Concept Checks

5.1: capital expenses
R&D expenses, for most firms, are investments for the future. Thus, they should be treated as capital expenditures which are tax deductible.

5.2: False
The capital expenditures and working capital needs may be large enough to offset the positive earnings.

5.3: use only 85% of the total revenues expected at the park
Disney's strong brand name in the theme park business leads me to assume that no other firm can cut into Disney's revenues, if it does not invest in the Bangkok park.

5.4: would increase
Inventory operates as a drain on the cash flows.

5.5: the depreciation numbers from the tax books
We are interested in the cash flows generated by this project. Using the tax numbers gives us a more precise estimate of these cash flows.

5.6: would increase by $ 50 million
There would be have been a cash inflow, reflecting the new borrowing of $ 50 million, in that year.

5.7: No
It does mean that long term projects which generate cash flows earlier rather than later will be viewed as much more valuable. (Strictly speaking, the answer is yes, but the bias towards shorter term projects will reflect the cost of financing)

5.8: increase the return on capital and increase the EVA
The reduction in the book value of capital will increase the return on capital. If operating income is only lightly affected by the buyback (as would be the case if cash were used for the buyback), the EVA will go up.

5.9: No. A positive NPV indicates a good project.
Even a small NPV is in excess of the hurdle rate. In this case, the positive NPV is over and above a hurdle rate of 15%.

5.10: No.
The cash flows will also grow faster, since the expected inflation used will be a higher number.

5.11: The NPV might go up or down, depending upon:
whether the cost of equity, with all equity, is greater than or lower than the cost of capital at its current mix. If the cost of equity is higher, the NPV will go down.

5.12: $ 12 million
Megatech paid $ 15 million, and lost $ 3 million in value, as a consequence. The net of these numbers is what the market thinks is a fair price for FastMail Corporation.

5.13: Yes.
It can be computed by setting the present value of the cash flows to $ 354.22 and solving for the discount rate. It would be a "weighted" average of the year-specific rates, similar to a YTM for a bond.

5.14: No.
If the cash flows are reversed, with positive cash flows up front and negative cash flows later, the NPV could go up as the discount rate is increased.