which is one year from today, than if you did not take on the delivery job. You estim

> Anaconda Manufacturing Company currently own a mine that is known to contain a certain amount of gold. Since Anaconda does not have any gold-mining expertise, the company plans to sell the entire mine and base the selling price on a fixed multiple of the

> Assume that you are considering replacing your old Nissan with a new Hyundai, as in the previous problem. However, the annual maintenance cost of the old Nissan increases as time goes by. It is $1,200 in the first year, $1,500 in the second year, and $1,

> You have a 2000 Nissan that is expected to run for another three years, but you are considering buying a new Hyundai before the Nissan wears out. You will donate the Nissan to Goodwill when you buy the new car. The annual maintenance cost is $1,500 per y

> Bell Mountain Vineyards is considering updating its current manual accounting system with a high-end electronic system. While the new accounting system would save the company money, the cost of the system continues to decline. The Bell Mountainâ&#1

> Predator LLC, a leveraged-buyout specialist, recently bought a company and wants to determine the optimal time to sell it. The partner in charge of this investment has estimated the after-tax cash flows from a sale at different times to be as follows: $7

> When can we not simply compare the NPVs of two mutually exclusive projects?

> You are starting a family pizza parlor and need to buy a motorcycle for delivery orders. You have two models in mind. Model A costs $9,000 and is expected to run for 6 years; Model B is more expensive, with a price of $14,000, and has an expected life of

> You are trying to choose between purchasing one of two machines for a factory. Machine A costs $15,000 to purchase and has a three-year life. Machine B costs $17,700 to purchase but has a four year life. Regardless of which machine you purchase, it will

> Archer Daniels Midland Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $12 million. This investment will consist of $2 million for land and $10 million for trucks and other eq

> Given the soaring price of gasoline, Ford is considering introducing a new production line of gas-electric hybrid sedans. The expected annual unit sales of the hybrid cars is 30,000; the price is $22,000 per car. Variable costs of production are $10,000

> Healthy Potions, Inc., is considering investing in a new production line for eye drops. Other than investing in the equipment, the company needs to increase its cash and cash equivalents by $10,000, increase the level of inventory by $30,000, increase ac

> You are buying a sofa. You will pay $200 today and make three consecutive annual payments of $300 in the future. The real rate of return is 10 percent, and the expected inflation rate is 4 percent. What is the actual price of the sofa?

> Explain the concept of equivalent annual cost and how it is used to compare projects with different lives?

> Define expected cash flows, and explain why this concept is important in evaluating projects?

> Keswick Supply Company wants to set up a division that provides copy and fax services to businesses. Customers will be given 20 days to pay for such services. The annual revenue of the division is estimated to be $25,000. Assuming that the customers take

> How are working capital items forecast? Why are accounts receivable typically forecast as a percentage of revenue and accounts payable and inventories as percentages of the cost of good sold?

> Blanda Incorporated management is considering investing in two alternative production systems. The systems are mutually exclusive, and the cost of the new equipment and the resulting cash flows are shown in the accompanying table. If the firm uses a 9 p

> Management of Franklin Mints, a confectioner, is considering purchasing a new jelly bean-making machine at a cost of $312,500. They project that the cash flows from this investment will be $121,450 for the next seven years. If the appropriate discount ra

> Compute the IRR for each of the following projects: Year Project 1 Project 2 Project 3 $(10,000) $(10,000) S(10,000) 4,750 1,650 800 3,300 3,890 1,200 3,600 5,100 2,875 2,100 2,750 3,400 5 80 6,600 2. 3. 4.

> Management of Larsen Automotive, a manufacturer of auto parts, is considering investing in two projects. The company typically compares project returns to a cost of funds of 17 percent. Compute the IRRs based on the cash flows in the following table. Whi

> Jekyll & Hyde Corp. management is evaluating two mutually exclusive projects. The cost of capital is 15 percent. Costs and cash flows for each project are given in the following table. Which project should be accepted? Year Project 1 Project 2 S(

> Management of Intrepid, Inc., is considering investing in three independent projects. The costs and the cash flows are given in the following table. The appropriate cost of capital is 14.5 percent. Compute the project IRRs and identify the projects that

> Management of Draconian Measures, Inc., is evaluating two independent projects. The company uses a 13.8 percent discount rate for such projects. The costs and cash flows for the projects are shown in the following table. What are their NPVs? Year Pro

> Suppose that you could invest in the same projects as in the previous problem, but have only $25,000 to invest. Which projects would you chose?

> Crescent Industries management is planning to replace some existing machinery in its plant. The cost of the new equipment and the resulting cash flows are shown in the accompanying table. If the firm uses an 18 percent discount rate for projects like thi

> Suppose that you could invest in the following projects but have only $30,000 to invest. How would you make your decision and in which projects would you invest? Project Cost NPV A $ 8,000 $4,000 B 11,000 7,000 9,000 5,000 D 7,000 4,000

> What is the difference between variable and fixed costs, and what are examples of each?

> Compute the IRR for the following project cash flows: a. An initial outlay of $3,125,000 followed by annual cash flows of $565,325 for the next eight years. b. An initial investment of $33,750 followed by annual cash flows of $9,430 for the next five yea

> Compute the IRR on the following cash flow streams: a. An initial investment of $25,000 followed by a single cash flow of $37,450 in year 6. b. An initial investment of $1 million followed by a single cash flow of $1,650,000 in year 4. c. An initial inve

> Ancala Corporation management is considering investments in two new golf apparel lines for next season: golf hats and belts. Due to a funding constraint, these lines are mutually exclusive. A summary of each project’s estimated cash flo

> Refer to problem 10.5. Compute the IRR for both production System 1 and production System 2. Which has the higher IRR? Which production system has the higher NVP? Explain why the IRR and NPV rankings of Systems 1 and 2 are different? Refer to proble

> Management of Great Flights, Inc., an aviation firm, is considering purchasing three aircraft for a total cost of $161 million. The company would lease the aircraft to an airline. Cash flows from the proposed leases are shown in the following table. What

> Management of Sycamore Home Furnishings is considering acquiring a new machine that can create customized window treatments. The equipment will cost $263,400 and will generate cash flows of $85,000 over each of the next six years. If the cost of capital

> Morningside Bakeries recently purchased equipment at a cost of $650,000. Management expects the equipment to generate cash flows of $275,000 in each of the next four years. The cost of capital is 14 percent. What is the MIRR for this project?

> Hathaway, Inc., a resort management company, is refurbishing one of its hotels at a cost of $7.8 million. Management expects that this will lead to additional cash flows of $1.8 million for the next six years. What is the IRR of this project? If the appr

> An investment of $150,000 is expected to generate an after-tax cash flow of $100,000 in one year and another $120,000 in two years. The cost of capital is 10 percent. What is the internal rate of return? a. 28.19 percent b. 28.39 percent c. 28.59 percent

> An investment of $100 generates after-tax cash flows of $40 in Year 1, $80 in Year 2, and $120 in Year 3. The required rate of return is 20 percent. The net present value is closest to a. $42.22 b. $58.33 c. $68.52 d. $98.95

> How can FCF in the terminal year of a project’s life differ from FCF in the other years?

> Given the following cash flows for a capital project, calculate its payback period and discounted payback period. The required rate of return is 8 percent. The discounted payback period is a. 0.16 year longer than the payback period. b. 0.80 year longer

> Given the following cash flows for a capital project, calculate the NPV and IRR. The required rate of return is 8 percent. …. NPV …………â€&brvba

> You are analyzing two proposed capital investments with the following cash flows: The cost of capital for both projects is 10 percent. Calculate the profitability index (PI) for each project. Which project, or projects, should be accepted if you have un

> Management of Tyler, Inc., is considering switching to a new production technology. The cost of the required equipment will be $4 million. The discount rate is 12 percent. The cash flows that management expects the new technology to generate are as follo

> Trident Corp. management is evaluating two independent projects. The costs and expected cash flows are given in the following table. The cost of capital is 10 percent? a. Calculate the projects’ NPV. b. Calculate the projectsâ&#

> Management of Skywards, Inc., an airline caterer, is purchasing refrigerated trucks at a total cost of $3.25 million. After-tax net income from this investment is expected to be $750,000 for the next five years. Annual depreciation expense will be $650,0

> Quasar Tech Co. management is investing $6 million in new machinery that will produce the next-generation routers. Sales to its customers will amount to $1,750,000 for the next three years and then increase to $2.4 million for three more years. The proje

> Primus Corp. management is planning to convert an existing warehouse into a new plant that will increase its production capacity by 45 percent. The cost of this project will be $7,125,000. It will result in additional cash flows of $1,875,000 for the nex

> Ceebros Builders is expanding very fast and is expected to grow at a rate of 25 percent for the next four years. The company recently paid a dividend of $3.60 but is not expected to pay any dividends for the next three years. In year 4, management expect

> Triton Inc., is expected to grow at a rate of 22 percent for the next five years and then settle to a constant growth rate of 6 percent. The company recently paid a dividend of $2.35. The required rate of return is 15 percent. a. Find the present value o

> What is a progressive tax system? What is the difference between a firm’s marginal and average tax rates?

> ZweitePharma is a fast-growing drug company. Management forecasts that in the next three years, the company’s dividend growth rates will be 30 percent, 28 percent, and 24 percent, respectively. Last week it paid a dividend of $1.67. After three years, ma

> Perry, Inc., paid a dividend of $2.50 yesterday. You are interested in investing in this company, which has forecasted a constant-growth rate of 7 percent for its dividends, forever. The required rate of return is 18 percent. a. Compute the expected divi

> Management of Dravid, Inc., is currently evaluating three projects that are independent. The cost of funds can be either 13.6 percent or 14.8 percent depending on their financing plan. All three projects cost the same at $500,000. Expected cash flow stre

> Refer to Problem 10.31. a. What are the IRRs for the projects? b. Does the IRR criterion suggest a different decision than the NPV criterion? c. Explain how you would expect the management of Draconian Measures to decide which project(s) to invest in. R

> Riker Departmental Stores management has forecasted a growth rate of 40 percent for the next two years, followed by growth rates of 25 percent and 20 percent for the following two years. It then expects growth to stabilize at a constant rate of 7.5 perce

> Equation 9.4 shows the relation between a stock’s value and the dividend that is expected next year if dividends grow at a constant rate forever. If a firm pays all of its earnings as dividends, show how Equation 9.4 can be rearranged to calculate that f

> Tin-Tin Waste Management, Inc., is growing rapidly. Dividends are expected to grow at rates of 30 percent, 35 percent, 25 percent, and 18 percent over the next four years. Thereafter, management expects dividends to grow at a constant rate of 7 percent.

> Diaz Corp. is expected to grow rapidly/ at a rate of 35 percent for the next seven years. The company’s first dividend, to be paid three years from now, will be $5. After seven years, the company (and the dividends it pays) will grow at a rate of 8.5 per

> Staggert Corp. will pay dividends of $5.00, $6.25, $4`.75, and $3.00 in the next four years. Thereafter, management expects the dividend growth rate to be constant at 6 percent. If the required rate of return is 18.5 percent, what is the current value of

> Quansi, Inc., management expects to pay no dividends for the next six years. It has projected a growth rate of 25 percent for the next seven years. After seven years, the firm will grow at a constant rate of 5 percent. Its first dividend, to be paid in y

> What is the difference between nominal and real dollars? Why is it important not to mix them in an NPV analysis?

> Revarop, Inc., is a fast-growth company that is expected to grow at a rate of 23 percent for the next four years. It is then expected to grow at a constant rate of 6 percent. Revarop’s first dividend, of $4.25, will be paid in year 3. If the required rat

> Management of ProCor, a biotech firm, forecasted the following growth rates for the next three years: 35 percent, 28 percent, and 22 percent. Management then expects the company to grow at a constant rate of 9 percent forever. The company paid a dividend

> Tre-Bien, Inc., is a fast-growing technology company. Management projects rapid growth of 30 percent for the next two years, then a growth rate of 17 percent for the following two years. After that, a constant-growth rate of 8 percent is expected. The fi

> You own a company that competes with Old World DVD Company (in the previous problem). Instead of selling DVDs, however, your company sells music downloads from a web site. Things are going well now, but you know that it is only a matter of time before so

> Nugent Communication Corp. is investing $9,365,000 in new technologies. The company’s management expects significant benefits in the first three years after installation (as can be seen by the following cash flows), and smaller constant

> Regent Corp. management is evaluating three competing types of equipment. Costs and cash flow projections for all three are given in the following table. Which would be the best choice based on payback period? Year Туре 1 Туре 2 Туре 3 $(1,311,450) S