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Financial Management Principals And Applications 11th Edition Sheridan Titman, John D Martin, Arthur J Keown - Solutions

(Related to Checkpoint 13.5 on page 439) (Real options and capital budgeting) You are considering introducing a new Tex-Mex-Thai fusion restaurant. The initial outlay on this new restaurant is $6 million and the present value of the free cash flows (excluding the initial outlay) is $5 million, such
(Real options) Hurricane Katrina brought unprecedented destruction to New Orleans and the Mississippi Gulf Coast in 2005. Notably, the burgeoning casino gambling industry along the Mississippi coast was virtually wiped out overnight. CGC Corporation owns one of the oldest casinos in the Biloxi, MS
(Degree of operating leverage) Brackets, Inc. currently anticipates that if they had a 10% increase in sales, net operating profits would increase by 60%. If Bracket’s NOI is$14 million, what level of fixed costs do they have?
(Degree of operating leverage) Drewery Inc. has fixed costs of $50,000 and net operating income of $17,000. If sales increase by 18%, by how much will NOI increase? What would happen to NOI if sales decreased by 20%?
(Break-even analysis) Niece Equipment Rentals of Del Valle, TX has recently been approached about the prospect of purchasing a large construction crane. The crane rents for $500 an hour but operator, fuel, insurance and miscellaneous expenses run $200 an hour when the crane is in use. The company
(Break-even analysis) Farrington Enterprises runs a number of sporting goods businesses and is currently analyzing a new T-shirt printing business. Specifically, the company is evaluating the feasibility of this business based on its estimates of unit sales, the price per unit, variable cost per
(Break-even analysis)Accounting Break-Even Price Variable Cost Project Point (in units) per Unit per Unit Fixed Costs Depreciation A 6,250 |-1 $55 $100,000 $ 25,000 B 750 $1,000 $500,000 $100,000 C 2,000 $ 20 $15 $ 5,000 1 1 D 2,000 $ 20 $ 5 1 1 $ 15,000a. Calculate the missing information for each
(Related to Checkpoint 13.4 on page 432) (Break-even analysis) The Marvel Mfg.Company is considering whether or not to construct a new robotic production facility.The cost of this new facility is $600,000 and it is expected to have a six-year life with annual depreciation expense of $100,000 and no
(Related to Checkpoint 13.2 on page 423 and Checkpoint 13.3 on page 427) (Comprehensive risk analysis) Blinkeria is considering introducing a new line of hand scanners that can be used to copy material and then download it into a personal computer. These scanners are expected to sell for an average
(Related to Checkpoint 13.3 on page 427) (Scenario analysis) Family Security is considering introducing tiny GPS trackers that can be inserted in the sole of a child’s shoe, which would then allow for the tracking of that child if he or she was ever lost or abducted. The estimates, that might be
(Calculating the expected NPV of a project) The Doctors Bone and Joint Clinic is considering whether to purchase a newly developed MRI machine which they feel will provide the basis for better diagnoses of foot and knee problems. The new machine is quite expensive and will be used for a number of
(Related to Checkpoint 13.3 on page 427) (Forecasting revenues using scenario analysis) Floating Homes, Inc. is a manufacturer of luxury pontoon and house boats that sell for $40,000 to $100,000. To estimate its revenues for the following year, Floating Homes divides its boat sales into three
(Forecasting cash flows using the expected value) Simpkins Trucking of Stillwater, OK, is also considering the acquisition of Armour Transport (see Problem 13-2).Simpkins has analyzed the annual cash flows for Armour Transport and come up with these estimates for each of the three states of the
(Related to Checkpoint 13.1 on page 420) (Forecasting cash flows using the expected value) Peterson Trucking is contemplating the acquisition of Armour Transport, a competing trucking firm, and estimates that during the next year Armour Transport’s flows from the acquisition will vary depending
(Related to Checkpoint 13.1 on page 420) (Calculating expected revenues) The owner of the Crusik Distribution Company is evaluating the expected annual sales for a new line of facial care products and estimates that there is a 50% chance that the product line will be extremely successful, in which
List and describe the types of real options often encountered in investment opportunities. Why is it important that real options be identified as part of the risk analysis of new investments?
What is the difference between accounting break-even and NPV break-even? Which will offer the higher break-even level of output and why?
Explain the five-step process used to carry out a simulation analysis of project risk.
How do you perform a sensitivity analysis, and what is its purpose? Contrast the use of scenario analysis with simulation analysis.13^1. (Related to Finance in a Flat World: Currency Risk on page 429) The feature Finance in a Flat World discusses the currency risk that multi-national firms face.
What is the objective of project risk analysis, and why is it critical to the investment decision-making process?
(Related _to Regardless of Your Major: Project Risk for Entrepreneurs on page 418) The feature titled Regardless ofYour Major discusses the risks that entrepreneurs face, with about 40 percent of new businesses shutting their doors during their first year. If you had to pick a business to start,
What is an option to contract an investment? When would you expect this type of option to be most valuable?
What is an expansion option?
Define timing options, and describe how they add value to investments.
What are real options, and how do they relate to the notion of managerial flexibility?
What is operating leverage?
What is NPV break-even analysis, and why does it differ from accounting break-even analysis?
What is accounting break even analysis?
Explain the concepts of fixed and variable costs. Which is an indirect cost, and which is a direct cost?
Describe the five-step process used to carry out simulation analysis. How is simulation analysis similar to scenario analysis?
Describe scenario analysis and contrast it with sensitivity analysis.
What is sensitivity analysis, and how is it used to evaluate the risk of project cash flows?
What are value drivers, and how are they important in the analysis of project risk?
Should the project be accepted? Why or why not?
What is its internal rate of return?
What is the project's net present value?
Sketch out a cash flow diagram for this project.
What is the project's initial outlay?
What are the incremental cash flows for the project in years 1 through 5 and how do these cash flows differ from ac- counting profits or earnings?
Why should Caledonia focus on project free cash flows as opposed to the accounting profits earned by the project when analyzing whether to undertake the project?
What are the NPV, IRR, and PI of this project, both including cash flows resulting from sales diverted from the existing product lines (Exhibit 1) and excluding cash flows resulting from sales diverted from the existing productlines (Exhibit 2)?Under the assumption that there is a good chance that
Would you suggest that the cash flows resulting from ero¬sion of sales from current laundry detergent products be in¬cluded as a cash inflow? If there was a chance of competitors introducing a similar product if you did not in¬troduce Blast, would this affect your answer?5, If debt were used to
Would you suggest that the product be charged for the use of excess production facilities and building space?
What would your opinion be as to how to deal with the ques¬tion of working capital?
If you were put in the place of Steve Gasper, would you ar¬gue for the cost from market testing to be included in a cash outflow?
(Replacement project cash flows) The Louisiana Land and Cattle Company (LL&CC)is one of the largest cattle buyers in the country. They have buyers at all the major cattle auctions throughout the southeastern part of the U.S. who buy on the company’s behalf and then have the cattle shipped to
(Replacement project cash flows) The Minot Kit Aircraft Company of Minot, ND uses a plasma cutter to fabricate metal aircraft parts for its plane kits. The company currently is using a cutter that it purchased used 4 years ago which has an $80,000 book value and is being depreciated $20,000 per
(Related to Checkpoint 12.2 on page 391) (Replacement project cash flows) Madrano’s Wholesale Fruit Company located in McAllen, TX is considering the purchase of a new fleet of tractors to be used in the delivery of fruits and vegetables grown in the Rio Grand Valley of Texas. If it goes through
(Inflation and project cash flows) After reporting your findings to the company management (problem 12-23), the company CFO suggested that they could purchase raw materials in advance for future delivery. This would involve paying for the raw materials today and taking delivery as the materials are
(Inflation and project cash flows) Carlyle Chemicals is evaluating a new chemical compound used in the manufacture of a wide range of consumer products. The firm is concerned that inflation in the cost of raw materials will have an adverse effect on the project cash flows. Specifically, the firm
(Inflation and project cash flows) On June 1, 2003 the average price of a gallon of gasoline in San Francisco, CA was $1.80. Just three years later the price of that same gallon of gas was $3.20. What was the rate of inflation in the price of a gallon of gas over the period?
(Inflation and project cash flows) If the price of a gallon of regular gasoline is $2.49 and the anticipated rate of inflation in energy prices is such that this cost of gasoline is expected to rise by 5% per year, what is the expected price per gallon in 10 years?
(Calculating cash flows—comprehensive problem) The C Corporation, a firm in the 34% marginal tax bracket with a 15% required rate of return or discount rate, is considering a new project. This project involves the introduction of a new product. This project is expected to last 5 years and then,
Finally, all working capital is liquidated at the termination of the project at the end of year 5.The depreciation method: Use the simplified straight-line method over 5 years. It is assumed that the plant and equipment will have no salvage value after 5 years.
(Calculating cash flows—comprehensive problem) The Shome Corporation, a firm in the 34% marginal tax bracket with a 15 percent required rate of return or discount rate, is considering a new project. This project involves the introduction of a new product.This project is expected to last 5 years
Finally, all working capital is liquidated at the termination of the project at the end of year 5.The depreciation method: Use the simplified straight-line method over 5 years. It is assumed that the plant and equipment will have no salvage value after 5 years.
(Calculating cash flows—comprehensive problem) The Kumar Corporation, a firm in the 34% marginal tax bracket with a 15% required rate of return or discount rate, is considering a new project. This project involves the introduction of a new product. This project is expected to last 5 years and
(Related to Checkpoint 12.1 on page 385) (Comprehensive problem—calculating project cash flows, NPV, PI, and IRR) Traid Winds Corporation, a firm in the 34%marginal tax bracket with a 15% required rate of return or discount rate, is considering a new project. This project involves the
(Calculating project cash flows and NPV) Garcia’s Truckin’, Inc. is considering the purchase of a new production machine for $200,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $50,000 per year. To operate this machine properly, workers
(Calculating project cash flows and NPV) Raymobile Motors is considering the purchase of a new production machine for $500,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $150,000 per year. To operate this machine properly, workers would have to
(Calculating project cash flows and NPV) The Chung Chemical Corporation is considering the purchase of a chemical analysis machine. Although the machine being considered will result in an increase in earnings before interest and taxes of $35,000 per year, it has a purchase price of $100,000, and it
(Calculating project cash flows and NPV) Weir’s Trucking, Inc. is considering the purchase of a new production machine for $100,000. The purchase of this new machine will result in an increase in earnings before interest and taxes of $25,000 per year. To operate this machine properly, workers
(Calculating project cash flows and NPV) El Gato’s Motors is considering the purchase of a new production machine for $1 million. The purchase of this machine will result in an increase in earnings before interest and taxes of $400,000 per year. It would cost $50,000 after tax to install this
(Calculating project cash flows and NPV) The Guo Chemical Corporation is considering the purchase of a chemical analysis machine. The purchase of this machine will result in an increase in earnings before interest and taxes of $70,000 per year. The machine has a purchase price of $250,000, and it
(Calculating project cash flows and NPV) You are considering new elliptical trainers and you feel you can sell 5,000 of these per year for 5 years (after which time this project is expected to shut down when it is learned that being fit is unhealthy). The elliptical trainers would sell for $1,000
(Related to Checkpoint 12.1 on page 385) (Calculating project cash flows and NPV)You are considering expanding your product line that currently consists of skateboards to include gas-powered skateboards, and you feel you can sell 10,000 of these per year for 10 years (after which time this project
(Calculating operating cash flows) The Heritage Farm Implement Company is considering an investment that is expected to generate revenues of $3 million per year.The project will also involve annual cash expenses (including both fixed and variable costs) of $900,000, while increasing depreciation by
(Related to Checkpoint 12.1 on page 385) (Calculating operating cash flows) Assume that a new project will annually generate revenues of $2,000,000 and cash expenses(including both fixed and variable costs) of $800,000, while increasing depreciation by$200,000 per year. In addition, the firm’s
(Calculating changes in net operating working capital) Visible Fences is introducing a new product and has an expected change in net operating income of $900,000. Visible Fences has a 34% marginal tax rate. This project will also produce $300,000 of depreciation per year. In addition, this project
(Calculating changes in net operating working capital) Racin’ Scooters is introducing a new product and has an expected change in net operating income of $475,000. Racin’Scooters has a 34% marginal tax rate. This project will also produce $100,000 of depreciation per year. In addition, this
(Calculating changes in net operating working capital) Duncan Motors is introducing a new product and has an expected change in net operating income of $300,000. Duncan Motors has a 34% marginal tax rate. This project will also produce $50,000 of depreciation per year. In addition, this project
(Related to Checkpoint 12.1 on page 385) (Calculating changes in net operating working capital) Tetious Dimensions is introducing a new product and has an expected change in net operating income of $775,000. Tetious Dimensions has a 34% marginal tax rate. This project will also produce $200,000 of
(Determining relevant cash flows) Fruity Stones is considering introducing a variation of its current breakfast cereal, Jolt ’n Stones. This new cereal will be similar to the old with the exception that it will contain more sugar in the form of small pebbles. The new cereal will be called Stones
(Determining relevant cash flows) Captain’s Cereal is considering introducing a variation of its current breakfast cereal, Crunch Stuff. This new cereal will be similar to the old, with the exception that it will contain sugar-coated marshmallows shaped in the form of stars. The new cereal will
Throughout the examples in this chapter we have assumed that the initial investment in working capital is later recaptured when the project ends. Is this a realistic assumption?Do firms always recover 100% of their investment in accounts receivable and inventories?
For years GM treated each car brand as if it were a separate company, considering all new car sales as incremental sales. Critically evaluate this position.
(Related to Finance in a Flat World: Entering New Markets on page 395) In the feature titled Finance in a Flat World: Entering New Markets, we described the importance of thinking globally when making investments. Pick a new product that you have just learned about that is being sold domestically
When McDonald’s (MCD) moved into India, it faced a particularly difficult task. The major religion in India is the Hindu religion, and Hindus don’t eat beef—in fact, most of the one billion people living in India are vegetarians. Still, McDonald’s ventured into India and has been enormously
Should anticipated inflation be incorporated into project cash flow forecasts? If so, how?
What are opportunity costs, and how should they affect an investment’s cash flows?Give an example.
Should overhead expense ever be considered when evaluating investment cash flows?
What are sunk costs and how should they be considered when evaluating an investment’s cash flows?
Describe net operating working capital, and explain how changes in this quantity affect an investment proposal’s cash flows.
If depreciation is not a cash flow item, why does it affect the level of cash flows from a project?
Discuss how to compute a project’s free cash flow. How does free cash flow differ from operating cash flow?
When a firm finances a new investment, it often borrows part of the money, so the interest and principal payments this creates are incremental to the project’s acceptance.Why are these expenditures not included in the project’s cash flow computation?
New investments often require that the firm invest additional money in working capital.Give some examples of what this means.
Corporate overhead expenses related to utilities and other corporate expenses are generally not relevant to the analysis of new investment opportunities. Why?
(Related to Regardless of Your Major: The Internet on Airline Flights—Making It Happen on page 380) In the feature titled Regardless ofYour Major, we describe an investment proposal involving the sale of Internet services on airlines. How would you approach the problem of calculating the cash
As you saw in the introduction, the Toyota Prius took some of its sales away from other Toyota products. Toyota has also licensed its hybrid technology to Ford Motor Company, which has allowed Ford to introduce a Ford Fusion Hybrid in 2010 with 39 mpg, almost doubling the city efficiency of the
What is the relevant depreciation expense when you are analyzing a replacement decision?
What is a replacement investment?
If you forecast nominal cash flows, should you use the nominal or the real discount rate? Why?
What is the distinction between nominal and real interest rates?
What is CAPEX, and how does it affect a project's cash flows?
What is net operating working capital, and how does it affect a project's cash flows?
What are the four steps used to forecast a project's future cash flows?
What does the term free cash flow mean?
When borrowing the money needed to make an investment, is the interest expense incurred relevant to the analysis of the project? Explain.
What are some examples of synergistic effects that affect a project's cash flows?

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