Total project risk is:

the chance that a project will perform below expectations

A firm's leveraged beta will always be ____ its unleveraged beta.

greater than

A project has the following cash flows:

Year 0 1 2 3 4
Cash flow: ($240,000) $60,000 $100,000 $60,000 $80,000

The project's payback period is:

three and one-quarter years. 60+100+60+20=240

The future cash flows of a stand-alone capital project follow:

Year 0 1 2 3
Cash flow ($5,000) $2,500 $2,500 $2,500

If the company's cost of capital is 14%, what is the approximate NPV of the project?
$804
Calculator steps: CFo = -5000, C01 = 2500, F01 = 3; NPV: I=14 NPV = $804

An investment project requires an outlay of $100,000, and is expected to generate annual cash inflows
of $28,000 for the next 5 years. The cost of capital is 12 percent. Determine a net present value for the
project.
NPV = 28,000(PVFA12,5) - 100,000 = $28,000(3.605) - 100,000 = $940 Calculator: $934

Calculate the NPV of a project requiring a $3,000 investment followed by an outflow of $500 in Year
1, and inflows of $1,000 in Year 2 and $4,000 in Year 3. The cost of capital is 12%. (Round to nearest
$)
Calculator Steps: -3,000 CFo; - 500 C01; 1,000 C02; 4,000 C03; 12 I/Y; NPV = $198

A project has the following cash flows:

0123
($500) $100 $200 $250

What is the project's NPV if the interest rate is $6%?

-500+100(.9434)+200(.8900)+250(.8396) = -$17.76

Atlantis Inc. is considering two mutually exclusive projects with the following cash flows:

Year 0 1 2 3 4
Project A ($120,000) $60,000 $40,000 $60,000 $80,000
Project B ($100,000) $60,000 $50,000 $0 $0

If Atlantis accepts projects that pay back in two years or less, which should be undertaken?
A: 60+40=100<120 payback longer that two years
B: 60+50=110>100 payback less than two years
What is the after-tax cash flow that results from the sale for $150,000 of a capital asset that has a book
value of $200,000, given a 40% tax rate?
Capital gains tax credit: (150 - 200).4 = -20
Cash flow:150 + 20 = 170

Ten years ago J-Bar Company purchased a lathe for $250,000. It was being depreciated on a straight-
line basis to an estimated $25,000 salvage value over a 15-year period. The firm is considering selling
the old lathe and purchasing a new one. The new lathe would cost $500,000. The firm's marginal tax
rate 40 percent. Determine the net investment required to purchase the new lathe, if the old lathe is
sold for $100,000.
New lathe cost $500,000
Less: Salvage value (old lathe) -100,000*
Net investment $400,000

*Book value (old lathe) = $250,000 - 10[($250,000 - $25,000)/15] = $100,000.

Because book value equals salvage value, no gain or loss is incurred on sale of old lathe.

In Step Video is considering expanding its video rental library to 8,000 tapes. The purchase price of
the additional videos will be $80,000 and the shipping cost is another $4,000. To house the tapes, the
owner will have to spend another $10,000 for display shelves, increase net working capital by $5,000,
and interest expenses will add another $8,000 to the operating cost. What is the net investment to In
Step Video for this project?
Net Investment = $80,000 + $4,000 + $10,000 + $5,000 = $99,000

Jim Bo's currently has annual cash revenues of $240,000 and annual operating expenses of $185,000
including $35,000 in depreciation. The firm's marginal tax rate is 40 percent. A new cutting machine
can be purchased for $120,000 that will increase revenues by $50,000 per year while operating
expenses would increase to $205,000, including $42,000 in depreciation. Compute Jim Bo's annual
incremental after-tax net cash flows.
CF = ($50,000 - $20,000) × (1 - .4) + $7,000 = $25,000

FV