FINC Chapter 12 Homework
Chapter 12 Homework Assignments (questions 1-6 each has 3 and #7 2 points)
Please Post Your Answers on Ch 12 Dropbox (D2L) Must Show All Work
1. Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project? C
a. Changes in net working capital.
b. Shipping and installation costs.
c. Sunk costs that have been expensed for tax purposes.
d. Cannibalization effects.
e. Opportunity costs.
2. Which of the following statements is CORRECT? E
a. A sunk cost is any cost that must be expended in order to complete a project and bring it into operation.
b. A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project.
c. Sunk costs were formerly hard to deal with, but once the NPV method came into wide use, it became possible to simply include sunk costs in the cash flows and then calculate the PV.
d. A good example of a sunk cost is a situation where Home Depot opens a new store, and that leads to a decline in sales of one of the firm’s existing stores.
e. A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project.
3. Clemson Software is considering a new project whose data are shown below. The required equipment has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight-line method over 3 years. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's Year 1 cash flow?
Equipment cost (depreciable basis) $65,000
Straight-line depreciation rate 33.333%
Sales revenues, each year $60,000
Operating costs (excl. deprec.) $25,000
Tax rate 40%
a. $29,665 b. $27,736 c. $28,575 d. $31,333 e. $28,665
4. Mulroney Corp. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project A has an expected life of 2
Please Post Your Answers on Ch 12 Dropbox (D2L) Must Show All Work
1. Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project? C
a. Changes in net working capital.
b. Shipping and installation costs.
c. Sunk costs that have been expensed for tax purposes.
d. Cannibalization effects.
e. Opportunity costs.
2. Which of the following statements is CORRECT? E
a. A sunk cost is any cost that must be expended in order to complete a project and bring it into operation.
b. A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project.
c. Sunk costs were formerly hard to deal with, but once the NPV method came into wide use, it became possible to simply include sunk costs in the cash flows and then calculate the PV.
d. A good example of a sunk cost is a situation where Home Depot opens a new store, and that leads to a decline in sales of one of the firm’s existing stores.
e. A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project.
3. Clemson Software is considering a new project whose data are shown below. The required equipment has a 3-year tax life, after which it will be worthless, and it will be depreciated by the straight-line method over 3 years. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's Year 1 cash flow?
Equipment cost (depreciable basis) $65,000
Straight-line depreciation rate 33.333%
Sales revenues, each year $60,000
Operating costs (excl. deprec.) $25,000
Tax rate 40%
a. $29,665 b. $27,736 c. $28,575 d. $31,333 e. $28,665
4. Mulroney Corp. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project A has an expected life of 2