Question
Q1. A firm evaluates a future project by undertaking a feasibility study. If the project is accepted it will reduce demand for existing products it
Q1. A firm evaluates a future project by undertaking a feasibility study. If the project is accepted it will reduce demand for existing products it sells. The firm will have to borrow money to fund the project. Which of the following cash flows is relevant to evaluating the NPV of this project?
a. The amount of revenue lost as a result of cannibilised sales from reduced demand.
b. Financing costs associated with the firm borrowing money.
c. None of the above are relevant to calculating the NPV.
d. The cost of the feasibility study.
Q2. A firm has undertaken a feasibility study to evaluateaproject that has the following estimated cashflows:
a. Increased sales to business of $140,000 for the next 5 years (starting in one year's time)
b. Increased costs of $20,000 forthe nexttwo years (startingin one year's time)
c. The initial capital expenditure requiredis $100,000.
d. The study cost $10,000 to conduct.
-Amount borrowed to fund project is $200,000 with interest of 8% pa paid yearly.
If the firm is facing a discount rate of 10%, what is the NPV of this project?
Q.3 Tank Ltd is considering undertaking the purchase of a new piece of equipment that is expected to increase pre-tax income (EBITDA) by $15,000 each year for the next 4 years. It costs $35,000 to purchase today and for tax purposes must be depreciated down to zero over its 5 year useful life using the straight-line method. If Tank is actually forecasting a salvage (for capital budgeting purposes) of $9,000 after 4 years, what is the machine's net cash flow (after tax) for year 4? Assume the tax rate is 30%.
NB: EBITDA is "Earnings Before Interest, Taxes, Depreciation and Amortisation"
Q.4 What is the Net Present Value of a project with a discount rate of 10%p.a. whose Net Cash Flows are forecast to be:
Year 0: $10,000 outflow
Year 1: $2,000 inflow
Year 2: $3,000 inflow
Year 3: $5000 inflow
Year 4 $10,000 inflow
Q5. You are considering investing in a start up project at a cost of $100,000. You expect the project to return $500,000 to you in seven years. Given the risk of this project, your cost of capital is 20%.The IRR for this project is closest to:
Q6. The NPV profile graphs:
a. the project's cash flows over a range of NPVs.
b. the project's NPV over a range of discount rates.
c. the project's IRR over a range of discount rates.
d. the project's IRR over a range of NPVs.
Q7. Temporary Housing Services Incorporated (THSI) is considering a project that involves setting up a temporary housing facility in an area recently damaged by a hurricane.THSI will lease space in this facility to various agencies and groups providing relief services to the area.THSI estimates that this project will initially cost $4.89 million to setup and will generate $20 million in revenues during its first and only year in operation (paid in one year). Operating expenses are expected to total $12 million during this year and depreciation expense will be another $3 million.THSI will require no working capital for this investment.THSI's marginal tax rate is 35%.
Assume that THSI's cost of capital is 11.4% p.a.
Compute the NPV of the temporary housing facility to the nearest dollar. (Do not enter a dollar sign, just enter your answer as a whole number, either positive or negative)
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