Question

Nogales Nickel Corp. recently spent $3,000 on consulting fees to estimate that new machinery would reduce production costs from $10,000 to $8,000 each year. Which of the following would be considered appropriate in measuring the cash flows from this project?

		Include only the consulting expenses since they are associated with the project.
		Use only the $8,000 production costs.
		Include only the $2,000 in production costs.
		Ignore indirect costs related to the project.
		Exclude changes in working capital associated with the project.

What is the equivalent annual annuity for the cash flows from a pizza oven that has a net present value of $100,000 and a 10-year life. The firms cost of capital is 10%.

		$25,568
		$37,999
		$16,275
		$29,437
		$30,158

The replacement chain approach to capital budgeting is based on the assumption that

		the pure play beta is the same as the firms beta.
		the terminal value of the project is zero.
		the firms cost of capital is less than its IRR.
		once a short-term project terminates, it can be replaced by another project with similar characteristics.
		the certainty-equivalent cash flow values are not significantly different from the risky cash flows.

Answer 1

Only incremental cashflows are considered in project.

Consulting fees are sunk cost

PVOrdinary Annuity = C*[(1-(1+i/100)^(-n))/(i/100)]

C = Cash flow per period

i = interest rate

n = number of payments

100000= Cash Flow*((1-(1+ 10/100)^-10)/(10/100))

Cash Flow = 16274.54

As replacement chain analysis involves repeating project cash flows until overall life of the comparative projects are same