Quiz 3

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George Mason University *

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303

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Finance

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Feb 20, 2024

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Question 1 XYZ is considering buying a new, high efficiency interception system. The new system would be purchased today for $46,100.00. It would be depreciated straight- line to $0 over 2 years. In 2 years, the system would be sold for an after-tax cash flow of $13,900.00. Without the system, costs are expected to be $100,000.00 in 1 year and $100,000.00 in 2 years. With the system, costs are expected to be $79,800.00 in 1 year and $67,500.00 in 2 years. If the tax rate is 48.40% and the cost of capital is 8.70%, what is the net present value of the new interception system project? Selected Answer: $9151.12 (plus or minus $50) Answers: $10641.91 (plus or minus $50) $9151.12 (plus or minus $50) $13428.21 (plus or minus $50) $12536.65 (plus or minus $50) Question 2 The following table presents information on a potential project currently being evaluated by XYZ. Which assertion about statement 1 and statement 2 is true? Expected cash flows (number of years from today) Cost of capital 0 1 2 3 4 -$68,000.00 $40,000.00 $17,000.00 $31,000.00 $9,000.00 11.31% Statement 1: XYZ would accept the project based on the project's net present value and the NPV rule. Statement 2: XYZ would accept the project based on the project's payback period and the payback rule if the payback threshold is 2.50 years . Selected Answer: Statement 1 is true and statement 2 is true Answers: Statement 1 is true and statement 2 is true Statement 1 is false and statement 2 is true Question 3

XYZ is considering a project that would last for 3 years and have a cost of capital of 19.80 percent. The relevant level of net working capital for the project is expected to be $2,173.00 immediately (at year 0); $5,000.00 in 1 year; $14,800.00 in 2 years; and $0.00 in 3 years. Relevant expected revenue, costs, depreciation, and cash flows from capital spending in years 0, 1, 2, and 3 are presented in the following table. The tax rate is 50.70 percent. What is the net present value of this project?. Year 0 Year 1 Year 2 Year 3 Revenue $ 0.00 $10,800.00 $12,000.00 $11,000.00 Costs $ 0.00 $4,000.00 $3,550.00 $2,000.00 Depreciation $ 0.00 $2,010.00 $2,200.00 $1,700.00 Cash flows from capital spending $-6,500.00 $1,480.00 $1,910.00 $3,020.00 Selected Answer: None of the above is within $10 of the correct answer Answers: $7657.36 (plus or minus $10) $5480.03 (plus or minus $10) $10986.59 (plus or minus $10) $1280.61 (plus or minus $10) Question 4 XYZ is evaluating the Reno project. The project would require an initial investment of $141,000 that would be depreciated to $16,200 over 6 years using straight-line depreciation. The project is expected to have operating cash flows of $49,300 per year forever. XYZ expects the project to have an after-tax terminal value of $383,000 in 3 years. The tax rate is 30%. What is (X+Y)/Z if X is the project's relevant expected cash flow in year 3, Y is the project's relevant expected cash flow in year 6, and Z is the project's relevant expected cash flow in year 2? Selected Answer: A number equal to or greater than 8.27 but less than 10.09 Answers: A number equal to or greater than 11.68 but less than 12.41 A number less than 8.27 or a rate greater than 13.33 A number equal to or greater than 12.41 but less than 13.33 A number equal to or greater than 10.09 but less than 11.68 A number equal to or greater than 8.27 but less than 10.09

Question 5 0 out of 0 points You own a portfolio that has 2,947 shares of stock A, which is priced at $19.30 per share and has an expected return of 12.49%, and 2,776 shares of stock B, which is priced at $7.70 per share and has an expected return of 7.00%. The risk-free return is 2.81% and inflation is expected to be 2.11%. What is the expected real return for your portfolio? Selected Answer: A rate equal to or greater than 10.00% but less than 11.59% Answers: A rate less than 7.41% or a rate greater than 11.59% A rate equal to or greater than 7.41% but less than 8.33% A rate equal to or greater than 8.95% but less than 10.00% A rate equal to or greater than 10.00% but less than 11.59% A rate equal to or greater than 8.33% but less than 8.95% Question 6 2 out of 2 points XYZ owns and operates sports facilities. The objective of its managers is to maximize shareholder value. The firm is evaluating the hoops project, which involves building a basketball court in a local mall. Which assertion is true, based on the information given in the question and the following table on the project? Base-case NPV (based on final estimates and expectations) $-16,000.00 Value created if 50 or more inches of snow fall in winter (based on scenario analysis) $-53,500.00 Value created if worst-case sales occur (based on sensitivity analysis) $-87,500.00 Value created if best-case sales occur (based on sensitivity analysis) $29,400.00 Probability that project will create more than $0 of value (based on simulation analysis) 10.30 Selected Answer: XYZ should reject the hoops project Answers: XYZ should accept the hoops project XYZ should be indifferent between accepting and rejecting the

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hoops project XYZ should reject the hoops project It is not clear whether XYZ should accept or reject the hoops project, because the information that is provided is contradictory with respect to answering the question It is not clear whether XYZ should accept or reject the hoops project, because the cost of capital is not given Question 7 XYZ is evaluating a project that would require an initial investment of $72,900.00 today. The project is expected to produce annual cash flows of $8,600.00 each year forever with the first annual cash flow expected in 1 year. The NPV of the project is $7,800.00. What is the IRR of the project? Selected Answer: 11.80% (plus or minus 0.02 percentage points) Answers: 10.66% (plus or minus 0.02 percentage points) 13.21% (plus or minus 0.02 percentage points) 10.70% (plus or minus 0.02 percentage points) 11.80% (plus or minus 0.02 percentage points) None of the above is within 0.02 percentage points of the correct answer Question 8 XYZ is evaluating a project that would last for 3 years. The project's cost of capital is 15.90 percent, its NPV is $45,700.00 and the expected cash flows are presented in the table. What is X? Years from today 0 1 2 3 Expected Cash Flow (in $) -55,200 71,200 -15,400 X

Selected Answer: An amount equal to or greater than $72,799.00 but less than $85,789.00 Answers: An amount equal to or greater than $45,700.00 but less than $56,967.00 An amount equal to or greater than $64,653.00 but less than $72,799.00 An amount equal to or greater than $72,799.00 but less than $85,789.00 An amount less than $45,700.00 or an amount greater than $85,789.00 An amount equal to or greater than $56,967.00 but less than $64,653.00 Question 9 XYZ is evaluating a project that would require the purchase of a piece of equipment for $440,000 today. During year 1, the project is expected to have relevant revenue of $787,000, relevant costs of $194,000, and relevant depreciation of $126,000. XYZ would need to borrow $440,000 today to pay for the equipment and would need to make an interest payment of $34,000 to the bank in 1 year. Relevant net income for the project in year 1 is expected to be $345,000. What is the tax rate expected to be in year 1? Selected Answer: A rate equal to or greater than 22.48% but less than 27.15% Answers: A rate equal to or greater than 22.48% but less than 27.15% A rate less than 22.48% or a rate greater than 43.31% A rate equal to or greater than 38.01% but less than 43.31% A rate equal to or greater than 27.15% but less than 31.77% A rate equal to or greater than 31.77% but less than 38.01% Question 10

XYZ operates indoor tracks. The firm is evaluating the Santa Fe project, which would involve opening a new indoor track in Santa Fe. During year 1, XYZ would have total revenue of $167,000 and total costs of $78,900 if it pursues the Santa Fe project, and the firm would have total revenue of $150,000 and total costs of $72,600 if it does not pursue the Santa Fe project. Depreciation taken by the firm would be $76,300 if the firm pursues the project and $36,100 if the firm does not pursue the project. The tax rate is 48.70%. What is the relevant operating cash flow (OCF) for year 1 of the Santa Fe project that XYZ should use in its NPV analysis of the Santa Fe project? Selected Answer: $25,066.50 (plus or minus $1) Answers: $25,066.50 (plus or minus $1) $32,133.50 (plus or minus $1) $46,500.00 (plus or minus $1) $21,433.50 (plus or minus $1) None of the above is within $1 of the correct answer

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