FIN-3403 Lecture Notes - Lecture 91: Capital Asset Pricing Model, Windstream Holdings, Capital Budgeting

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23 Nov 2016

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If so, how: how and why are taxes considered in capital budgeting analysis, what is a proforma financial statement, explain the difference between depreciation as calculated on the income statement and depreciation as calculated for taxes. How does it differ from sensitivity analysis: describe simulation analysis. Define strong form, semistrong form and weak form efficient markets. An unexpected return: what is the principle of diversification, describe the concept of systematic and unsystematic risk. Beta coefficient for a portfolio given the component security information. Required return for an asset given inputs to capm. The fixed assets fall into a 5-year macrs category, and it is expected that the assets will have no salvage value at the end of the project. The project is estimated to generate ,328,000 in annual sales, with costs of ,131,200. What is the total cash flow for this project in year 1: consider an asset that costs ,000 and is in a seven-year macrs class.

Related Questions

Which of the following should be included in the capital budgeting decision

Select one:

A. Sunk costs

B. Opportunity costs

C. Relevant externalities

D. #2 and #3 should be included

E. All of the above should be included

Which of the following is NOT correct

Select one:

A. If an investment project would make use of land which the firm already owns, the opportunity cost of the land is a relevant cash flow and should be included with other project cash flows

B. Analysis of capital projects focuses on cash flows rather than accounting income

C. Changes in working capital do not need to be considered in capital project analysis

D. All of the above are correct

Stock dividends

Select one:

B. must be accompanied by cash dividends

C. are viewed unfavorably by investors and thus should not be used

D. have the same effect on financial statements as cash dividends

A project has initial costs of $5,000 and subsequent cash inflows of $1800, 1275, 1875, and 1525. The company's cost of capital is 10%. Calculate the Payback Period for the project

Problem 12-9
New project analysis

You must evaluate a proposal to buy a new milling machine. The base price is $164,000, and shipping and installation costs would add another $7,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $82,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $7,500 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $41,000 per year. The marginal tax rate is 35%, and the WACC is 11%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

How should the $5,000 spent last year be handled?

The cost of research is an incremental cash flow and should be included in the analysis.

Only the tax effect of the research expenses should be included in the analysis.

Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay.

Last year's expenditure is considered an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.

Last year's expenditure is considered a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.

-Select-IIIIIIIVVItem 1

What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.
$

What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent.
Year 1 $
Year 2 $
Year 3 $

Should the machine be purchased?
-Select-yesno

You must evaluate a proposal to buy a new milling machine. The base price is $167,000, and shipping and installation costs would add another $9,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $108,550. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $6,500 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $38,000 per year. The marginal tax rate is 35%, and the WACC is 10%. Also, the firm spent $5,000 last year investigating the feasibility of using the machine.

How should the $5,000 spent last year be handled?

I. The cost of research is an incremental cash flow and should be included in the analysis.

II. Only the tax effect of the research expenses should be included in the analysis.

III. Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay.

IV. Last year's expenditure is considered an opportunity cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.

V. Last year's expenditure is considered a sunk cost and does not represent an incremental cash flow. Hence, it should not be included in the analysis.

I, II, III, IV or V?

What is the initial investment outlay for the machine for capital budgeting purposes, that is, what is the Year 0 project cash flow? Round your answer to the nearest cent.
$

What are the project's annual cash flows during Years 1, 2, and 3? Round your answer to the nearest cent.
Year 1 $
Year 2 $
Year 3 $

Should the machine be purchased?

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FIN-3403 Lecture Notes - Lecture 91: Capital Asset Pricing Model, Windstream Holdings, Capital Budgeting

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