FINC 450 Fall 2022 Exam 2 A

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The University of Tennessee, Knoxville *

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450

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Business

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Apr 3, 2024

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FINC 450 Fall 2022 Exam 1 Name__________________________________________ 1 Instructions: READ THESE! Print your name on the bubble form and on your exam sheet. Bubble in your 9-digit TN-ID (starts with 9, not with 0. Do not fill in the 10 th place on the scan form.). Select the best answer for each question and record on your bubble sheet. When finished, sign the honor pledge, slip the bubble sheet form inside this exam, and turn in both the form and the exam. Bubble sheets without a printed exam will not be graded. You may use your financial calculator and your single page, single- sided notes sheet for reference. Put away all phones and tablets. You may use space on this exam for scratch paper but note that I will not grade any of your scratch work. There will be no partial credit. Each question is worth the same amount. Excel Instructions: I am also allowing you to use a BLANK Excel spreadsheet for calculations. If you do so, then download the special Excel spreadsheet whose link I’ve put on our Canvas page and use that one. It must be the only app open on your computer and must occupy your entire screen the entire time for the exam. It must be the only Excel spreadsheet open on your Professional Conduct and Academic Integrity : The Haslam College of Business holds Integrity as one of its four core values. Integrity is essential to our community. Integrity is supported by openness, communication, accountability, professionalism, and the courage to live our values. Our core values provide the foundation for a collaborative community and for achieving our mission and vision. Therefore, the guidelines set forth in The University of Tennessee Student Code of Conduct will be followed in cases of academic dishonesty and misconduct. WE ADHERE TO THIS POLICY VERY STRICTLY. If you are a registered student in this class, it will be assumed that you will abide by the following UT Honor Statement: "As a student of the University, I pledge that I will neither knowingly give nor receive any inappropriate assistance in academic work, thus affirming my own personal commitment to honor and integrity." For a complete text of the Code of Student Conduct, click the following link: https://hilltopics.utk.edu/student-code-of-conduct/ All honor code violations are reported to the office of student conduct and community standards. Violations will go on your records in accordance with University policy. I pledge that I have neither given nor received unauthorized help on this exam. Furthermore, I realize that giving or receiving unauthorized help on this exam could result in failure of this course or dismissal from the University. Signed _________________________________ Date: ________________________ "Use the following information for Project A's cash flows. Year 0 1 2 3 Cash flow -$1000 $300 $500 $700 WACC = 8.0%." 1. Calculate Project A's NPV a. $238.30 b. $262.13 c. $288.34 d. $317.18 e. $348.89

FINC 450 Fall 2022 Exam 1 Name__________________________________________ 2 2. Calculate Project A's internal rate of return (IRR). a. 16.6% b. 17.4% c. 18.3% d. 19.2% e. 20.1% 3. Calculate Project A's payback. a. 1.56 b. 1.72 c. 1.89 d. 2.08 e. 2.29 4. Calculate Project A's modified internal rate of return (MIRR) assuming the reinvestment rate and finance rates are both equal to the WACC. a. 12.6% b. 13.8% c. 15.2% d. 16.7% e. 18.4% 5. Calculate Project A's Equivalent Annual Annuity (EAA). a. $85.62 b. $94.18 c. $103.60 d. $113.96 e. $125.35 6. Which one of the following statements is true? a. When there are multiple IRRs for a non-normal project, the MIRR will be equal to the largest IRR b. The profitability index (PI) measures how many years it takes before the project's initial investment is recovered. c. The NPV of a project's cashflows when discounted at the IRR is zero. d. If a project has two IRRs, then the MIRR will be numerically equal to the average of the two IRRs. e. The IRR of a negative NPV project will be undefined.

FINC 450 Fall 2022 Exam 1 Name__________________________________________ 3 7. Which one of the following statements about Projects A and B, whose NPV profile is shown above, is TRUE? a. If the cost of capital is 11% and the projects are independent then neither project should be accepted. b. If the cost of capital is 14% and the two projects are independent then only project B should be accepted. c. If the cost of capital is 6% and the projects are independent then only project A will be accepted. d. The internal return for A is greater than the internal return for B. e. If the cost of capital is 10% and the two projects are mutually exclusive then both A and B should be accepted.

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FINC 450 Fall 2022 Exam 1 Name__________________________________________ 4 "Use this information for the next two problems. VOLs Inc. purchased a Mask Maker Model 3 for $100,000 including shipping and installation. The equipment falls in the 5 year MACRs depreciation class, with depreciation rates given below. VOLs sold it after 3 years for $25,000. VOL's tax rate is 25%. Year 1 2 3 4 5 6 Depreciation % 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% " 8. Calculate the book value of the machine when it is sold. a. 28,800 b. 31,680 c. 34,848 d. 38,333 e. 42,166 9. Assume that the book value of the machine when it is sold is $15,500. Calculate the after-tax salvage value of selling the machine. a. $25,000 b. $18,750 c. $27,375 d. $13,125 e. $7,125 10. Cash flows from which of the following would NOT impact the NPV analysis of a project? a. Selling the new product associated with the project will cause the sales of a competing company to decrease. b. The company must pay a licensing fee for the rights to use the technology required for manufacturing the product. The licensing fee would be $1,000 per month. c. The new product associated with the project will reinforce the sales of an existing product the company sells. d. When the new project comes on line, the CEO will get a bonus of $200,000 for finishing it on time. e. The space the project will go in is currently being rented out for storage for $2000 per month. If the project is accepted the rental will stop.

FINC 450 Fall 2022 Exam 1 Name__________________________________________ 5 "Use this information for the next 2 questions. Vols, Inc. is considering introducing a new bobblehead doll. Each doll costs $1.00 to make and will sell for $5.00. Packaging machinery will cost $100,000, including shipping and installation. Sales are expected to be 100,000 dolls in Year 1, 150,000 dolls in Year 2 and 200,000 dolls in Year 3 after which the equipment will be sold, and the production line shut down. The equipment will be sold for $60,000 at the end of 3 years. The machinery will be depreciated using the 5-year MACRS depreciation schedule, shown below. Working capital in the amount of 11.0% of the current years' sales will be required at the beginning of the year (that is, will be required at the end of the previous year). Vol's tax rate is 25% Year 1 2 3 4 5 6 Depreciation % 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% " 11. Calculate the required incremental investment in working capital in Year 1. a. 20,661 b. 22,727 c. 25,000 d. 27,500 e. 30,250 12.Assume that the required incremental investment in working capital in Year 1 is $20,000. Calculate the project's total cash flow for capital budgeting purposes in Year 1. a. 285,000 b. 313,500 c. 344,850 d. 379,335 e. 417,269 13. Suppose project A has an NPV of $50 million and project B has an NPV of $70 million and that the projects are independent of each other and there is no capital rationing. Which one of the following statements is true? a. Only project A should be accepted. b. Only project B should be accepted. c. Neither project A nor project B should be accepted. d. We must know the cost of capital before determining which project should be accepted. e. Both projects A and B should be accepted. 14. Suppose project A has an IRR of 15% and Project B has an IRR of 21% and the company's WACC is 10%. The projects are independent and there is no capital rationing. Which one of the following statements is true? a. Both projects A and B should be accepted. b. Only project A should be accepted. c. Only project B should be accepted. d. Neither project A nor project B should be accepted. e. We must know the crossover point before determining which project should be accepted.

FINC 450 Fall 2022 Exam 1 Name__________________________________________ 6 15. Suppose project A has an NPV of $50 million and project B has an NPV of $70 million. Assume projects A and B are mutually exclusive and there is no capital rationing. Which one of the following statements is true? a. Only project A should be accepted. b. Both projects A and B should be accepted c. Neither project A nor project B should be accepted. d. We must know the projects' crossover point before determining which project should be accepted. e. Only project B should be accepted. 16. Suppose project A has an IRR of 15% and Project B has an IRR of 21% and the company's WACC is 10%. The projects are mutually exclusive and there is no capital rationing. Which one of the following statements is true? a. Neither project A nor project B should be accepted. b. Both projects A and B should be accepted. c. We must know the projects' NPVs before determining which project should be accepted. d. Only project A should be accepted. e. Only project B should be accepted. For the following True/False questions, choose answer 'a' if the statement is true, and choose answer 'b' if the statement is false. 17. An NPV profile can show whether or not a project has multiple IRRs. 18. An NPV profile cannot determine a project's IRR by itself. You must also know the company's WACC. 19. An NPV profile of projects A and B, combined with the company's WACC, can be used to identify which projects should be accepted if the projects are independent. 20. If projects A and B are mutually exclusive, then it might be optimal to choose the project with the lower IRR. 21. The IRR and NPV decision rules will always give the same accept/reject decision for mutually exclusive projects. 22. If a project has multiple IRRs, then the company should choose a cost of capital that makes the project have a positive NPV.

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FINC 450 Fall 2022 Exam 2 A

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