Question

In January 2008, Commonwealth Biofuels LLC opened a production facility that is capable of producing 2 million gallons per year of ethanol from cellulosic material. The company wants to expand and open three more ethanol production facilities within the next two years. The venture capital firm that financed the company’s first project has asked the company’s management team to perform a post-audit on the initial project. The venture capital firm will use the information from the post-audit to help evaluate the company’s plans for expansion. Which of the following would be part of the post-audit? Check all that apply. Check all that apply.

A: The management team will need to compare the projected selling price of ethanol to the actual selling price of ethanol.

B: management team will need to determine if it wants to use straight-line or accelerated depreciation to depreciate the property, plant, and equipment used in the initial project.

C: In instances where the company’s estimated costs were different from the actual costs, the management team will need to explain why these differences occurred.

When a firm is forced to employ capital rationing, it generally means that the firm has _____ positive NPV projects than it can finance.

A: Less

B: More

The size of a firm’s optimal capital budget is defined as the point where the project’s marginal IRR is _______ the marginal WACC.

A: equal to

B: less than

C: greater than

Answer 1

A: The management team will need to compare the projected selling price of ethanol to the actual selling price of ethanol.

C: In instances where the company’s estimated costs were different from the actual costs, the management team will need to explain why these differences occurred.

When a firm is forced to employ capital rationing, it generally means that the firm has More positive NPV projects than it can finance

project’s marginal IRR is equal to the marginal WACC