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ACCT 221 – Manufacturing Company is considering a project that requires an investment

01 / 10 / 2021 Projects

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ACCT 221 – Manufacturing Company is considering a project that requires an investment

Manufacturing Company is considering a project that requires an investment in new equipment of $4,200,000, with an additional $210,000 in shipping and installation costs. Co estimates that its accounts receivables and inventories need to increase by $840000 to support new project, some of which is financed by a 336,000 increase in spontaneous liabilities (accounts payable and accruals).1. The total cost of Manufacturing Co. new equipment is___________ and consists of the price of the new equipment plus the _________________________.a. 4,200,000 a. projects additional accounts receivable investmentsb. 4,410,000 b. assets installation, shipping and delivery costs c. 840,00 c. project’s accounts payable2. In contrast,Manufacturing Co. initial investment outlay is _________________.a. 4,410,000b. 4,914,000c. 4,704,0003. Suppose Manufacturing Co. new equipment is expected to sell for $1,200,000 at the end of its four year useful life, and at the same time, the firm expects to recover all of its net working capital investment. The company chose to straight-line depreciation, and the new equipment was fully depreciated by the end of its useful life. If the firm’s tax rate is 40%, what is the projects total termination cash flow?a. 720,000b. 1,224,000c. 1,200,000d. 984,000 Cash Inc. is involved in a wide range of unrelated projects. The company will pursue any project that it thinks will create value for its stockholders. Consequently the risk level of the company’s projects tends to vary a great deal from project to project.4. If Cash Inc. does not risk-adjust its discount its discount rate for specific projects properly, which of the following is likely to occur over time? CHECK ALL THAT APPLYa. The firm will increase in valueb. The firm could potentially reject projects that provide a higher rate of return than the company should requirec. The firm overall risk level will increase5. How do managers typically deal with within-firm risk and beta risk when they are evaluating a potential projecta. quantitativelyb. subjectively6. True or False — Decision tree analysis is more commonly used in valuing securities than real assets.7. Which type of real option allows a firm to shut down a project if its cash flows are lower than expected?a. Timing optionb. flexibility optionc. expansion optiond. abandonment optionSnow Co. began operations in Chicago two years ago. As an independent contractor, the company does the majority of its business working for the city. The company also had offers from surrounding cities, but these offers would have required the company to invest in additional snowplow- which have high up-front costs. Snow Co. decided to purchase only the snowplows necessary to handle its contract Chicago. The company will pursue the additional contracts with the surrounding cities in the future if it thinks that the additional contracts justify investing in more snowplows.8. This decision described a real option toa. expandb. abandonAche Co. is considering a four year project that will require an initial investment of $15,000. The base-case cash flow for this project are projected to be $14,000 per year. The best-case cash flows are projected to e $26,000 per year, and the worst case cash flows are projected to be -$4,500 per year. The company’s analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that there is a 25% probability of the project generating the best case cash flows and a 35% probability of the project generating the worst-case cash flows. 9. What would be the expected net present value (NPV) of this project’s cost of capital is 14%a. $23,163b. $25,268c. $21,057d. $25,216Ache wants to take into account its ability to abandon he project at the end of year 2 if the projects ends up generating the worst-case scenario cash flows. If it decides to abandon he project at the end of year 2, the company will receive a one-time net cash inflow of $4,500 (at the end of year 2). The $4,5000 the company receives at the end of year 2 is difference between the cash the company receives from selling off the project’s assets and the company’s -$4,5000 cash outflow from operations. Additionally, if it abandons the project, the company will have no cash flows in years 3 and 4 of the project.10. Using the information, find the expected NPV of this project when taking the abandonment option into account.a. $27,846b. $24,214c. $21,793d. $23,00311. What is the value of the option to abandon the project?a. $2,683b. $2,368c. $3,157d. $2,210e. $3,473_____________________________________________________12. United Co. is one of the country’s largest distributors of servers and video-conferencing tech. Recently, the company successfully expended into three new markets. The company’s CFO needs to perform a post-audit to examine the feasibility of expansion into more new markets. Which of the following would be part of the post-audit? CHECK ALL THAT APPLY.a. Comparing the company’s actual sales volume in the new markets to the company’s expected sales volume in the new markets.b. Explaining why the company spent three times more on shipping products than what was forecastc. Determining which markets the company should expand into next13. When a firm is forced to employ capital rationing, it generally means that the firm has ______ positive NPV projects than it can finance.a. moreb. lessTurnup Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 11%, and its cost of preferred stock is 12.2%. If Turnup Co. can raise all of its equity capital from retained earnings, its cost of common equity will be 14.7%. However if it is necessary to raise new common equit, it will carry a cost of 16.8%14. If its current tax rate is 40%, how much higher will Turnup weighted average cost of capital (WACC) be if it has to raise additional common equity by issuing new common stock instead of raising the funds through retained earnings?a. .90%b. .98%c. .75%d. .94%15. Turnup Co is considering a project that requires an initial investment of $1,708,000. The firm will raise the $1,708,000 in capital by issuing $750,000 of debt at a before-tax cost of 11.1%, $78,000 of preferred stock at a cost of 12.2%, and $880,000 of equity at a cost of 147%. The firm faces a tax rate of 40%. What will be the WACC for this projecta. 9.40%b. 11.06%c. 7.19%d. 7.74%Last Tuesday, Metal Inc. lost a portion of its planning and financial data when its server and its backup server crashed. The company remembers that the internal rate of return (IRR) of Project Lima is 11.3%, but can’t recall how much Metal Inc originally invested in the project nor the project’s NPV. However, he found a note that contained the annual net cash flows expected to be generated b Project Lima. They areYear Cashflows1 $2,000,0002 $3,750,0003 $3,750,0004 $3,750,000The CFO asked to compute Project Lima initial investment using the information currently available to you. He has offered the following suggestions and observations: – A project’s IRR represents the return the project would generate when its NPV is zero or te discount value of its cash inflows equals the discounted value of its cash outflows-when the cash flows are discounted using the project’s IRR. – The level of risk exhibited by Project Lima is the same as that exhibited by the company’s average project, which means Project Lima net cash flows can be discounted using Metal inc. 10% WACC.16. Given the data and hints Projects Lima initial investments is _____________ and its NPV is________. rounded to the nearest dollar value.a. $10,081,684 a. $246,98b. $10,329,788 b. $277,535c. $11,560,041 c. $308,372d. $9,987,714 d. $354,628

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