The economic income in euros for the Fontenot Company is:

Linda Pyle is head of analyst recruiting for PPA Securities. She has been very frustrated by
the number of job applicants who, in spite of their stellar pedigrees, seem to have little
understanding of basic financial concepts. Pyle has written a set of conceptual questions and
simple problems for the human resources department to use to screen for the better candidates
in the applicant pool. A few of her corporate finance questions and problems are given below.
Concept 1. “A company invests in depreciable assets, financed partly by issuing fixedrate bonds. If inflation is lower than expected, the value of the real tax
savings from depreciation and the value of the real after-tax interest expense
are both reduced.”
Concept 2. “Sensitivity analysis and scenario analysis are useful tools for estimating
the impact on a project’s NPV of changing the value of one capital
budgeting input variable at a time.”
Concept 3. “When comparing two mutually exclusive projects with unequal lives,
the IRR is a good approach for choosing the better project because it
does not require equal lives.”
Chapter 2 Capital Budgeting 19
part-i-02 13 January 2012; 10:13:21
Concept 4. “Project-specific betas should be used instead of company betas whenever
the risk of the project differs from that of the company.”
Problem. “Fontenot Company is investing h100 in a project that is being depreciated
straight-line to zero over a two-year life with no salvage value. The project
will generate earnings before interest and taxes of h50 each year for two
years. Fontenot’s weighted average cost of capital and required rate of
return for the project are both 12 percent, and its tax rate is 30 percent.”
A. 17.24 in year one and 9.11 in year two.
B. 17.76 in year one and 24.89 in year two.
C. 24.89 in year one and 17.76 in year two.

Answer: A. 17.24 in year one and 9.11 in year two.