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?

Question

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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?

a. Shipping and installation costs.

b. Cannibalization effects.

c. Opportunity costs.

d. Sunk costs that have been expensed for tax purposes.

e. Changes in net working capital.

2. Tallant Technologies is considering two potential projects, X and Y. In assessing the projects' risks, the company estimated the beta of each project versus both the company's other assets and the stock market, and it also conducted thorough scenario and simulation analyses. This research produced the following data:

….………………………………..Project X……………………………………………Project Y

Expected NPV…………………...$500,000………………………….…………..…….$500,000

Standard deviation (?NPV)……..$200,000………..………………………………….$250,000

Project beta (vs. market)…….………1.4………………………………………………….0.8

Correlation of the project cash flows with cash flows from currently existing projects. Cash flows are not correlated with the cash flows from existing projects. Cash flows are highly correlated with the cash flows from existing projects.

Which of the following statements is CORRECT?

a. Project X has more corporate (or within-firm) risk than Project Y.

b. Project X has more market risk than Project Y.

c. Project X has the same level of corporate risk as Project Y.

d. Project X has less market risk than Project Y.

e. Project X has more stand-alone risk than Project Y.

3. You have just landed an internship in the CFO's office of ABC Inc. Your first task is to estimate the Year 1 cash flow for a project with the following data. What is the Year 1 cash flow?

Sales revenues……………..$13,000

Depreciation…………………$4,000

Other operating costs…………$5,000

Tax rate………………………30.0%

a. $5,950

b. $6,099

c. $6,350

d. $6,400

e. $6,800

4. In your first job with TBL Inc. your task is to consider a new project whose data are shown below. What is the project's Year 1 cash flow?

Sales revenues……………….$22,250

Depreciation…………………..$8,000

Other operating costs………...$12,000

Tax rate……………………….30.0%

a. $8,903

b. $9,179

c. $9,463

d. $9,575

e. $9,663

5. ABA Inc. is considering a capital budgeting project that has an expected return of 22% and a standard deviation of 30%. What is the project's coefficient of variation?

a. 1.20

b. 1.26

c. 1.32

d. 1.36

e. 1.42