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FIN 571 Wk 3 Apply Wk 3 Quiz
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FIN 571 Wk 3 Apply Wk 3 Quiz

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1 You can buy property today for $2.0 million and sell it in 4 years for $3.0 million. (You earn no rental income on the property.) a. If the interest rate is 12%, what is the present value of the sales price? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.) b. Is the property investment attractive to you? c-1. What is the present value of the future cash flows, if you also could earn $100,000 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? a. Present value million b. Is the property investment attractive to you? c-1. Present value million c-2. Is the property investment attractive to you now? 2 A factory costs $440,000. You forecast that it will produce cash inflows of $140,000 in year 1, $200,000 in year 2, and $340,000 in year 3. The discount rate is 11%. a. What is the value of the factory? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Value of the factory $754.80selected answer incorrect b. Is the factory a good investment? • Yes • No 3 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.) a. Calculate the NPV for both projects if the discount rate is 12%. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Project NPV Project A Project B b. Suppose that you can choose only one of these projects. Which would you choose? • Project B • Project A • Neither 5 Compute the future value of a $185 cash flow for the following combinations of rates and times. (Do not round intermediate calculations. Round your answers to 2 decimal places.) a. r = 8%; t = 10 years b. r = 8%; t = 20 years c. r = 4%; t = 10 years d. r = 4%; t = 20 years Future Value a. b. c. d. 6 Johnny’s Lunches is considering purchasing a new, energy-efficient grill. The grill will cost $33,000 and will be depreciated straight-line over 3 years. It will be sold for scrap metal after 5 years for $8,250. The grill will have no effect on revenues but will save Johnny’s $16,500 in energy expenses. The tax rate is 30%. Required: a. What are the operating cash flows in each year? b. What are the total cash flows in each year? c. Assuming the discount rate is 10%, calculate the net present value (NPV) of the cash flow stream. Should the grill be purchased? Complete this question by entering your answers in the tabs below. • Required A • Required B • Required C What are the operating cash flows in each year? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Year Operating Cash Flows 1 2 3 What are the total cash flows in each year? (Negative amounts should be indicated with a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) Time Total Cash Flows 0 1 2 3 Assuming the discount rate is 10%, calculate the net present value (NPV) of the cash flow stream. Should the grill be purchased? (Do not round intermediate calculations. Round your answer to 2 decimal places.) NPV of cash flow stream Should the grill be purchased? 7 Old Time Savings Bank pays 3% interest on its savings accounts. If you deposit $1,200 in the bank and leave it there: (Do not round intermediate calculations. Round your answers to 2 decimal places.) a. How much interest will you earn in the first year? First year interest b. How much interest will you earn in the second year? Second year interest 1,273.08 c. How much interest will you earn in the 10th year? Tenth year interest 15,131.00 8 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%. a. What is the present value of the cost of leasing? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. Is it cheaper to buy or lease? c. 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.) d. Is it now cheaper to buy or lease? a. Present value of lease b. Is it cheaper to buy or lease? c. Present value of lease d. Is it now cheaper to buy or lease? 9 The following are the cash flows of two independent projects: a. If the opportunity cost of capital is 10%, calculate the NPV for both projects. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Project NPV Project A Project B b. Which of these projects is worth pursuing? • Project A • Project B • Both • Neither 10 The owner of a bicycle repair shop forecasts revenues of $176,000 a year. Variable costs will be $54,000, and rental costs for the shop are $34,000 a year. Depreciation on the repair tools will be $14,000. a. Prepare an income statement for the shop based on these estimates. The tax rate is 20%. INCOME STATEMENT Revenueselected answer correct Variable costsselected answer correct Rental costsselected answer correct Depreciationselected answer correct Pretax profitselected answer correct ormula-based calculation is incorrect; no points deducted. b. Calculate the operating cash flow for the repair shop using the three methods given below: Now calculate the operating cash flow. i. Dollars in minus dollars out. ii. Adjusted accounting profits. iii. Add back depreciation tax shield. Methods of Calculation Operating Cash Flow i. Dollars in Minus Dollars Out ii. Adjusted Accounting profits iii. After tax Operating Cash flow 11 If you insulate your office for $24,000, you will save $2,400 a year in heating expenses. These savings will last forever. a. What is the NPV of the investment when the cost of capital is 8%? 10%? Cost of Capital NPV b. What is the IRR of the investment? (Enter your answer as a whole percent.) IRR 8selected answer incorrect % c. What is the payback period on this investment? Payback period 5selected answer incorrect years 12 a. What is the present value of a 3-year annuity of $270 if the discount rate is 7%? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Present value $330.00selected answer incorrect b. 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.) Present value $353.00selected answer incorrect 13 A new furnace for your small factory will cost $41,000 and a year to install, will require ongoing maintenance expenditures of $3,500 a year. But it is far more fuel-efficient than your old furnace and will reduce your consumption of heating oil by 3,800 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%. a. 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.) b. What is the IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) c. What is the payback period? (Do not round intermediate calculations. Round your answer to 2 decimal places.) d. What is the equivalent annual cost of the furnace? (Do not round intermediate calculations. Round your answer to 2 decimal places.) e. What is the equivalent annual savings derived from the furnace? (Do not round intermediate calculations. Round your answer to 2 decimal places.) f. 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? a. NPV b. IRR c. Cumulative cash flows are positive in: d. Equivalent annual cost e. Equivalent annual savings f. Are the two measures the same or is one larger? 14 Revenues generated by a new fad product are forecast as follows: 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: a. What is the initial investment in the product? Remember working capital. b. 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. c. If the opportunity cost of capital is 10%, what is the project's NPV? d. What is project IRR? Complete this question by entering your answers in the tabs below. • Req A • Req B • Req C and D • What is the initial investment in the product? Remember working capital. Initial investment $70,000selected answer incorrect 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. (Do not round intermediate calculations.) c. If the opportunity cost of capital is 10%, what is the project's NPV? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) d. What is project IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) 15 Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $2,400 and sell its old washer for $800. The new washer will last for 6 years and save $700 a year in expenses. The opportunity cost of capital is 21%, and the firm’s tax rate is 21%. a. 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.) b. What is project NPV? (Do not round intermediate calculations. Round your answer to 2 decimal places.) c. 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.) a. Annual operating cash flow in year 0 Annual operating cash flow in years 1 to 6 b. NPV c. NPV

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