财务管理课后答案-托马斯-chapter-12.doc
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1、Chapter 12Discussion Questions12-1.What are the important administrative considerations in the capital budgeting process?Important administrative considerations relate to: the search for and discovery of investment opportunities, the collection of data, the evaluation of projects, and the reevaluati
2、on of prior decisions.12-2.Why does capital budgeting rely on analysis of cash flows rather than on net income?Cash flow rather than net income is used in capital budgeting analysis because the primary concern is with the amount of actual dollars generated. For example, depreciation is subtracted ou
3、t in arriving at net income, but this non-cash deduction should be added back in to determine cash flow or actual dollars generated.12-3.What are the weaknesses of the payback method?The weaknesses of the payback method are:a. There is no consideration of inflows after payback is reached.b. The conc
4、ept fails to consider the time value of money.12-4.What is normally used as the discount rate in the net present value method?The cost of capital as determined in Chapter 11.12-5.What does the term mutually exclusive investments mean?The selection of one investment precludes the selection of other a
5、lternative investments because the investments compete with one another. For example if a company is going to build one new plant and is considering 5 cities, one city will win and the others will lose. 12-6.How does the modified internal rate of return include concepts from both the traditional int
6、ernal rate of return and the net present value methods?The modified internal rate of return calls for the determination of the interest rate that equates future inflows to the investment as does the traditional internal rate or return. However, it incorporates the reinvestment rate assumption of the
7、 net present value method. That is that inflows are reinvested at the cost of capital.12-7.If a corporation has projects that will earn more than the cost of capital, should it ration capital?From a purely economic viewpoint, a firm should not ration capital. The firm should be able to find addition
8、al funds and increase its overall profitability and wealth through accepting investments to the point where marginal return equals marginal cost.12-8.What is the net present value profile? What three points should be determined to graph the profile?The net present value profile allows for the graphi
9、c portrayal of the net present value of a project at different discount rates. Net present values are shown along the vertical axis and discount rates are shown along the horizontal axis.The points that must be determined to graph the profile are:a. The net present value at zero discount rate.b. The
10、 net present value as determined by a normal discount rate.c. The internal rate of return for the investment.12-9.How does an assets ADR (asset depreciation range) relate to its MACRS category?The ADR represents the asset depreciation range or the expected physical life of the asset. Generally, the
11、midpoint of the range or life is utilized. The longer the ADR midpoint, the longer the MACRS category in which the asset is placed. However, most assets can still be written off more rapidly than the midpoint of the ADR. For example, assets with ADR midpoints of 10 years to 15 years can be placed in
12、 the 7-year MACRS category for depreciation purposes.Chapter 12Problems1.Assume a corporation has earnings before depreciation and taxes of $90,000, depreciation of $40,000, and that it is in a 30 percent tax bracket. Compute its cash flow using the format below.Earnings before depreciation and taxe
13、s_Depreciation_Earnings before taxes_Taxes 30%_Earnings after taxes_Depreciation_Cash flow_12-1.Solution:Earnings before depreciation and taxes$90,000Depreciation40,000Earnings before taxes50,000Taxes 30%15,000Earnings after taxes$35,000Depreciation+40,000Cash flow$75,0002.a.In problem 1, how much w
14、ould cash flow be if there were only $10,000 in depreciation? All other factors are the same.b.How much cash flow is lost due to the reduced depreciation between problems 1 and 2a?12-2.Solution:a.Earnings before depreciation and taxes$90,000Depreciation10,000Earnings before taxes$80,000Taxes 30%24,0
15、00Earnings after taxes$56,000Depreciation+10,000Cash flow$66,000b.Cash flow (problem 1)$75,000Cash flow (problem 2a) 66,000Difference in cash flow$ 9,0003.Assume a firm has earnings before depreciation and taxes of $200,000 and no depreciation. It is in a 40 percent tax bracket.a.Compute its cash fl
16、ow.b.Assume it has $200,000 in depreciation. Recompute its cash flow.c.How large a cash flow benefit did the depreciation provide?12-3.Solution:a.Earnings before depreciation and taxes$200,000Depreciation 0Earnings before taxes200,000Taxes 40% 80,000Earnings after taxes120,000Depreciation 0Cash flow
17、$120,00012-3. (Continued)b.Earnings before depreciation and taxes$200,000Depreciation200,000Earnings before taxes0Taxes 40% 0Earnings after taxes0Depreciation 200,000Cash flow$200,000c.The $200,000 in depreciation provided a cash flow benefit of $80,000.Cash flow (b)$200,000Cash flow (a) 120,000Cash
18、 flow benefit$ 80,0004.Bob Cole, the president of a New York Stock Exchange-listed firm, is very short term oriented and interested in the immediate consequences of his decisions. Assume a project that will provide an increase of $3 million in cash flow because of favorable tax consequences, but car
19、ries a three-cent decline in earning per share because of a write-off against first quarter earnings. What decision might Mr. Cole make?12-4.Solution:Bob ColeBeing short term oriented, he may make the mistake of turning down the project even though it will increase cash flow because of his fear of i
20、nvestors negative reaction to the more widely reported quarterly decline in earnings per share. Even though this decline will be temporary, investors might interpret it as a negative signal.5.Assume a $100,000 investment and the following cash flows for two alternatives.YearInvestment AInvestment B1
21、$30,000$40,000250,00030,000320,00015,000460,00015,000550,000Which of the two alternatives would you select under the payback method?12-5.Solution:Payback for Investment XPayback for Investment Y$100,000$30,0001 year$100,00040,0001 Year70,00050,0002 years60,00030,0002 years20,00020,0003 years30,00015
22、,0003 years15,00015,0004 yearsPayback Investment X = 3 yearsPayback Investment Y = 4 yearsInvestment X should be selected because of the faster payback.6.Assume a $40,000 investment and the following cash flows for two alternatives.YearInvestment XInvestment Y1$ 6,000$15,00028,00020,00039,00010,0004
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