FIN 571 Wk 3 – Apply: Wk 3 Quiz

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FIN 571 Wk 3 - Apply: Wk 3 Quiz
FIN 571 Wk 3 – Apply: Wk 3 Quiz
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FIN 571 Wk 3 – Apply: Wk 3 Quiz

Old Time Savings Bank pays 3% interest on its savings accounts. If you deposit $2,100 in the bank and leave it there: (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

Revenues generated by a new fad product are forecast as follows:

 

Year Revenues

1     $60,000

2     40,000

3     30,000

4     20,000

Thereafter       0

________________________________________

 

Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 30% of revenues in the following year. The product requires an immediate investment of $70,000 in plant and equipment.

 

Required:

  1. What is the initial investment in the product? Remember working capital.

  2. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm’s tax rate is 20%, what are the project cash flows in each year? Assume the plant and equipment are worthless at the end of 4 years.

  3. If the opportunity cost of capital is 10%, what is the project’s NPV?

  4. What is project IRR?

 

 

 

 

A new furnace for your small factory is being installed right now, will cost $28,000, and will be completed in one year. At that point, it will require ongoing maintenance expenditures of $1,600 a year. But it is far more fuel-efficient than your old furnace and will reduce your consumption of heating oil by 2,500 gallons per year. Heating oil this year costs $3 a gallon; the price per gallon is expected to increase by $0.50 a year for the next 3 years and then to stabilize for the foreseeable future. The furnace will last for 20 years from initial use, at which point it will need to be replaced and will have no salvage value. (Specifically, the firm pays for the furnace at time 0, and then reaps higher net cash flows from that investment at the end of years 1 – 20.). The discount rate is 10%.

 

  1. What is the net present value of the investment in the furnace? (Do not round intermediate calculations. Round your answer to the nearest whole dollar.)

  2. What is the IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

  3. What is the payback period? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

  4. What is the equivalent annual cost of the furnace? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

  5. What is the equivalent annual savings derived from the furnace? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

  6. Compare the PV of the difference between the equivalent annual cost and savings to your answer to part (a). Are the two measures the same or is one larger?

 

 

 

Talia’s Tutus bought a new sewing machine for $70,000 that will be depreciated over 5 years using double-declining-balance depreciation with a switch to straight-line.

 

Required:

  1. Find the depreciation charge each year.

  2. If the sewing machine is sold after 2 years for $44,000, what will be the after-tax proceeds on the sale if the firm’s tax bracket is 35%?

 

 

 

 

Find the interest rate implied by the following combinations of present and future values: (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Leave no cells blank – be certain to enter “0” wherever required.)

 

 

 

 

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $46,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $11,500. The grill will have no effect on revenues but will save Johnny’s $23,000 in energy expenses. The tax rate is 30%.

 

Required:

  1. What are the operating cash flows in each year?

  2. What are the total cash flows in each year?

  3. Assuming the discount rate is 12%, calculate the net present value (NPV) of the cash flow stream. Should the grill be purchased?

 

 

 

 

You can buy property today for $3.1 million and sell it in 6 years for $4.1 million. (You earn no rental income on the property.)

 

  1. If the interest rate is 7%, what is the present value of the sales price? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)

  2. Is the property investment attractive to you?

c-1. What is the present value of the future cash flows, if you also could earn $210,000 per year rent on the property? The rent is paid at the end of each year. (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)

c-2. Is the property investment attractive to you now?

 

 

 

The following are the cash flows of two projects:

 

Year Project A Project B

0     $     (230 )      $     (230 )

1          110             130

2          110             130

3          110             130

4          110

________________________________________

 

  1. Calculate the NPV for both projects if the discount rate is 11%. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

 

 

Compute the future value of a $150 cash flow for the following combinations of rates and times. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

  1. r = 7%; t = 10 years

  2. r = 7%; t = 20 years

  3. r = 3%; t = 10 years

  4. r = 3%; t = 20 years

 

 

 

Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $3,600 and sell its old washer for $900. The new washer will last for 6 years and save $1,100 a year in expenses. The opportunity cost of capital is 20%, and the firm’s tax rate is 21%.

 

  1. If the firm uses straight-line depreciation over a 6-year life, what are the cash flows of the project in years 0 to 6? The new washer will have zero salvage value after 6 years, and the old washer is fully depreciated. (Negative amounts should be indicated by a minus sign.)

  2. What is project NPV? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

  3. What is NPV if the firm investment is entitled to immediate 100% bonus depreciation? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

 

 

Your landscaping company can lease a truck for $8,600 a year (paid at year-end) for 6 years. It can instead buy the truck for $42,000. The truck will be valueless after 6 years. The interest rate your company can earn on its funds is 7%.

 

  1. What is the present value of the cost of leasing? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

  2. Is it cheaper to buy or lease?

  3. What is the present value of the cost of leasing if the lease payments are an annuity due, so the first payment comes immediately? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

  4. Is it now cheaper to buy or lease?

 

 

 

 

The owner of a bicycle repair shop forecasts revenues of $188,000 a year. Variable costs will be $57,000, and rental costs for the shop are $37,000 a year. Depreciation on the repair tools will be $17,000.

 

  1. Prepare an income statement for the shop based on these estimates. The tax rate is 20%.

 

 

  1. Calculate the operating cash flow for the repair shop using the three methods given below:

Now calculate the operating cash flow.

  1. Dollars in minus dollars out.

  2. Adjusted accounting profits.

iii.   Add back depreciation tax shield.

  1. The following are the cash flows of two projects:

 

Year Project A Project B

0     −$340              −$340

1     170           240

2     170           240

3     170           240

4     170

________________________________________

 

  1. If the opportunity cost of capital is 10%, calculate NPV for both projects? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

Project    NPV

A     $

 

B

 

________________________________________

 

  1. Which of these projects is worth pursuing?

 

Both

 

 

 

The following are the cash flows of two projects:

 

Year: Project A;Project B

0:$(200);$(200)

1: $80; $100

2: $80;$100

3: $80; $100

4: $80

  1. Calculate the NPV for both projects if the discount rate is 11%.

Suppose that you can choose only one of these projects. Which would you choose?

a)

NPVA = −$200 + [$80 × Annuity factor (11%, 4 periods)]

 

=−200+$80×[(1/0.11)−(1/(0.11×(1.11)4))]=$48.20

 

NPVB = −$200 + [$100 × Annuity factor (11%, 3 periods)]

 

=−200+$100×[(1/0.11)−(1/(0.11×(1.11)3))]=$44.37

 

  1. b) Since you can only choose one project, select the one with the higher positive NPV.

 

 

 

 

Find the interest rate implied by the following combinations of present and future values:

 

 

 

Talia’s Tutus bought a new sewing machine for $85,000 that will be depreciated using the MACRS depreciation schedule for a 5-year recovery period.

 

 

  1. Find the depreciation charge each year.

 

  1. If the sewing machine is sold after 3 years for $35,000, what will be the after-tax proceeds on the sale if the firm’s tax bracket is 35%?

 

After-tax proceeds     $

 

 

rev: 04_19_2013_QC_29586

 

 

 

Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $6,900 and sell its old washer for $2,900. The new washer will last for 6 years and save $1,650 a year in expenses. The opportunity cost of capital is 16%, and the firm’s tax rate is 40%. What is the equivalent annual cost of the washer, if the firm uses straight-line depreciation? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

Equivalent annual cost       $

 

 

 

If you insulate your office for $17,000, you will save $1,700 a year in heating expenses. These savings will last forever.

 

  1. What is the NPV of the investment when the cost of capital is 8%? 10%?

 

 

  1. What is the IRR of the investment? (Enter your answer as a whole percent.)

 

 

  1. What is the payback period on this investment?

 

 

 

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $48,000 and will be depreciated according to the 3-year MACRS schedule. It will be sold for scrap metal after 3 years for $12,000. The grill will have no effect on revenues but will save Johnny’s $24,000 per year in energy expenses. The tax rate is 30%. Use MACRS depreciation schedule.

 

  1. What are the operating cash flows in years 1 to 3? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Year Operating Cash Flows

  1. What are total cash flows in years 1 to 3? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.)

Time          Total Cash Flows

  1. If the discount rate is 10%, should the grill be purchased?

 

Yes

 

 

Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $46,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $11,500. The grill will have no effect on revenues but will save Johnny’s $23,000 in energy expenses. The tax rate is 30%.

 

Required:

  1. What are the operating cash flows in each year?

  2. What are the total cash flows in each year?

  3. Assuming the discount rate is 12%, calculate the net present value (NPV) of the cash flow stream. Should the grill be purchased?

 

 

The following are the cash flows of two projects:

 

Year Project A Project B

0     $     (260 )      $     (260 )

1          140             160

2          140             160

3          140             160

4          140

________________________________________

 

  1. Calculate the NPV for both projects if the discount rate is 11%. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

 

  1. Suppose that you can choose only one of these projects. Which would you choose?

 

Project A

Project B

Neither

 

 

 

  1. What is the present value of a 3-year annuity of $210 if the discount rate is 7%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

 

  1. What is the present value of the annuity in (a) if you have to wait an additional year for the first payment? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

 

 

  1. Revenues generated by a new fad product are forecast as follows:

 

Year Revenues

1     $54,000

2     30,000

3     20,000

4     10,000

Thereafter       0

________________________________________

 

Expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 10% of revenues in the following year. The product requires an immediate investment of $50,000 in plant and equipment.

 

  1. What is the initial investment in the product? Remember working capital.

 

Initial investment       $

 

 

  1. If the plant and equipment are depreciated over 4 years to a salvage value of zero using straight-line depreciation, and the firm’s tax rate is 30%, what are the project cash flows in each year? (Enter your answers in thousands of dollars. Do not round intermediate calculations. Round your answers to 2 decimal places.)

Year Cash Flow

  1. If the opportunity cost of capital is 12%, what is project NPV? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

NPV    $

 

 

  1. What is project IRR? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

IRR       %

 

 

Compute the future value of a $300 cash flow for the same combinations of rates and times: (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

Future Value

  1. r = 12%, t = 8 years $

 

  1. r = 12%, t = 16 years

 

  1. r = 6%, t = 8 years

 

  1. r = 6%, t = 16 years

 

________________________________________

 

Compute the future value of a $125 cash flow for the following combinations of rates and times. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

  1. r = 8%; t = 10 years

  2. r = 8%; t = 20 years

  3. r = 4%; t = 10 years

  4. r = 4%; t = 20 years

 

 

 

 

 

Old Time Savings Bank pays 4% interest on its savings accounts. If you deposit $1,000 in the bank and leave it there (Do not round intermediate calculations. Round your answers to 2 decimal places.):

 

  1. How much interest will you earn in the first year?

 

First year interest       $

 

 

  1. How much interest will you earn in the second year?

 

Second year interest   $

 

 

  1. How much interest will you earn in the tenth year?

 

Tenth year interest      $

 

 

 

A factory costs $460,000. You forecast that it will produce cash inflows of $150,000 in year 1, $210,000 in year 2, and $360,000 in year 3. The discount rate is 12%.

 

  1. Calculate the PV of cash inflows. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

Present value      $

 

 

  1. Is the factory a good investment?

 

Yes

 

 

 

 

 

You can buy property today for $3.5 million and sell it in 4 years for $4.5 million. (You earn no rental income on the property.)

 

 

  1. If the interest rate is 9.25%, what is the present value of the sales price? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)

 

 

Present value      $

million

 

 

  1. Is the property investment attractive to you?

 

 

No

 

 

c-1.  What is the present value of the sales price, if you also could earn $250,000 per year rent on the property? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)

 

 

Present value      $

million

 

 

c-2.  Is the property investment attractive to you?

 

 

 

 

Your landscaping company can lease a truck for $7,100 a year (paid at year-end) for 7 years. It can instead buy the truck for $38,000. The truck will be valueless after 7 years. The interest rate your company can earn on its funds is 8%.

 

  1. What is the present value of the cost of leasing? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

  2. Is it cheaper to buy or lease?

  3. What is the present value of the cost of leasing if the lease payments are an annuity due, so the first payment comes immediately? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

  4. Is it now cheaper to buy or lease?

 

 

 

 

A new furnace for your small factory will cost $46,000 to install and will require ongoing maintenance expenditures of $4,000 a year. But it is far more fuel efficient than your old furnace and will reduce your consumption of heating oil by 4,300 gallons per year. Heating oil this year will cost $3 a gallon; the price per gallon is expected to increase by $0.50 a year for the next 3 years and then to stabilize for the foreseeable future. The furnace will last for 20 years, at which point it will need to be replaced and will have no salvage value. The discount rate is 10%.

  1. What is the net present value of the investment in the furnace? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

NPV    $

 

  1. What is the IRR? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

IRR     %

 

  1. What is the payback period? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Payback period   years

 

  1. What is the equivalent annual cost of the furnace? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Equivalent annual cost     $

 

  1. What is the equivalent annual savings derived from the furnace? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Equivalent annual savings    $