Question

1. Newex, Inc. has a capital investment opportunity with the following cash flows:

Year cash flow
0 (100,000)
1 45,000
2 35,000
3 30,000
4 20,000

Which of the following is closest to the project’s payback period?
a) 4 years
b) 2 years
c) 3.7 years
d) 3.5 years
e) 2.7 years

2. Zoomit Corporation has a capital investment opportunity that will cost $250,000. The cash inflows from year 1 through year 10 will be $40,000 each year. The firm’s required rate of return is 9%. What is the IRR for this project?

a) 15.1%
b) 9.61%
c) 21.42%
d) 14.41%
e) 19.38%

3. Scottech is examining an investment opportunity that will involve buying $150,000 worth of equipment. They will need $10,000 in net working capital up front. Shipping will cost $5,000 and installation will cost $5,000. The firm paid a management consultant $4,000 to analyze this project, which is supposed to increase sales by $20,000 per year. If the firm accepts the project, they will have to spend $3,500 to train the employees to use the new equipment. The corporate tax rate is 21%. What is the initial outlay for the project?

a) $126,500
b) $130,500
c) $173,500
d) $150,500
e) $142,300

4. Zencorp is considering buying a $220,000 production machine. It would be depreciated (simplified straight line) for 10 years. This investment would allow the firm to increase sales by $150,000 per year. Operating expenses would increase by $70,000 per year also. The corporate tax rate is 21%. What is the annual cash flow for the project?

a) $75,720
b) $53,720
c) $67,820
d) $71,100
e) $170,520

5. Golddex Corporation has decided to sell some old equipment to make room for a new project. The salvage value of the equipment is $250,000. The firm would be able to recover $40,000 in working capital when the equipment is sold. Their tax rate is 21%. The old equipment has a book value of $160,000. What is the terminal cash flow?

a) $271,100
b) $87,400
c) $198,000
d) $187,400
e) $158,000

6. Betatech has some slightly obsolete equipment that still has a book value of $310,000 on their balance sheet. They can sell the equipment now for $210,000, and they would recover $40,000 in working capital. Their tax rate is 21%. If they sell the equipment, what would be the terminal cash flow?

a) $268,900
b) $111,100
c) $271,000
d) $165,900
e) $205,900

Consider the following cash flows for two mutually exclusive capital investment projects. The required rate of return is 13%. Use this information for the next 5 questions.

Year Project A Cash Flow Project B Cash Flow
0 -$32,400 -$14,400
1 9,720 4,320
2 9,720 4,320
3 9,720 4,320
4 8,748 3,888
5 8,748 3,888
6 4,374 3,888

7. What is the profitability index of project A?

a) 1.128
b) 1.06
c) .94
d) 1.09
e) 1.117

8. Calculate the net present value of project B.

a) $1,564.25
b) $1,415
c) $3,802
d) $2,162.49
e) $331.40

9. Which of the following statements is true concerning projects A and B?

a) Both NPV and IRR lead to the same investment decision.
b) Due to time disparity, IRR indicates that project A should be accepted and NPV indicates that project B should be accepted.
c) Due to time disparity, IRR indicates that project B should be accepted and NPV indicates that project A should be accepted.
d) Due to size disparity, IRR indicates that project A should be accepted and NPV indicates that project B should be accepted.
e) Due to size disparity, IRR indicates that project B should be accepted and NPV indicates that project A should be accepted.

10. Which of the following cash flows are not considered in the calculation of the annual cash-flow for a capital investment proposal?

a) Depreciation on project
b) Taxes
c) Incremental costs.
d) change in revenue
e) proceeds from selling an old asset which is being replaced by a new asset.

Answer 1

1.
=2+(100000-45000-35000)/30000=2.66666666666667

2.
=RATE(10,40000,-250000)=9.6058564114969%

3.
=150000+10000+5000+5000+3500=173500

4.
=(150000-70000-220000/10)*(1-21%)+220000/10=67820

5.
=40000+250000-(250000-160000)*21%=271100

6.
=40000+210000-(210000-310000)*21%=271000

7.
=1+(-32400+9720/1.13+9720/1.13^2+9720/1.13^3+8748/1.13^4+8748/1.13^5+4374/1.13^6)/32400=1.08533001975592

8.
=-14400+4320/1.13+4320/1.13^2+4320/1.13^3+3888/1.13^4+3888/1.13^5+3888/1.13^6=2162.49

9.
e) Due to size disparity, IRR indicates that project B should be accepted and NPV indicates that project A should be accepted.

10.
a) Depreciation on project