Question Details

Which one of the following would NOT result in incremental cash flows 



1.	Masulis Inc. is considering a project that has the following cash flow and WACC data.  What is the project's discounted payback?

WACC:  10.00%
Year		0	1	2	3	4	
Cash flows	-$950	$525	$485	$445	$405

a.	1.61 years
b.	1.79 years
c.	1.99 years
d.	2.22 years
e.	2.44 years
	
2.	Tesar Chemicals is considering Projects S and L, whose cash flows are shown below.  These projects are mutually exclusive, equally risky, and not repeatable.  The CEO believes the IRR is the best selection criterion, while the CFO advocates the NPV.  If the decision is made by choosing the project with the higher IRR rather than the one with the higher NPV, how much, if any, value will be forgone, i.e., what's the chosen NPV versus the maximum possible NPV?  Note that (1) "true value" is measured by NPV, and (2) under some conditions the choice of IRR vs. NPV will have no effect on the value gained or lost.

WACC:  7.50%
Year		0	1	2	3	4	
CFS	-$1,100	$550	$600	$100	$100
CFL	-$2,700	$650	$725	$800	$1,400

a.	$138.10
b.	$149.21
c.	$160.31
d.	$171.42
e.	$182.52
	
3.	Yonan Inc. is considering Projects S and L, whose cash flows are shown below.  These projects are mutually exclusive, equally risky, and not repeatable.  If the decision is made by choosing the project with the shorter payback, some value may be forgone.  How much value will be lost in this instance?  Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost.

WACC:  10.25%
Year		0	1	2	3	4	
CFS	-$950	$500	$800	$0	$0
CFL	-$2,100	$400	$800	$800	$1,000

a.	$24.14
b.	$26.82
c.	$29.80
d.	$33.11
e.	$36.42
	
4.	A company is considering a new project.  The CFO plans to calculate the project- NPV by estimating the relevant cash flows for each year of the project- life (i.e., the initial investment cost, the annual operating cash flows, and the terminal cash flow), then discounting those cash flows at the company- overall WACC.  Which one of the following factors should the CFO be sure to INCLUDE in the cash flows when estimating the relevant cash flows?

a.	All sunk costs that have been incurred relating to the project.
b.	All interest expenses on debt used to help finance the project.
c.	The investment in working capital required to operate the project, even if that investment will be recovered at the end of the project- life.
d.	Sunk costs that have been incurred relating to the project, but only if those costs were incurred prior to the current year.
e.	Effects of the project on other divisions of the firm, but only if those effects lower the project- own direct cash flows.

5.	Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?

a.	Using some of the firm's high-quality factory floor space that is currently unused to produce the proposed new product.  This space could be used for other products if it is not used for the project under consideration.
b.	Revenues from an existing product would be lost as a result of customers switching to the new product.
c.	Shipping and installation costs associated with a machine that would be used to produce the new product.
d.	The cost of a study relating to the market for the new product that was completed last year.  The results of this research were positive, and they led to the tentative decision to go ahead with the new product.  The cost of the research was incurred and expensed for tax purposes last year.
e.	It is learned that land the company owns and would use for the new project, if it is accepted, could be sold to another firm.



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