Corporate Finance

Week 4
Quiz

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2021-03-15
Corporate Finance Week 4 — Quiz

WEEK 4 — QUIZ
1. Doncaster Inc. is currently assessing two projects. One project is to renovate an
existing building by upgrading the heating and air conditioning to more energy-
efficient equipment and then rent out any excess space that is no longer required.
The other project is to demolish the existing building and replace it with a smaller
building that will be more efficient in terms of costs and space usage. Which of the
following best describes the relationship between these two projects?

a) Contingent
b) Interdependent
c) Mutually exclusive
d) Independent

2. Rostenkowski Ltd. has budgeted $2,500,000 for capital investment in the coming
year. It is currently reviewing four projects. The CFO has gathered the following
information with respect to these projects:
Net present
Project Initial outlay value (NPV)
Q $1,150,000 $158,000
R $870,000 $75,000
S $865,000 $85,000
T $735,000 $99,000

Each of the projects can be undertaken only once, and they are not divisible. Which
of these projects should Rostenkowski invest in?

a) Q, R, S, and T
b) R, S, and T
c) Q and R
d) Q and T

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Corporate Finance Week 4 — Quiz

3. Nayyar Construction has confirmed the economic feasibility of a new tower crane
and is now trying to decide whether to purchase or lease it. If purchased, the tower
crane will cost $980,000, it will be depreciated on a straight-line basis to an
estimated salvage value of $50,000 over its five-year useful life, and it will belong to
a capital cost allowance (CCA) category with a rate of 30%. The new equipment will
qualify for the Accelerated Investment Incentive, and therefore 1.5 times the CCA
can be claimed in the year of acquisition. At the time of disposal, there will be assets
remaining in the class, and the UCC will be positive after the deduction of the
proceeds. If the tower crane is leased, the annual lease payments will be $235,000,
payable at the beginning of each of the five years. Nayyar’s tax rate is 28%, its cost
of capital is 15%, and its after-tax cost of borrowing is 8%. What is the correct
calculation of the net value to leasing (NVL), and should Nayyar lease or purchase
the crane?

a) NVL = –15,818; Nayyar should purchase the asset.

b) NVL = –8,296; Nayyar should purchase the asset.
c) NVL = –774; Nayyar should purchase the asset.
d) NVL = 53,271; Nayyar should lease the asset.

4. Which of the following is the appropriate discount rate for a firm to use in its capital
budgeting decisions?

a) The project-specific risk-adjusted discount rate

b) The current prime rate
c) The firm’s weighted average cost of capital
d) The after-tax rate at which the firm can borrow from the bank

5. Consider the cash flows for the following projects:

Project A: Initial investment = $43,300; Year 1 = $22,000; Year 2 = $21,500;
Year 3 = $17,000
Project B: Initial investment = $55,000; Year 1 = $0; Year 2 = $34,500;
Year 3 = $55,700

Which of Project A and Project B should you accept if they are mutually exclusive
and the required rate of return is 20%?

a) Project A
b) Project B
c) Both projects
d) Neither project

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