SOLVED

31) When identifying profitable project opportunities, management should A) Focus only on cash returns and always move forward with the highest cash flow project first B) Develop projects at the senior management level and, thus, ensure support down through the company C) Concentrate first on the best opportunity in the strongest product category D) First focus on opportunities that utilize the lowest amount of capital required E) Search for opportunities that mesh with strategic plans and utilize the company’s core competencies 32) Capital rationing occurs when A) Expected cash inflows do not materialize when the project is implemented B) There are too few investment opportunities that can match or exceed the hurdle rate C) Poor investment decisions cause limited resources to be spread thinly among the several projects undertaken D) There are more investment opportunities meeting the hurdle rate than can be undertaken by the company E) Sufficient funds for a capital investment cannot be obtained from a single source 33) An investment decision can also be assessed on the basis of the Triple Bottom Line accounting. In this methodology managers A) Assess a project on the basis of what is referred to as People, Plant and Profit impact B) Are responsible for accounting results, cash flow performance and balance sheet impact C) Assess a project on the basis of its impact on future profits, present profits and any restatement of past performance that may need to be undertaken D) Are required to focus on the impact the use of capital will have on leverage, revenue and cash flow E) Determine the profit potential utilizing zero cost of capital, weighted average cost of capital and real cost of capital 34) One of the important results of the large number of companies now using post-completion audits is that A) It is easier to discover fraudulent behaviour B) Cost overruns on projects have been virtually eliminated C) There is early detection of projects going wrong D) A higher overall cash flow is being achieved E) More realistic investment proposals are being submitted 35) Open Windows Corp. has the following investment goals: payback (PB) of five years, accounting rate of return (ARR) of 15%, hurdle rate of 20%. Analysis of the Great Bear Oil plant expansion shows the following results: PB is 4.5 years, ARR is 14%, IRR is 21% and NPV is ($12,500). What should Open Windows do? A) Proceed with the expansion because the PB period is less than the goal. B) Proceed with the expansion because the ARR is less than the goal. C) Wait until the price of oil rises and the calculations improve. D) Reject the expansion because the the NPV is less than zero. E) Reject the expansion because the IRR is higher than the goal. 36) Some high tech firms have billions of dollars of cash in the bank. What does this tell you about these firms? A) They are charging too high a price for their products and services. B) They have been able to cut way back on their expenses such as salaries. C) They have been able to defer a large portion of their income taxes. D) They are having trouble generation excellent new investment projects. E) They are in need of better auditing because company’s do not have that much cash. 37) What type of investment opportunities are Apple Inc.’s iPod, 4G iPhone, and iPad? A) New product development. B) Improving existing product sales C) Reducing costs D) Replacement of equipment E) Welfare and safety 38) A large cable television provider is considering getting in to the high end ice cream business. Which of the following questions is most relevant to evaluating this proposal? A) What is the nature and purpose of the project? B) How much financing is required and what is the cash flow pattern? C) What other resources of the company are required for this project? D) How long will the project last and what are its key stages? E) Does the project align with the overall objectives of the company? 39) Aviation Cargo Ltd. (ACL) wants to spend $5 million to expand a runway at its air field to accommodate a new larger cargo jet. It estimates additional cash inflows of $1 million for the next ten years. What should ACL do? A) Accept the project because the payback period is six years. B) Accept the project because the ARR is 20%. C) Accept the project because the IRR is 15%. D) Accept the project because the NPV is $1, 710,000. E) Accept the project because the the profits will increase. 40) The Paper Euphoria Co. (PEC) has received several similar new machine investment proposals from its branches across Canada. In general the data are: cost of the new machine is $200,000; residual value after five years is $40,000; economic life is 10 years; average annual profit before depreciation is $48,000. PEC only uses the ARR to measure investment success and requires an ARR of at least 27.5%. Which of the following actions would result in the project being accepted by PEC? A) Changing nothing from the data given and accepting the investment as is. B) Giving away the machine after ten years instead of selling it. C) Using the machine for seven years instead of 10. D) Paying only $199,000 for the new machine instead of $200,000. E) Increasing annual profit before depreciation to 48,500 instead of $48,000. 41) What is an advantage of the payback method? A) It considers the timing of cash flows. B) It considers all relevant cash flows. C) It considers the wealth of shareholders of the business. D) It considers the hurdle rate. E) It is very intuitive to use. 42) Calgary Cabs is considering buying 10 new taxi cabs for a total cost of $310,000. After the purchase, total cash flows will improve by $80,000. the new cabs are expected to be in service for six years. What is the internal rate of return for this investment proposal? A) 8% B) 10% C) 12% D) 14% E) 16% 43) Air Porters Inc. is considering acquiring an airplane with a new type of engine that requires more frequent maintenance. Cash flows starting now and for the first eight years are as follows: ($2,000,000); $500,000; $500,000; ($100,000); $450,000; $450,000; ($110,000); $400,000; $400,000. How many internal rates of return does this investment project have? A) 1 B) 2 C) 3 D) 4 E) 5 44) Two years ago Red Bricks Ltd. bought a parcel of land for $200,000 and spent $40,000 laying a foundation for a new factory. Work was stopped because of a recession. Now that the economy has improved, Red Bricks is considering starting the expansion again. The latest numbers suggest it can complete construction using 1 million of its own bricks that cost $0.50 to make but could have been sold for $0.75 each. The company could use 10 of its own idle workers for 40 hours per week for 10 weeks, each earning $15 per hour. These workers would not be laid off if the firm decides against expansion. In addition, another 20 new hires would have to be done for the same period, but these employees would only earn $10 per hour. New machines costing $5,000,000 would be purchased. The new factory is expected to produce $2,000,000 cash flow per year for 10 years. What is the net present value of the project if Red Brick’s hurdle rate is 14%? A) $4.2 million B) $5.2 million C) $6.2 million D) $7.2 million