All Related Questions of Capital Budgeting

Q: Haskin Company was founded 40 years ago and now has several manufacturing

Haskin Company was founded 40 years ago and now has several manufacturing plants in the Northeast and Midwest. The evaluation of proposed capital expenditures became increasingly difficult for managem...

Q: Are the capital budgeting criteria we discussed applicable to not-for

Are the capital budgeting criteria we discussed applicable to not-for-profit corporations? How should such entities make capital budgeting decisions? What about the U.S. government? Should it evaluate...

Q: You are discussing a project analysis with a coworker. The project

You are discussing a project analysis with a coworker. The project involves real options, such as expanding the project if successful, or abandoning the project if it fails. Your coworker makes the fo...

Q: In our capital budgeting examples, we assumed that a firm would

In our capital budgeting examples, we assumed that a firm would recover all of the working capital it invested in a project. Is this a reasonable assumption? When might it not be valid?

Q: Why does traditional NPV analysis tend to underestimate the true value of

Why does traditional NPV analysis tend to underestimate the true value of a capital budgeting project?

Q: You recently went to work for Allied Components Company, a supplier

You recently went to work for Allied Components Company, a supplier of auto repair parts used in the after-market with products from Daimler, Chrysler, Ford, and other automakers. Your boss, the chief...

Q: A company is considering two mutually exclusive expansion plans. Plan A

A company is considering two mutually exclusive expansion plans. Plan A requires a $40 million expenditure on a large-scale integrated plant that would provide expected cash flows of $6.4 million per...

Q: A mining company is deciding whether to open a strip mine,

A mining company is deciding whether to open a strip mine, which costs $2 million. Net cash inflows of $13 million would occur at the end of Year 1. The land must be returned to its natural state at a...

Q: Discuss the following statement: If a firm has only independent projects

Discuss the following statement: If a firm has only independent projects, a constant WACC, and projects with normal cash flows, the NPV and IRR methods will always lead to identical capital budgeting...

Q: How are project classifications used in the capital budgeting process?

How are project classifications used in the capital budgeting process?

Q: Allied Food Products is considering expanding into the fruit juice business with

Allied Food Products is considering expanding into the fruit juice business with a new fresh lemon juice product. Assume that you were recently hired as assistant to the director of capital budgeting...

Q: Kristin is evaluating a capital budgeting project that should last 4 years

Kristin is evaluating a capital budgeting project that should last 4 years. The project requires $800,000 of equipment. She is unsure what depreciation method to use in her analysis, straight-line or...

Q: You must evaluate a proposal to buy a new milling machine.

You must evaluate a proposal to buy a new milling machine. The base price is $108,000, and shipping and installation costs would add another $12,500. The machine falls into the MACRS 3-year class, and...

Q: Explain why sunk costs should not be included in a capital budgeting

Explain why sunk costs should not be included in a capital budgeting analysis but opportunity costs and externalities should be included. Give an example of each.

Q: Explain why working capital is included in a capital budgeting analysis and

Explain why working capital is included in a capital budgeting analysis and how it is recovered at the end of a project’s life.

Q: Citrus Products Inc. is a medium-sized producer of citrus

Citrus Products Inc. is a medium-sized producer of citrus juice drinks with groves in Indian River County, Florida. Until now, the company has confined its operations and sales to the United States; b...

Q: Use the spreadsheet model to rework Parts a and b of Problem

Use the spreadsheet model to rework Parts a and b of Problem 20-8. Then answer the following question. c. Accepting that the corporate WACC should be used equally to discount all anticipated cash flow...

Q: As part of its overall plant modernization and cost reduction program,

As part of its overall plant modernization and cost reduction program, the management of Tanner-Woods Textile Mills has decided to install a new automated weaving loom. In the capital budgeting analys...

Q: Why is the coefficient of variation a better risk measure to use

Why is the coefficient of variation a better risk measure to use than the standard deviation when evaluating the risk of capital budgeting projects?

Q: Explain how using a risk-adjusted discount rate improves capital budgeting

Explain how using a risk-adjusted discount rate improves capital budgeting decision making compared to using a single discount rate for all projects?

Q: How do we calculate the payback period for a proposed capital budgeting

How do we calculate the payback period for a proposed capital budgeting project? What are the main criticisms of the payback method?

Q: How and why does working capital affect the incremental cash flow estimation

How and why does working capital affect the incremental cash flow estimation for a proposed large capital budgeting project? Explain.

Q: How do opportunity costs affect the capital budgeting decision-making process

How do opportunity costs affect the capital budgeting decision-making process?

Q: What is the major criticism of the payback and simple rate of

What is the major criticism of the payback and simple rate of return methods of making capital budgeting decisions?

Q: What is real option analysis? How is it a better method

What is real option analysis? How is it a better method of making investment decisions than using traditional capital budgeting analysis?

Q: How is foreign exchange risk sensitivity factored into the capital budgeting analysis

How is foreign exchange risk sensitivity factored into the capital budgeting analysis of a foreign project?

Q: How is expropriation risk factored into the capital budgeting analysis of a

How is expropriation risk factored into the capital budgeting analysis of a foreign project?

Q: Your company currently uses traditional capital budgeting techniques, including net present

Your company currently uses traditional capital budgeting techniques, including net present value. After hearing about the use of real option analysis, your boss decides that your company should use r...

Q: For a given IOS and MCC, how do financial managers decide

For a given IOS and MCC, how do financial managers decide which proposed capital budgeting projects to accept, and which to reject?

Q: Explain how to measure the firm risk of a capital budgeting project

Explain how to measure the firm risk of a capital budgeting project.

Q: Why do we focus on cash flows instead of profits when evaluating

Why do we focus on cash flows instead of profits when evaluating proposed capital budgeting projects?

Q: What is a sunk cost? Is it relevant when evaluating a

What is a sunk cost? Is it relevant when evaluating a proposed capital budgeting project? Explain.

Q: How do we estimate expected incremental cash flows for a proposed capital

How do we estimate expected incremental cash flows for a proposed capital budgeting project?

Q: How financing costs are generally incorporated into the capital budgeting analysis process

How financing costs are generally incorporated into the capital budgeting analysis process?

Q: What is the difference between capital budgeting screening decisions and capital budgeting

What is the difference between capital budgeting screening decisions and capital budgeting preference decisions?

Q: Why isn’t accounting net income used in the net present value and

Why isn’t accounting net income used in the net present value and internal rate of return methods of making capital budgeting decisions?

Q: Why are discounted cash flow methods of making capital budgeting decisions superior

Why are discounted cash flow methods of making capital budgeting decisions superior to other methods?

Q: Identify two simplifying assumptions associated with discounted cash flow methods of making

Identify two simplifying assumptions associated with discounted cash flow methods of making capital budgeting decisions.

Q: Midwest Water Works estimates that its WACC is 10.5%.

Midwest Water Works estimates that its WACC is 10.5%. The company is considering the following capital budgeting projects: Assume that each of these projects is just as risky as the firmâ€&...

Q: Why are interest charges not deducted when a project’s cash flows for

Why are interest charges not deducted when a project’s cash flows for use in a capital budgeting analysis are calculated?

Q: Suppose that your company used “APV,” or “All-

Suppose that your company used “APV,” or “All-the-Present Value-Except-CF0”, to analyze capital budgeting projects. What would this rule’s benchmark value be?

Q: Suppose a company wanted to double their firm’s value with the next

Suppose a company wanted to double their firm’s value with the next round of capital budgeting project decisions. To what would they set the PI benchmark to make this goal?

Q: Suppose your firm is considering investing in a project with the cash

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowa...

Q: The capital budgeting decision techniques that we’ve discussed all have strengths and

The capital budgeting decision techniques that we’ve discussed all have strengths and weaknesses, but they do comprise the most popular rules for valuing projects. Valuing entire bus...

Q: Give some examples of the financial complications that occur when evaluating a

Give some examples of the financial complications that occur when evaluating a capital budgeting project in a foreign country.

Q: A consultant commented that “too often the numbers look good but

A consultant commented that “too often the numbers look good but feel bad.” This commentoften stems from estimation error common to capital budgeting proposals that relate to future cash flows. Three...

Q: Capital budgeting is an important topic and there are Websites designed to

Capital budgeting is an important topic and there are Websites designed to helppeople understand the methods available. Access TeachMeFinance.com’s capital budgeting web page (teachm...

Q: Identify four reasons that capital budgeting decisions by managers are risky.

Identify four reasons that capital budgeting decisions by managers are risky.

Q: Why should managers set the required rate of return higher than the

Why should managers set the required rate of return higher than the rate at which money can be borrowed when making a typical capital budgeting decision?

Q: How would you incorporate political risk into the capital budgeting process of

How would you incorporate political risk into the capital budgeting process of foreign investment projects?

Q: The Alpha Company plans to establish a subsidiary in Hungary to manufactureand

The Alpha Company plans to establish a subsidiary in Hungary to manufactureand sell fashion wristwatches. Alpha has total assets of $70 million, of which$45 million is equity financed. The remainder i...

Q: Why is capital budgeting analysis so important to the firm?

Why is capital budgeting analysis so important to the firm?

Q: What is the intuition behind the NPV capital budgeting framework?

What is the intuition behind the NPV capital budgeting framework?

Q: Discuss the difference between performing the capital budgeting analysis from the parent

Discuss the difference between performing the capital budgeting analysis from the parent firm’s perspective as opposed to the subsidiary’s perspective.

Q: What makes the APV capital budgeting framework useful for analyzing foreign capital

What makes the APV capital budgeting framework useful for analyzing foreign capital expenditures?

Q: What problems can enter into the capital budgeting analysis if project debt

What problems can enter into the capital budgeting analysis if project debt is evaluated instead of the borrowing capacity created by the project?

Q: The Flower City Grocery is faced with the following capital budgeting decision

The Flower City Grocery is faced with the following capital budgeting decision. Its display freezer system must be repaired. The cost of this repair will be $1,000 and the system will be usable for an...

Q: Geico is considering expanding an existing plant on a piece of land

Geico is considering expanding an existing plant on a piece of land it already owns. The land was purchased 15 years ago for $325,000 and its current market appraisal is $820,000. A capital budgeting...

Q: Vocabulary test. Explain the differences between: a. Real

Vocabulary test. Explain the differences between: a. Real and financial assets. b. Capital budgeting and financing decisions. c. Closely held and public corporations. d. Limited and unlimited liab...

Q: Describe the capital budgeting process in your own words.

Describe the capital budgeting process in your own words.

Q: Preston Plastics is about to wrap up its capital budgeting cycle,

Preston Plastics is about to wrap up its capital budgeting cycle, and department managers across the company have submitted 500 capital project requests for consideration in the next round of funding....

Q: Preston Plastics is about to wrap up its capital budgeting cycle,

Preston Plastics is about to wrap up its capital budgeting cycle, and department managers across the company have submitted 500 capital project requests for consideration in the next round of funding....

Q: The Chicago Youth Association (CYA) and the Palmer Athletic Club

The Chicago Youth Association (CYA) and the Palmer Athletic Club (PAC) are each considering purchasing a van. The CYA is a not‐for‐profit organization serving at‐risk inner‐city youth. It operates a c...

Q: Hager’s Home Repair Company, a regional hardware chain that specializes in

Hager’s Home Repair Company, a regional hardware chain that specializes in “do it yourself” materials and equipment rentals, is cash rich because...

Q: Annual reports provide significant information about an organization’s capital budget and capital

Annual reports provide significant information about an organization’s capital budget and capital budgeting process. Intel Corporation provides financial reports for several years at www.intel.com (Ab...

Q: National Leasing is evaluating the cost of capital to use in its

National Leasing is evaluating the cost of capital to use in its capital budgeting process. Over the recent past, the company has averaged a return on equity of 12% and a return on investment of 9%. T...

Q: A task force of capital budgeting analysts at Seger Ltd. collected

A task force of capital budgeting analysts at Seger Ltd. collected the following data concerning the drilling and production of known petroleum reserves at an offshore location: Investment in rigging...

Q: Distinguish between the following two types of capital budgeting decisions: acceptance

Distinguish between the following two types of capital budgeting decisions: acceptance-or-rejection decisions and capital-rationing decisions.

Q: Mutually exclusive capital budgeting projects are those that a.

Mutually exclusive capital budgeting projects are those that a. if accepted or rejected do not affect the cash flows of other projects. b. if accepted will produce a negative NPV. c. if rejected prec...

Q: Which of the following is not true regarding the IRR?

Which of the following is not true regarding the IRR? a. The IRR is the interest rate that sets the present value of a project’s cash inflows equal to the present value of the project’s cost. b. The...

Q: A manager decided to acquire some expensive equipment through the use of

A manager decided to acquire some expensive equipment through the use of an operating lease even though a capital budgeting analysis showed that it was more profitable to buy than to lease. However, t...

Q: Kildare Medical Center, a for-profit hospital, has three

Kildare Medical Center, a for-profit hospital, has three investment opportunities: (1) adding a wing for in-patient treatment of substance abuse, (2) adding a pathology laboratory, and (3) expanding t...

Q: Shelley Couts, the owner of Conch Republic Electronics, had received

Shelley Couts, the owner of Conch Republic Electronics, had received the capital budgeting analysis from Jay McCanless for the new PDA the company is considering. Shelley was pleased with the results,...

Q: Explain why interest expense is not treated as a cash outflow in

Explain why interest expense is not treated as a cash outflow in capital budgeting decisions made using net present value (NPV) analysis.

Q: Why is it important to take into account the time value of

Why is it important to take into account the time value of money when making capital budgeting decisions?

Q: What is the major criticism of the payback and simple rate of

What is the major criticism of the payback and simple rate of return methods of making capital budgeting decisions?

Q: What is the difference between capital budgeting screening decisions and capital budgeting

What is the difference between capital budgeting screening decisions and capital budgeting preference decisions?

Q: Why isn’t accounting net income used in the net present value method

Why isn’t accounting net income used in the net present value method of making capital budgeting decisions?

Q: Why are discounted cash flow methods of making capital budgeting decisions superior

Why are discounted cash flow methods of making capital budgeting decisions superior to other methods?

Q: Identify two simplifying assumptions associated with discounted cash flow methods of making

Identify two simplifying assumptions associated with discounted cash flow methods of making capital budgeting decisions.

Q: The chapter showed how analyzing a box spread is like a capital

The chapter showed how analyzing a box spread is like a capital budgeting problem using the NPV approach. Consider the internal rate of return method of examining capital budgeting problems and analyz...

Q: At any one time, should the same WACC be used to

At any one time, should the same WACC be used to evaluate each of a company’s capital budgeting projects? If not, how should the WACC be adjusted for the different projects?

Q: If the company’s capital budgeting analyst decided to show all projected cash

If the company’s capital budgeting analyst decided to show all projected cash flows, both positive and negative, in current dollars rather than inflation-adjusted dollars, would this affect the calcul...

Q: Option values are extinguished when they are exercised. How does this

Option values are extinguished when they are exercised. How does this influence capital budgeting decisions? What considerations, or types of analysis, might lead management to “take the plunge” and p...

Q: Suppose a company uses the NPV method, along with risk-

Suppose a company uses the NPV method, along with risk-adjusted WACCs, to calculate project NPVs. However, it has not been considering real options in its capital budgeting decisions. Now suppose the...

Q: Explain why sunk costs should not be included in a capital budgeting

Explain why sunk costs should not be included in a capital budgeting analysis but opportunity costs and externalities should be included.

Q: Describe the six primary capital budgeting decision criteria. What are their

Describe the six primary capital budgeting decision criteria. What are their pros and cons, and how are they related to maximizing shareholder wealth? Should managers use just one criterion, or are th...

Q: Explain how net operating working capital is recovered at the end of

Explain how net operating working capital is recovered at the end of a project’s life and why it is included in a capital budgeting analysis.

Q: What types of projects require the least detailed and the most detailed

What types of projects require the least detailed and the most detailed analysis in the capital budgeting process?

Q: Why are interest charges not deducted when a project’s cash flows are

Why are interest charges not deducted when a project’s cash flows are calculated for use in a capital budgeting analysis?

Q: You have just graduated from the MBA program of a large university

You have just graduated from the MBA program of a large university, and one of your favorite courses was “Today’s Entrepreneurs.” In fact, you enj...

Q: Shrieves Casting Company is considering adding a new line to its product

Shrieves Casting Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by Sidney Johnson, a recently graduated MBA. The production line wou...

Q: The Ulmer Uranium Company is deciding whether or not to open a

The Ulmer Uranium Company is deciding whether or not to open a strip mine whose net cost is $4.4 million. Net cash inflows are expected to be $27.7 million, all coming at the end of Year 1. The land m...

Q: Bill Watts, president of Western Publications, accepts a capital budgeting

Bill Watts, president of Western Publications, accepts a capital budgeting project proposed by division X. This is the division in which the president spent his first 10 years with the company. On the...

Q: How can capital budgeting tools assist in evaluating a manager who is

How can capital budgeting tools assist in evaluating a manager who is responsible for retaining customers of a cellular telephone company?

Q: “Only quantitative outcomes are relevant in capital budgeting analyses.” Do

“Only quantitative outcomes are relevant in capital budgeting analyses.” Do you agree? Explain.

Q: How is risk defined in capital budgeting analysis? List several aspects

How is risk defined in capital budgeting analysis? List several aspects of a project in which risk is involved and how risk can affect a project’s net present value.

Q: Why do capital budgeting evaluation methods use cash flows rather than accounting

Why do capital budgeting evaluation methods use cash flows rather than accounting income?

Q: Will the NPV amount determined in the capital budgeting process be the

Will the NPV amount determined in the capital budgeting process be the same amount as that which actually occurs after a project is undertaken? Why or why not?

Q: Because depreciation is not a cash flow, why is it important

Because depreciation is not a cash flow, why is it important in capital budgeting evaluation techniques that use discounted cash flows?

Q: In discussing your cost accounting class with friends, you explained that

In discussing your cost accounting class with friends, you explained that you were currently studying methods of evaluating capital investments. You mentioned that most of these methods rely upon cash...

Q: Choose letter C (for committed cost) or D (for

Choose letter C (for committed cost) or D (for discretionary cost) to indicate the type of each of the following described costs. Explain the rationale for your choice. a. Control is first provided du...

Q: The Charlotte Bobcats, a professional basketball team, has been offered

The Charlotte Bobcats, a professional basketball team, has been offered the opportunity to purchase the contract of an aging superstar basketball player from another team. The general manager of the B...

Q: America Cola is considering the purchase of a special-purpose bottling

America Cola is considering the purchase of a special-purpose bottling machine for $65,000. It is expected to have a useful life of 4 years with no terminal disposal value. The plant manager estimates...

Q: Andrews Construction is analyzing its capital expenditure proposals for the purchase of

Andrews Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $5,000,000 for the year. Lori Bart, staff analyst...

Q: Walker Inc. is considering the purchase of new equipment that will

Walker Inc. is considering the purchase of new equipment that will automate production and thus reduce labor costs. Walker made the following estimates related to the new machinery: Cost of the equipm...

Q: Johnny Buster owns Entertainment World, a place that combines fast food

Johnny Buster owns Entertainment World, a place that combines fast food, innovative beverages, and arcade games. Worried about the shifting tastes of younger audiences, Johnny contemplates bringing in...

Q: Level 3 Communications, LLC, provides integrated telecommunications services including voice

Level 3 Communications, LLC, provides integrated telecommunications services including voice, Internet access, and data transmission using rapidly improving optical and Internet protocol technologies...

Q: “The decision to start your own firm and go into business

“The decision to start your own firm and go into business can be thought of as a capital budgeting decision. You only go ahead if projected returns look attractive on a personal and financial basis.”...

Q: What major steps are involved in the capital budgeting process?

What major steps are involved in the capital budgeting process?

Q: Level 3 Communications, Inc., like many emerging telecom carriers,

Level 3 Communications, Inc., like many emerging telecom carriers, has only limited and infrequent access to domestic debt and equity markets. Explain the attractiveness of a “benefit-cost ratio” appr...

Q: How is a crossover discount rate calculated, and how does it

How is a crossover discount rate calculated, and how does it affect capital budgeting decisions?

Q: The benefit-cost approach first surfaced in France during 1844.

The benefit-cost approach first surfaced in France during 1844. In this century, benefit-cost analysis has been widely used in the evaluation of river and harbor projects since as early as 1902. In th...

Q: Toby Amberville’s Manhattan Café, Inc., is considering investment in two

Toby Amberville’s Manhattan Café, Inc., is considering investment in two alternative capital budgeting projects. Project A is an investment of $75,000 to replace working but obsolete refrigeration equ...

Q: Webb Publishing Company is evaluating two investment opportunities. One is to

Webb Publishing Company is evaluating two investment opportunities. One is to purchase an Internet company with the capacity to open new marketing channels through which Webb can sell its books. This...

Q: Barbara Harvey is angry with Martin Cochran. He is behind schedule

Barbara Harvey is angry with Martin Cochran. He is behind schedule developing supporting material for tomorrow’s capital budget committee meeting. When she approached him about his apparent lackadaisi...

Q: In one group, find a local business, such as a

In one group, find a local business, such as a copy shop, that charges for printing, faxing, copying, and scanning documents. In the other group, determine the price of a mid-range printer/copier/scann...

Q: Why does traditional NPV analysis tend to underestimate the true value of

Why does traditional NPV analysis tend to underestimate the true value of a capital budgeting project?

Q: Are the capital budgeting criteria we discussed applicable to not-for

Are the capital budgeting criteria we discussed applicable to not-for-profit corporations? How should such entities make capital budgeting decisions? What about the U.S. government? Should it evaluate...

Q: Your company currently uses traditional capital budgeting techniques, including net present

Your company currently uses traditional capital budgeting techniques, including net present value. After hearing about the use of real option analysis, your boss decides that your company should use r...

Q: You are discussing a project analysis with a coworker. The project

You are discussing a project analysis with a coworker. The project involves real options, such as expanding the project if successful, or abandoning the project if it fails. Your coworker makes the fo...

Q: In our capital budgeting examples, we assumed that a firm would

In our capital budgeting examples, we assumed that a firm would recover all of the working capital it invested in a project. Is this a reasonable assumption? When might it not be valid?

Q: Wendell’s Donut Shoppe is investigating the purchase of a new $18

Wendell’s Donut Shoppe is investigating the purchase of a new $18,600 donut-making machine. The new machine would permit the company to reduce the amount of part-time help needed, at...

Q: Derrick Iverson is a divisional manager for Holston Company. His annual

Derrick Iverson is a divisional manager for Holston Company. His annual pay raises are largely determined by his division’s return on investment (ROI), which has been above 20% each...

Q: Casey Nelson is a divisional manager for Pigeon Company. His annual

Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s return on investment (ROI), which has been above 20% each of t...

Q: Gaston Company is considering a capital budgeting project that would require a

Gaston Company is considering a capital budgeting project that would require a $2,000,000 investment in equipment with a useful life of five years and no salvage value. The company’s...

Q: Lander Company has an opportunity to pursue a capital budgeting project with

Lander Company has an opportunity to pursue a capital budgeting project with a five-year time horizon. After careful study, Lander estimated the following costs and revenues for the project: Cost of...

Q: Rosman Company has an opportunity to pursue a capital budgeting project with

Rosman Company has an opportunity to pursue a capital budgeting project with a five-year time horizon. After careful study, Rosman estimated the following costs and revenues for the project: Cost of...

Q: You have recently been hired by Swan Motors, Inc. (

You have recently been hired by Swan Motors, Inc. (SMI), in its relatively new treasury management department. SMI was founded 8 years ago by Joe Swan. Joe found a method to manufacture a cheaper batt...

Q: You have run a regression of monthly returns on Amgen, a

You have run a regression of monthly returns on Amgen, a large biotechnology firm, against monthly returns on the S&P 500 Index, and come up with the following output: The current one-year Treasur...

Q: You have been hired as a capital budgeting analyst by a sporting

You have been hired as a capital budgeting analyst by a sporting goods firm that manufactures athletic shoes and has captured 10% of the overall shoe market (the total market is worth $100 million a y...

Q: A consultant commented that “too often the numbers look good but

A consultant commented that “too often the numbers look good but feel bad.” This comment often stems from estimation error common to capital budgeting proposals that relate to future cash flows. Three...

Q: The primary purpose of managerial accounting is to provide information useful for

The primary purpose of managerial accounting is to provide information useful for management decisions. Many of the managerial accounting techniques that you learn in this section of the course will b...

Q: Identify four reasons that capital budgeting decisions by managers are risky.

Identify four reasons that capital budgeting decisions by managers are risky.

Q: What are some examples of potential intangible benefits of investment proposals?

What are some examples of potential intangible benefits of investment proposals? Why do these intangible benefits complicate the capital budgeting evaluation process? What might happen if intangible b...

Q: Compare and contrast NPV and IRR as capital budgeting techniques.

Compare and contrast NPV and IRR as capital budgeting techniques.

Q: Consider the issues of project budget, scope, and project timetable

Consider the issues of project budget, scope, and project timetable. Discuss the extent to which the City Center project reflects survey evidence discussed in the chapter about capital budgeting biase...

Q: Why is capital budgeting such an important process? Why are capital

Why is capital budgeting such an important process? Why are capital budgeting errors so costly?

Q: The following data have been collected by capital budgeting analysts

The following data have been collected by capital budgeting analysts at Sunrise Beach, Inc., concerning an investment in an expansion of the company’s product line. Analysts estimate that an investmen...

Q: The net present value method is the preferred method for capital budgeting

The net present value method is the preferred method for capital budgeting decisions. Therefore, managers will always use it.” Do you agree? Explain.

Q: A number of terms are listed below: /

A number of terms are listed below: Select the terms from the above list to complete the following sentences. The goal of ________________ is to provide capacity in a planned and orderly manner that...

Q: Norberto Garcia, general manager of the Argentinean subsidiary of Innovation Inc

Norberto Garcia, general manager of the Argentinean subsidiary of Innovation Inc., is considering the purchase of new industrial equipment to improve efficiency at its Cordoba plant. The equipment has...

Q: Southern Cola is considering the purchase of a special-purpose bottling

Southern Cola is considering the purchase of a special-purpose bottling machine for $23,000. It is expected to have a useful life of four years with no terminal disposal value. The plant manager estim...

Q: List and briefly describe each of the six parts in the capital

List and briefly describe each of the six parts in the capital budgeting decision process.

Q: Andrews Construction is analyzing its capital expenditure proposals for the purchase of

Andrews Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $6,000,000 for the year. Lori Bart, staff analyst...

Q: Edgeley Inc., a logistics operator located in Concord, Ontario,

Edgeley Inc., a logistics operator located in Concord, Ontario, is considering replacing one of its tractor trailers (informally known as a 53’ truck). The truck was purchased for $64,800 two years ag...

Q: Anna’s Bakery plans to purchase a new oven with an estimated useful

Anna’s Bakery plans to purchase a new oven with an estimated useful life of four years. The estimated pretax cash flows for the oven are as shown in the table that follows, with no a...

Q: Met-All Manufacturing manufactures over 20,000 different products made

Met-All Manufacturing manufactures over 20,000 different products made from metal, including building materials, tools, and furniture parts. The manager of the Furniture Parts division has proposed th...

Q: LudmillaQuagg owns a fitness centre and is thinking of replacing the old

LudmillaQuagg owns a fitness centre and is thinking of replacing the old Fit-O-Matic machine with a brand new Flab-Buster 3000. The old FitO-Matic has a historical cost of $50,000 and accumulated depr...

Q: Why are capital budgeting decisions among the most important decisions in the

Why are capital budgeting decisions among the most important decisions in the life of a firm?

Q: Give an example of a capital budgeting decision and a financing decision

Give an example of a capital budgeting decision and a financing decision?

Q: a. Sykes, Inc. management is considering two projects:

a. Sykes, Inc. management is considering two projects: a plant expansion and a new computer system for the firm’s production department. Classify these projects as independent, mutually exclusive, or...

Q: Explain the difference between marginal and average tax rates, and identify

Explain the difference between marginal and average tax rates, and identify which of these rates is used in capital budgeting and why?

Q: What are the major shortcomings of using the Accounting Rate of Return

What are the major shortcomings of using the Accounting Rate of Return (ARR) method as a capital budgeting method?

Q: What changes have taken place in the capital budgeting techniques used by

What changes have taken place in the capital budgeting techniques used by U.S. companies?

Q: Staunton Energy Corporation managers are considering a capital budgeting project to replace

Staunton Energy Corporation managers are considering a capital budgeting project to replace some machinery used in one of the company’s oil refineries. Is the company’s WACC the appropriate discount r...

Q: What are the differences between cash flows used in capital budgeting calculations

What are the differences between cash flows used in capital budgeting calculations and past accounting earnings?

Q: Llama Wool Company management is doing some financial planning for the coming

Llama Wool Company management is doing some financial planning for the coming year. Llama plans to raise $10,000 in new equity this year and wants to pay a dividend to stockholders of $30,000. The fir...

Q: Future Enterprises is considering building a factory that will include an option

Future Enterprises is considering building a factory that will include an option to expand operations in three years. If things go well, the anticipated expansion will have a value of $10 million and...

Q: Ford Motor Company maintains production facilities in many different countries including Brazil

Ford Motor Company maintains production facilities in many different countries including Brazil, Taiwan, and the United States. Given the data in Exhibit 21.6, which production plant is likely to face...

Q: Your company is considering opening a new factory in Europe to serve

Your company is considering opening a new factory in Europe to serve the growing demand for your product there. What real options might you want to consider in your capital budgeting analysis of the f...

Q: Why is it necessary to consider changes to working capital accounts as

Why is it necessary to consider changes to working capital accounts as part of the capital budgeting decision?

Q: 1. A capital budget is the tool hospitality managers use to

1. A capital budget is the tool hospitality managers use to plan and evaluate A. the purchase of fixed assets. B. the amount of cash to keep on hand. C. their selling prices. D. their operating expens...

Q: You have recently been hired by Swan Motors, Inc. (SMI),

You have recently been hired by Swan Motors, Inc. (SMI), in its relatively new treasury management department. SMI was founded eight years ago by Joe Swan. Joe found a method to manufacture a cheaper...

Q: Shelley Couts, the owner of Conch Republic Electronics, has received

Shelley Couts, the owner of Conch Republic Electronics, has received the capital budgeting analysis from Jay McCanless for the new smartphone the company is considering. Shelley is pleased with the re...

Q: You have recently been hired by Swan Motors, Inc. (SMI),

You have recently been hired by Swan Motors, Inc. (SMI), in its relatively new treasury management department. SMI was founded eight years ago by Joe Swan. Joe found a method to manufacture a cheaper...

Q: Shelley Couts, the owner of Conch Republic Electronics, has received

Shelley Couts, the owner of Conch Republic Electronics, has received the capital budgeting analysis from Jay McCanless for the new smartphone the company is considering. Shelley is pleased with the re...

Q: Why does personal financial planning involve other disciplines as shown in Figure

Why does personal financial planning involve other disciplines as shown in Figure 1.3? Give some practical examples of their use. Figure 1.3:

Q: Compare capital budgeting practices as outlined in this chapter with those used

Compare capital budgeting practices as outlined in this chapter with those used on a day-to-day basis.

Q: Brook’s Window Shields Inc. is trying to calculate its cost of

Brook’s Window Shields Inc. is trying to calculate its cost of capital for use in a capital budgeting decision. Mr. Glass, the vice president of finance, has given you the following information and ha...

Q: A-Rod Manufacturing Company is trying to calculate its cost of

A-Rod Manufacturing Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Jeter, the vice president of finance, has given you the following information...

Q: Northwest Utility Company faces increasing needs for capital. Fortunately, it

Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 25 percent. Northwest’s treasurer is trying to deter...

Q: Why does capital budgeting rely on analysis of cash flows rather than

Why does capital budgeting rely on analysis of cash flows rather than on net income?

Q: Explain how the concept of risk can be incorporated into the capital

Explain how the concept of risk can be incorporated into the capital budgeting process.

Q: Explain how the bond refunding problem is similar to a capital budgeting

Explain how the bond refunding problem is similar to a capital budgeting decision.

Q: What are the important administrative considerations in the capital budgeting process?

What are the important administrative considerations in the capital budgeting process?

Q: Perhaps the national debt and federal budget deficits are really not so

Perhaps the national debt and federal budget deficits are really not so large and threatening. For example, it can be argued that we should use real rather than nominal values to report the national d...

Q: How does the basic net present value model of capital budgeting deal

How does the basic net present value model of capital budgeting deal with the problem of project risk? What are the shortcomings of this approach?

Q: How would you define risk as it is used in a capital

How would you define risk as it is used in a capital budgeting analysis context?

Q: How does the basic net present value capital budgeting model deal with

How does the basic net present value capital budgeting model deal with the phenomenon of increasing risk of project cash flows over time?

Q: What are the primary advantages and disadvantages of applying simulation to capital

What are the primary advantages and disadvantages of applying simulation to capital budgeting risk analysis?

Q: What major problems can you foresee in applying capital budgeting techniques to

What major problems can you foresee in applying capital budgeting techniques to investments made by public sector and not-for-profit enterprises or organizations?

Q: Discuss how capital budgeting procedures might be used by each of the

Discuss how capital budgeting procedures might be used by each of the following: a. Personnel managers b. Research and development staffs c. Advertising executives

Q: How is the opportunity cost concept used in the capital budgeting process

How is the opportunity cost concept used in the capital budgeting process?

Q: The Cooper Electronics Company has developed the following schedule of potential investment

The Cooper Electronics Company has developed the following schedule of potential investment projects that may be undertaken during the next 6 months: a. If Cooper requires a minimum rate of return o...

Q: Suppose that FedEx Kinko’s has decided to install personal computers and printers

Suppose that FedEx Kinko’s has decided to install personal computers and printers in its Pittsburgh store that will be rented to customers on an hourly basis. FedEx Kinko’s management has called in co...

Q: How is foreign exchange risk sensitivity factored into the capital budgeting analysis

How is foreign exchange risk sensitivity factored into the capital budgeting analysis of a foreign project?

Q: How is expropriation risk factored into the capital budgeting analysis of a

How is expropriation risk factored into the capital budgeting analysis of a foreign project?

Q: What is real option analysis? How is it a better method

What is real option analysis? How is it a better method of making investment decisions than traditional capital budgeting analysis?

Q: Capital projects provide both operating cash flows and financial cash flows.

Capital projects provide both operating cash flows and financial cash flows. Why are operating cash flows preferred for domestic capital budgeting but financial cash flows given major consideration in...

Q: Southern Cola is considering the purchase of a special-purpose bottling

Southern Cola is considering the purchase of a special-purpose bottling machine for $23,000. It is expected to have a useful life of four years with no terminal disposal value. The plant manager estim...

Q: Innovation, Inc., is considering the purchase of a new industrial

Innovation, Inc., is considering the purchase of a new industrial electric motor to improve efficiency at its Fremont plant. The motor has an estimated useful life of five years. The estimated pretax...

Q: Ludmilla Quagg owns a fitness center and is thinking of replacing the

Ludmilla Quagg owns a fitness center and is thinking of replacing the old Fit-O-Matic machine with a brand new Flab-Buster 3000. The old Fit-O-Matic has a historical cost of $50,000 and accumulated de...

Q: Unbreakable Manufacturing manufactures over 20,000 different products made from metal

Unbreakable Manufacturing manufactures over 20,000 different products made from metal, including building materials, tools, and furniture parts. The manager of the furniture parts division has propose...

Q: Summarize all the cash flows that cannot be used in the capital

Summarize all the cash flows that cannot be used in the capital budgeting process and explain the reasons.

Q: Your boss is very puzzled by the finance courses in his MBA

Your boss is very puzzled by the finance courses in his MBA program. He has learned that “cash flow is king,” but notices that the capital budgeting problems spend a lot of time and effort dealing wit...

Q: What is the financial manager’s goal in selecting investment projects for the

What is the financial manager’s goal in selecting investment projects for the firm? Define the capital budgeting process, and explain how it helps managers achieve their goal.

Q: Why is it important to evaluate capital budgeting projects on the basis

Why is it important to evaluate capital budgeting projects on the basis of incremental cash flows?

Q: Diagram and describe the three types of net cash flows for a

Diagram and describe the three types of net cash flows for a capital budgeting project.

Q: Are most mutually exclusive capital budgeting projects equally risky? If you

Are most mutually exclusive capital budgeting projects equally risky? If you think about a firm as a portfolio of many different kinds of investments, how can the acceptance of a project change a firm...

Q: Define risk in terms of the cash flows from a capital budgeting

Define risk in terms of the cash flows from a capital budgeting project. How can determination of the breakeven cash inflow be used to gauge project risk?

Q: Briefly explain how the following items affect the capital budgeting decisions of

Briefly explain how the following items affect the capital budgeting decisions of multinational companies: (a) exchange rate risk; (b) political risk; (c) tax law differences; (d) transfer pricing; an...

Q: Explain why a firm whose stock is actively traded in the securities

Explain why a firm whose stock is actively traded in the securities markets need not concern itself with diversification. Despite this reason, how is the risk of capital budgeting projects frequently...

Q: Describe the four basic steps involved in the lease-versus-

Describe the four basic steps involved in the lease-versus-purchase decision process. How are capital budgeting methods applied in this process?

Q: Ken Allen, capital budgeting analyst for Bally Gears, Inc.,

Ken Allen, capital budgeting analyst for Bally Gears, Inc., has been asked to evaluate a proposal. The manager of the automotive division believes that replacing the robotics used on the heavy truck g...

Q: Diane Dennison is a financial analyst working for a large chain of

Diane Dennison is a financial analyst working for a large chain of discount retail stores. Her company is looking at the possibility of replacing the existing fluorescent lights in all of its stores w...

Q: Fiftycent Inc. has hired you to advise the firm on a

Fiftycent Inc. has hired you to advise the firm on a capital budgeting issue involving two unequal-lived, mutually exclusive projects, S and T. The cash flows for each project are presented in the fol...

Q: Jenny Rene, the CFO of Asor Products Inc., has just

Jenny Rene, the CFO of Asor Products Inc., has just completed an evaluation of a proposed capital expenditure for equipment that would expand the firm’s manufacturing capacity. Using the traditional N...

Q: Recall from P11-28 that when the market price of gold

Recall from P11-28 that when the market price of gold is C$1,562.50 per ounce (C$ stands for Canadian dollars) the NPV for Maritime Resources Corp.—a Canadian mining firm that was reopening an old gol...

Q: As president of Young’s of California, a large clothing chain,

As president of Young’s of California, a large clothing chain, you have just received a letter from a major stockholder. The stockholder asks about the company’s dividend policy. In fact, the stockhol...

Q: Suppose a firm uses a constant WACC to calculate the NPV of

Suppose a firm uses a constant WACC to calculate the NPV of all of its capital budgeting projects, rather than adjusting for the risk of the individual projects. What errors will the firm make in its...

Q: 1. Capital budgeting is the process of doing which of the

1. Capital budgeting is the process of doing which of the following? a. Allocating capital among bonds and stocks. b. Making certain adequate capital is available to pay bills when they come due. c. B...

Q: 1. Risk-adjusted discount rates should be used to evaluate

1. Risk-adjusted discount rates should be used to evaluate capital budgeting projects for which of the following reasons? a. The risk/expected return tradeoff in finance b. Otherwise low-risk, low-ret...

Q: 1. True or False? Net working capital changes will affect

1. True or False? Net working capital changes will affect a project’s operating cash flow estimates. a. True because the project may affect levels of inventory or accounts receivable. b. True because...

Q: 1. The stages of the capital budgeting process do not include

1. The stages of the capital budgeting process do not include which one of the following? a. Design b. Identification c. Development d. Follow-up 2. In which stage of the capital budgeting process a...

Q: 1. How is NPV computed? a. Present value

1. How is NPV computed? a. Present value of future cash flows minus cost b. Sum of cash inflow minus cost c. Future value of cash inflows minus future value of cost d. Present value of profits from th...

Q: 1. How is MIRR computed? a. By finding

1. How is MIRR computed? a. By finding the discount rate that equates the present value of the cash outflows with the terminal value of the cash inflows of a capital budgeting project b. By finding th...

Q: 1. What is the profitability index (PI)? a

1. What is the profitability index (PI)? a. The benefit/cost ratio of a capital budgeting project, in present value terms. b. The benefit/cost ratio of a capital budgeting project, in future value ter...

Q: 1. The payback period is the amount of time until a

1. The payback period is the amount of time until a project achieves which of the following? a. Profits are positive b. Total cash flows (outflows and inflows) sum to zero c. Revenues equal operating...

Q: 1. Why might managers prefer to use capital budgeting techniques other

1. Why might managers prefer to use capital budgeting techniques other than the NPV? a. They give the manager an intuitive feel for a safety margin in case cash flow estimates are too high. b. Because...

Q: 1. What is the stand-alone principle? a

1. What is the stand-alone principle? a. Mutually exclusive projects should be considered one at a time. b. Independent projects should be considered one at a time. c. Each capital budgeting project m...

Q: 1. What is the relationship between a project’s cost of capital

1. What is the relationship between a project’s cost of capital and its minimum required rate of return? a. The cost of capital is always greater than the minimum required return. b. The cost of capit...

Q: Sensitivity analysis involves changing one variable at a time in a capital

Sensitivity analysis involves changing one variable at a time in a capital budgeting situation and seeing how NPV changes. Perform sensitivity analysis on the each of the following variables from prob...

Q: Compute operating cash flows for the following: a. A

Compute operating cash flows for the following: a. A project that is expected to have sales of $10,000, expenses of $5,000, depreciation of $200, an investment of $50 in net working capital and a 20 p...

Q: Why might there be tax implications when an asset is sold at

Why might there be tax implications when an asset is sold at the termination of a capital budgeting project?

Q: Identify the internal rate of return method and describe how it is

Identify the internal rate of return method and describe how it is used in making capital budgeting decisions.

Q: Describe the payback period method for making capital budgeting decisions.

Describe the payback period method for making capital budgeting decisions.

Q: Why might managers want to use other techniques besides NPV to make

Why might managers want to use other techniques besides NPV to make capital budgeting decisions?

Q: What is a way to keep managers accountable for their capital budgeting

What is a way to keep managers accountable for their capital budgeting forecasts and estimates?

Q: Identify some capital budgeting considerations that are unique to multinational corporations.

Identify some capital budgeting considerations that are unique to multinational corporations.

Q: 1. What are typical titles for a firm's top financial officers

1. What are typical titles for a firm's top financial officers? a. Corporate financial officer, treasurer, controlling manager b. Chief financial officer, payroll, controller c. Controlling manager...

Q: Haskin Company was founded 40 years ago and now has several manufacturing

Haskin Company was founded 40 years ago and now has several manufacturing plants in the Northeast and Midwest. The evaluation of proposed capital expenditures became increasingly difficult for managem...

Q: In one group, find a local business, such as a

In one group, find a local business, such as a copy shop, that rents time on desktop computers for an hourly rate. Determine the hourly rate. In the other group, determine the price of a mid-range des...

Q: One of the problems of using simulation to incorporate risk into capital

One of the problems of using simulation to incorporate risk into capital budgeting is related to the idea that the probability distributions of successive cash flows usually are not independent. If t...

Q: The Brown Owl Corporation manufactures high quality outdoor equipment for adventurous people

The Brown Owl Corporation manufactures high quality outdoor equipment for adventurous people who enjoy hiking, hunting, climbing, and trekking under extreme conditions. The firm has been very success...

Q: Taunton Construction Inc.'s capital situation is described as follows:

Taunton Construction Inc.'s capital situation is described as follows: Debt: The firm issued 10,000 25-year bonds10 years ago at their par value of $1,000. The bonds carry a coupon rate of 14% and...

Q: Find the MIRR and the IRR for the following capital budgeting project

Find the MIRR and the IRR for the following capital budgeting project and comment on the difference between the two. The cost of capital is 12%.

Q: You are a financial analyst for the Ajax Company, which uses

You are a financial analyst for the Ajax Company, which uses about $1M of inventory per month. The purchasing manager has come to you for help with a buying decision. He can get a big discount on $1...

Q: Charlie Brown is thinking about starting Wing-It Airlines to fly

Charlie Brown is thinking about starting Wing-It Airlines to fly a commuter route in and out of a major city. Four planes are on the market that will do the job, but each has different flight, load,...

Q: Most top executives are graded primarily on their results in terms of

Most top executives are graded primarily on their results in terms of net income rather than net cash flow. Why then, is capital budgeting done with incremental cash flows rather than with incrementa...

Q: Creighton Inc. is preparing a bid to sell a large telephone

Creighton Inc. is preparing a bid to sell a large telephone communications system to a major business customer. It is characteristic of the telephone business that the vendor selling a system gets su...

Q: Webley Motors, a manufacturer of small gas engines, has been

Webley Motors, a manufacturer of small gas engines, has been working on a new design for several years. It's now considering going into the market with the new product, and has projected future sales...

Q: Ed Draycutt is the engineering manager of Airway Technologies, a firm

Ed Draycutt is the engineering manager of Airway Technologies, a firm that makes computer systems for air traffic control installations at airports. He has proposed a new device the success of which...

Q: Charlie Henderson, a senior manager in the Bartok Company, is

Charlie Henderson, a senior manager in the Bartok Company, is known for taking risks. He recently proposed that the company expand its operations into a new and untried field. He put together a set...

Q: The engineering department at Digitech Inc. wants to buy a new

The engineering department at Digitech Inc. wants to buy a new, state-of-the-art computer. The proposed machine is faster than the one now being used, but whether the extra speed is worth the expense...

Q: Whitefish Inc. operates a fleet of 15 fishing boats in the

Whitefish Inc. operates a fleet of 15 fishing boats in the North Atlantic Ocean. Fishing has been good in the last few years, as has the market for product, so the firm can sell all the fish it can c...

Q: The Capricorn Company is launching a new venture in a field related

The Capricorn Company is launching a new venture in a field related to, but separate from, its present business. Management is proposing that financing for the new enterprise be supplied by a local b...

Q: You're the CFO of a small company that is considering a new

You're the CFO of a small company that is considering a new venture. The president and several other members of management are very excited about the idea for reasons related to engineering and marke...

Q: Gander, Inc. is considering two projects with the following cash

Gander, Inc. is considering two projects with the following cash flows. Gander uses the payback period method of capital budgeting and accepts only projects with payback periods of 3 years or less....

Q: Kneelson and Botes Inc. (K&B) is a

Kneelson and Botes Inc. (K&B) is a construction company that does road and bridge work for the state highway authority. The state government solicits bids on construction projects from private co...

Q: Capital budgeting is based on the idea of identifying incremental cash flows

Capital budgeting is based on the idea of identifying incremental cash flows, so overheads aren't generally included. Does this practice create a problem for a firm that over a long period of time ta...

Q: Why is it desirable to construct capital budgeting rules so that higher

Why is it desirable to construct capital budgeting rules so that higher risk projects become less acceptable than lower risk projects?

Q: Harrington Inc. is introducing a new product in its line of

Harrington Inc. is introducing a new product in its line of household appliances. Household products generally have ten-year life cycles and are viewed as capital budgeting projects over that period....

Q: Energy plays an important role in improving people’s lifestyles. In Australia

Energy plays an important role in improving people’s lifestyles. In Australia, our energy consumption is growing and is forecasted to increase by 50 per cent over the next 15 years. The available powe...

Q: Xi Phan, CEO of the Fine Furniture Supply Group, is

Xi Phan, CEO of the Fine Furniture Supply Group, is considering an investment to upgrade his current computer-aided design equipment. The new equipment would cost $110 000, have a five-year useful lif...

Q: Describe the pros and cons of each of the capital budgeting methods

Describe the pros and cons of each of the capital budgeting methods learned in this chapter: (a) net present value, (b) internal rate of return, (c) payback, and (d) accrual accounting rate of ret...

Q: Suppose an entity has five different capital budgeting projects from which to

Suppose an entity has five different capital budgeting projects from which to choose, but has constrained funds and cannot implement all of the projects. Explain why comparing the projects’ NPVs is be...

Q: Put the following six steps for capital budgeting in the most likely

Put the following six steps for capital budgeting in the most likely order, numbering the first activity as number 1, the second as 2, and so on. • Perform sensitivity analysis. • Identify decision al...

Q: Solve the capital budgeting problem in Problem 12.21(a

Solve the capital budgeting problem in Problem 12.21(a) using the linear programming model and a spreadsheet. Problem 12.21(a): A capital-budgeting problem is defined as follows: three projects are to...

Q: For some years, the City of Armstrong Power Authority has used

For some years, the City of Armstrong Power Authority has used 4-20 mA technology to measure parameters such as pressure, temperature, flow rates, and speed of various machinery and systems installed...

Q: List at least three characteristics of a capital budgeting study.

List at least three characteristics of a capital budgeting study.

Q: When there are a total of four projects involved in a capital

When there are a total of four projects involved in a capital budgeting study, the maximum number of bundles that can be formulated is: (a) 6 (b) 8 (c) 15 (d) 16

Q: All of the following are correct when a capital budgeting problem is

All of the following are correct when a capital budgeting problem is solved using the 0-1 integer linear programming model, except: (a) Partial investment in a project is acceptable. (b) The objective...

Q: Rockyford Company must replace some machinery that has zero book value and

Rockyford Company must replace some machinery that has zero book value and a current market value of $1,800. One possibility is to invest in new machinery costing $40,000. This new machinery would pro...

Q: Lou Lewis, the president of Lewisville Company, has asked you

Lou Lewis, the president of Lewisville Company, has asked you to give him an analysis of the best use of a warehouse the company owns. Note: The company has a 40% effective tax rate. a. Lewisville Com...

Q: MaxiCare Corporation, a not-for-profit organization, specializes

MaxiCare Corporation, a not-for-profit organization, specializes in health care for senior citizens. Management is considering whether to expand operations by opening a new chain of care centers in th...

Q: J. Morgan of SparkPlug Inc. has been approached to take

J. Morgan of SparkPlug Inc. has been approached to take over a production facility from B.R. Machine Company. The acquisition will cost $1,500,000, and the after-tax net cash inflows are expected to b...

Q: You and several of your classmates have just graduated from college and

You and several of your classmates have just graduated from college and are evaluating various investment opportunities, including a startup company that would produce high-quality jackets embroidered...

Q: A proposed investment has the following projected after-tax cash flows

A proposed investment has the following projected after-tax cash flows over its 3-year life: Initial outlay (time 0) = ($1,000) End of year 1 = $2,000 End of year 2 = $2,000 End of year 3 = ($3,700)...

Q: Estimated cash-flow data for each of two projects, A

Estimated cash-flow data for each of two projects, A and B, and the discount rate, r, to be used for the analysis of capital investment projects are given below: Discount rate, r = 10.0%. Required:...

Q: What are the distinguishing characteristics of capital budgeting decisions?

What are the distinguishing characteristics of capital budgeting decisions?

Q: In what ways can accountants add value to the capital budgeting process

In what ways can accountants add value to the capital budgeting process?

Q: In capital budgeting analysis, what is meant by the income tax

In capital budgeting analysis, what is meant by the income tax effect? Give three examples of the tax effect pertaining to the acquisition of new factory (manufacturing) equipment.

Q: What are the limitations of the payback period method for making capital

What are the limitations of the payback period method for making capital budgeting decisions (e.g., whether to accept or reject a proposed investment)? Does the present value payback period overcome t...

Q: List at least three important behavioral issues related to the capital budgeting

List at least three important behavioral issues related to the capital budgeting process.

Q: Traditionally, Granite Company has accepted a proposal only if the payback

Traditionally, Granite Company has accepted a proposal only if the payback period is less than 50 percent of the asset’s useful life. Peggy Casteel is the new accounting manager. She suggested to mana...

Q: A number of terms and concepts from this chapter and a list

A number of terms and concepts from this chapter and a list of descriptions, definitions, and explanations appear as follows. For each term listed (1 through 9), choose at least one corresponding item...

Q: Citco Company is considering investing up to $500,000 in

Citco Company is considering investing up to $500,000 in a sustainability-enhancing project. Its managers have narrowed their choices to three potential projects. ∙ Project A would r...

Q: Citco Company is considering investing up to $500,000 in

Citco Company is considering investing up to $500,000 in a sustainability-enhancing project. Its managers have narrowed their choices to three potential projects. ∙ Project A would r...

Q: Which capital budgeting methods incorporate the time value of money and which

Which capital budgeting methods incorporate the time value of money and which do not? Which are considered superior and why?

Q: John Barleycorn estimates his firm’s after-tax WACC at only 8

John Barleycorn estimates his firm’s after-tax WACC at only 8%. Nevertheless, he sets a 15% companywide discount rate to offset the optimistic biases of project sponsors and to impose “discipline” on...

Q: Explain how each of the following actions or problems can distort or

Explain how each of the following actions or problems can distort or disrupt the capital budgeting process. a. Overoptimism by project sponsors. b. Inconsistent forecasts of industry and macroeconomic...

Q: Draw up an outline or flowchart tracing the capital budgeting process from

Draw up an outline or flowchart tracing the capital budgeting process from the initial idea for a new investment project to the completion of the project and the start of operations. Assume the idea f...

Q: Corporation tax only plays a role in capital budgeting because of capital

Corporation tax only plays a role in capital budgeting because of capital allowances.’ Do you agree? Explain.

Q: Introduction Jack Watson, an electrical engineer, established Electronic Boards plc

Introduction Jack Watson, an electrical engineer, established Electronic Boards plc as a ‘one-man’ company in the late 1970s. From small beginnings, the company ea...

Q: Toyota Motor Company is expanding the production of their gas-electric

Toyota Motor Company is expanding the production of their gas-electric hybrid drive systems and plans to shift production in the United States. To enable the expansion, they are contemplating investin...

Q: You have just been hired by Internal Business Machines Corporation (IBM

You have just been hired by Internal Business Machines Corporation (IBM) in their capital budgeting division. Your first assignment is to determine the free cash flows and NPV of a proposed new type o...

Q: What is capital budgeting? Why are capital budgeting decisions crucial to

What is capital budgeting? Why are capital budgeting decisions crucial to the long-run financial health of a business enterprise?

Q: What is the major shortcoming of using the payback period as the

What is the major shortcoming of using the payback period as the only criterion in making capital budgeting decisions?

Q: An investment center in Shellforth Corporation was asked to identify three proposals

An investment center in Shellforth Corporation was asked to identify three proposals for its capital budget. Details of those proposals are as follows. Shellforth uses residual income to evaluate all...

Q: The division managers of Chester Construction Corporation submit capital investment proposals each

The division managers of Chester Construction Corporation submit capital investment proposals each year for evaluation at the corporate level. Typically, the total dollar amount requested by the divis...

Q: Red Robin Gourmet Burgers is an upscale restaurant chain founded in the

Red Robin Gourmet Burgers is an upscale restaurant chain founded in the Pacific Northwest. The chain’s former chairman, Michael Snyder, encouraged employees to be “unbridled”? in everything they did....

Q: Because Ben Holt, Blades’ chief financial officer, believes the growth

Because Ben Holt, Blades’ chief financial officer, believes the growth potential for the roller blades market in Thailand is very high, he has decided to invest in Thailand. This investment would invo...

Q: Jim Logan, owner of the Sports Exports Company, has been

Jim Logan, owner of the Sports Exports Company, has been pleased with his success in the United Kingdom. He began his business by producing footballs and exporting them to the United Kingdom. Although...

Q: Recently, Ben Holt, Blades’ chief financial officer, has assessed

Recently, Ben Holt, Blades’ chief financial officer, has assessed whether it would be more beneficial for Blades to establish a subsidiary in Thailand to manufacture roller blades or to acquire an exi...

Q: Recall that Blades has tentatively decided to establish a subsidiary in Thailand

Recall that Blades has tentatively decided to establish a subsidiary in Thailand to manufacture roller blades. The new plant will be utilized to produce Speedos, Blades’ primary product. Once the subs...

Q: Why should capital budgeting for subsidiary projects be assessed from the parent’s

Why should capital budgeting for subsidiary projects be assessed from the parent’s perspective? Which additional factors that normally are not relevant for a purely domestic project deserve considerat...

Q: Santa Monica Co., a U.S.-based MNC,

Santa Monica Co., a U.S.-based MNC, was considering establishing a consumer products division in Germany, which would be financed by German banks. Santa Monica completed its capital budgeting analysis...

Q: Assume that a less developed country called LDC encourages direct foreign investment

Assume that a less developed country called LDC encourages direct foreign investment (DFI) in an effort to reduce its unemployment rate, currently at 15 percent. Also assume that several MNCs are like...

Q: PepsiCo recently decided to invest more than $300 million for expansion

PepsiCo recently decided to invest more than $300 million for expansion in Brazil. Brazil offers considerable potential because it has 150 million people and their demand for soft drinks is increasing...

Q: What is the major limitation of using point estimates of exchange rates

What is the major limitation of using point estimates of exchange rates in the capital budgeting analysis? List the various techniques for adjusting risk in multinational capital budgeting. Describe a...

Q: Assume that Nike decides to build a shoe factory in Brazil;

Assume that Nike decides to build a shoe factory in Brazil; half the initial outlay will be funded by the parent’s equity and half by borrowing funds in Brazil. Assume that Nike wants to assess the pr...

Q: Using the capital budgeting framework discussed in this chapter, explain the

Using the capital budgeting framework discussed in this chapter, explain the sources of uncertainty surrounding a proposed project in Hungary being considered by a U.S. firm. In what ways is the estim...

Q: Ethridge Co. of Atlanta, Georgia, has a subsidiary in

Ethridge Co. of Atlanta, Georgia, has a subsidiary in India that produces products and sells them throughout Asia. In response to the September 11, 2001, terrorist attacks on the United States, Ethrid...

Q: Explain how the capital budgeting analysis in question 16 would need to

Explain how the capital budgeting analysis in question 16 would need to be adjusted if there were three possible outcomes for the British pound along with the possible outcomes for the British economy...

Q: Recently, Best Bargain Co., a U.S.-based

Recently, Best Bargain Co., a U.S.-based retailer, decided to consider expanding into various foreign countries; it applied a comprehensive country risk analysis before making its expansion decisions....

Q: Monk, Inc., is considering a capital budgeting project in Tunisia

Monk, Inc., is considering a capital budgeting project in Tunisia. The project requires an initial outlay of 1 million Tunisian dinars; the dinar is currently valued at $0.70. In the first and second...

Q: If the potential return is high enough, any degree of country

If the potential return is high enough, any degree of country risk can be tolerated. Do you agree with this statement? Why or why not? Do you think that a proper country risk analysis can replace a ca...

Q: Gandor Co. is a U.S. firm that is

Gandor Co. is a U.S. firm that is considering a joint venture with a Chinese firm to produce and sell DVDs. Gandor will invest $12 million in this project, which will help finance the Chinese firm&aci...

Q: 21. Three general types of capital budgeting models are:

21. Three general types of capital budgeting models are: (a) Net present value declining balance and accounting rate of return (b) Payback, internal rate of return and units of production (c) Accou...

Q: Heaps Company produces jewelry that requires electroplating with gold, silver,

Heaps Company produces jewelry that requires electroplating with gold, silver, and other valuable metals. Electroplating uses large amounts of water and chemicals, producing wastewater with a number o...

Q: Barbara Harvey is angry with Martin Cochran. He is behind schedule

Barbara Harvey is angry with Martin Cochran. He is behind schedule developing supporting material for tomorrow’s capital budget committee meeting. When she approached him about his apparent lackadaisi...

Q: Webb Publishing Company is evaluating two investment opportunities. One is to

Webb Publishing Company is evaluating two investment opportunities. One is to purchase an Internet company with the capacity to open new marketing channels through which Webb can sell its books. This...

Q: What types of investments and expenditures are typically considered in the capital

What types of investments and expenditures are typically considered in the capital budgeting process?

Q: In the capital budgeting model in Figure 6.5, we

In the capital budgeting model in Figure 6.5, we supplied the NPV for each investment. Suppose instead that you are given only the streams of cash inflows from each investment. This file also shows th...

Q: The models in this chapter are often called combinatorial models because each

The models in this chapter are often called combinatorial models because each solution is a combination of the various 0–1 values, and only a finite number of such combinations exist. For the capital...

Q: Solve the problem 1 using the input data in the file P06

Solve the problem 1 using the input data in the file P06_02.xlsx. Data from Problem 1: In the capital budgeting model in Figure 6.5, we supplied the NPV for each investment. Suppose instead that you...

Q: Solve the following modifications of the capital budgeting model. a

Solve the following modifications of the capital budgeting model. a. Suppose that at most two of projects 3, 5, and 6 can be selected. b. Suppose that if investment 5 is selected, then investment 1 mu...

Q: In the capital budgeting model, investment 4 is tied for the

In the capital budgeting model, investment 4 is tied for the largest ROI, but it is not selected in the optimal solution. How much NPV will be lost if Tatham is forced to select investment 4? Answer b...

Q: As it currently stands, investment 7 in the capital budgeting model

As it currently stands, investment 7 in the capital budgeting model has the lowest ROI. Keeping this same ROI, can you change the cash requirement and NPV for investment 7 so that it is selected in th...

Q: Change the capital budgeting model so that 80% of each cost

Change the capital budgeting model so that 80% of each cost in row 5 is incurred right now, at the beginning of year 1, and the other 20% is incurred a year from now, at the beginning of year 2. You c...

Q: Expand and then solve the capital budgeting model so that 20 investments

Expand and then solve the capital budgeting model so that 20 investments are now possible. You can make up the data on cash requirements, NPVs, and the budget, but use the following guidelines: ■ The...

Q: Eastern Cola is considering the purchase of a special-purpose bottling

Eastern Cola is considering the purchase of a special-purpose bottling machine for $70,000. It is expected to have a useful life of 4 years with no terminal disposal value. The plant manager estimates...

Q: Lulus Construction is analyzing its capital expenditure proposals for the purchase of

Lulus Construction is analyzing its capital expenditure proposals for the purchase of equipment in the coming year. The capital budget is limited to $12,000,000 for the year. Lyssa Bickerson, staff an...

Q: Captain Inc. is considering the purchase of new equipment that will

Captain Inc. is considering the purchase of new equipment that will automate production and thus reduce labor costs. Captain made the following estimates related to the new machinery: Assume depreciat...

Q: Johnny Buster owns Entertainment World, a place that combines fast food

Johnny Buster owns Entertainment World, a place that combines fast food, innovative beverages, and arcade games. Worried about the shift- ing tastes of younger audiences, Johnny contemplates bringing...

Q: Shalie Manufacturing makes several thousand different metal products, including building materials

Shalie Manufacturing makes several thousand different metal products, including building materials, tools, and furniture parts. The manager of the furniture parts division has proposed that his divisi...

Q: National Leasing is evaluating the cost of capital to use in its

National Leasing is evaluating the cost of capital to use in its capital budgeting process. Over the recent past, the company has averaged a return on equity of 13% and a return on investment of 10%....

Q: A task force of capital budgeting analysts at Morrison Ltd. collected

A task force of capital budgeting analysts at Morrison Ltd. collected the following data concerning the drilling and production of known petroleum reserves at an offshore location: Required: a. Calcul...

Q: The following data have been collected by capital budgeting analysts at Sunset

The following data have been collected by capital budgeting analysts at Sunset Beach Inc. concerning an investment in an expansion of the company’s product line. Analysts estimate th...