BU393

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Western University *

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393

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Finance

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Jan 9, 2024

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Uploaded by ProfessorOxideButterfly181

Question 3 (1 point) VAT Corp. has a $2,500 capital budget, and has access to the following 5 independent projects. In all these 5 projects, cash outflows occur only in year 0. Calculate the total NPV of the projects) that are optimally chosen by the company. A. -1200. PI=2 B. -1800. 1.4 C. -1000. 1.5 D. -500. 1.35 E. -250. 0.80 - 1600 - 1550 - 1650 - 1700 Solution: Step 1. Cash Flows A. 1200 x (2) = 2400 B. 1800 x (1.4) = 2520 C. 1000 x (1.5) = 1500 D. 500 x (1.35) = 675 E. 250 x (0.8) = 200 Step 2: NPV A. 2400 - 1200 = 1200 B. 2520 - 1800 = 720 C. 1500 - 1000 = 500 D. 675 - 500 = 175 E. 200 - 250 = -50 1200 + 500 = 1700 Question 1 (1 point) Alexa bought a store two years ago for $250,000. She leased it out at $4,000 a month. Now she is considering the option to cancel the lease and use the location as a salon. About two months ago, Alexa changed the flooring of the store at a cost of $20,000. She estimates that the machinery for the salon will cost $150,000. Alexa expects the net operating cash flows to be $35,000 annually for 5 years, after which she plans to scrap the remaining inventory and retire. If she opens up this new salon, the sales from her other salon would drop by 10%. Alexa wants a return of 9% on his investment or else she would not go ahead with his plans. The $4000 leasing revenue would be included in the calculation of operating cash flows as it the opportunity cost.

True Question 2 (1 point) Saved Ahmed bought a store two years ago for $250,000. He leased it out at $4,000 a month. Now he is considering the option to cancel the lease and use the location as a years, after which he plans to scrap the remaining inventory and retire. If he opens this new store, the sales from his other clothing store would drop by 10%. Ahmed wants a return of 9% on his investment or else he would not go ahead with his plans. The $150,000 machinery expenditure would be included as the initial cost in the calculation of NPV. True Question 4 (1 point) H3 Corp. has pitched a project that. produces portable helium tanks for small parties. The project requires an investment of 979 dollars, and will generate 253 dollars for 10 years. In the 10th year, the project requires a clean up fee to wind down the project of 525 dollars. What is the NPV of the project given a cost of capital of 8.10 percent? - 493 - 470 - 521 - 545

Question 6 (1 point) You have an investment opportunity that requires a payment of $3000 upfront. The investment will generate $800, $1200, $1500 in subsequent three years. According to the simple payback method, how many years will it take to recoup your investment? Assume the cash flows occur uniformly throughout the year. The NPV method accounts for the tax shield associated with interest in the calculation of? - 2.83 - 2 - 3 - 2.67 **use a payback calculator with irregular CF Question 9 (1 point) Angular Footwear purchased a $100,000 machine that falls into Class 39 with a 20% depreciation rate. The machine is used for 5 years and then sold. What is the ending book value of the machine, rounded to the nearest dollar, at the end of year 4? - $36,864 - $46,080 - $40,960 - $57,600 Question 10 (1 point) The Fritz Electric Company replaced an old machine 8 years ago with a new one. They sold the new machine today for $250,000. If Fritz had kept the old machine, it could have been sold for $150,000 today. The incremental undepreciated capital cost is $300,000. The tax rate is 45%. The depreciation rate for the machines is 30%, and Fritz's cost of capital is 10%. What is the present value of the incremental tax shields associated with selling the new machine? - 67500 - 16875 - 50625 - (-33750)? Question 11 (1 point) LAC Corporation has 100000 common shares outstanding with a market value of $93 per share, and a cost of equity of capital of 12%. It also has a total face value of $1622000 in zero-coupon

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bonds outstanding, which are currently trading a price of $750 per $1000 face value and have a yield-to-maturity of 5%. The current tax rate is 25%. What is its weighted average cost of capital? - 14.05% - 13.05% - 11.05% - 12.05% Question 12 (1 point) Disney needs to close Magic Kingdom to remodel and update the castle. Disney's advisors presented two renovation alternatives: (1) a quick facelift or (2) a complete rebuild. The quick facelift would cost $10 million, would generate annual after-tax cash flows of $3.75 million per year on completion, and would last only 5 years until another facelift was needed. The complete rebuild would cost $20 million, would also generate, annual cash flows of $3.75 million per year on completion, and would last 11 years until another renovation was needed. Assume Disney always renovates the Magic Kingdom when needed. What is the Equivalent Annual Annuity (EAA) for the option Disney should choose? Assume a cost of capital of 6.0%. - 1.477 - 1.376 - 1.413 - 1.279

Question 13 (1 point) A firm has asked you to invest in their "Aviator" project that requires an initial investment of $750. The project will pay $200 annually for 5 years (payments are received at year-end). The cost of capital is 7%. According to the IRR method, with respect to the Aviator Project, you should: - Accept the project, because the IRR is greater than the cost of capital - Accept the project, because the IRR is less than the cost of capital - Reject the project, because the IRR is greater than the cost of capital - Reject the project, because the IRR is less than the cost of capital - Not enough information provided to determine a course of action. Solution: The IRR rule says that Accept the project if IRR > Cost of capital and Reject the project if IRR < Cost of capital Question 14 (1 point) • Alpha Inc. is evaluating a new product. The production line for the new product would be set up in an unused plant, which was purchased one year ago at $300,000. The machinery will cost $200,000. The company's inventories would have to be increased by $25,000 to handle the new line and will reverse when the machine is sold. The machinery is in Class 43 with a depreciation rate of 25%. The project is expected to last 3 years with estimated EBIT of $180,000 in each year. The machinery has an expected salvage value of $25,000 at the end of three years. The company's tax rate is 30% and its weighted average cost of capital is 10%. What is the depreciation tax shield, rounded to the nearest dollar, in year 2? - 7500 - 32813 - 11250 - 13125 - 9844 Question 15 (1 point) Alpha Inc. is evaluating a new product. The production line for the new product would be set up in an unused plant, which was purchased one year ago at $300,000. The machinery will cost $200,000. The company's inventories would have to be increased by $25,000 to handle the new line and will reverse when the machine is sold. The machinery is in Class 43 with a depreciation rate of 25%. The project is expected to last 3 years with estimated

BIT of $180,000 in each year. The machinery has an expected salvage value of $25,000 at the end of three years. The company's tax rate is 30% and its weighted average cost of capital is 10%. What are the operating cash flows, rounded to the nearest dollar, in year 3? $151,000 $158,813 O $169,750 $139,125 O $135,844 Question 16 (1 point) Alpha Inc. is evaluating a new product. The production line for the new product would be set up in an unused plant, which was purchased one year ago at $300,000. The machinery will cost $200,000. The company's inventories would have to be increased by $25,000 to handle the new line and will reverse when the machine is sold. The machinery is in Class 43 with a depreciation rate of 25%. The project is expected to last 3 years with estimated EBIT of $180,000 in each year. The machinery has an expected salvage value of $25,000 at the end of three years. The company's tax rate is 30% and its weighted average cost of capital is 10%. Rounded to the nearest dollar, what are the terminal cash flows in Year 3?

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- 225000 - 135844 - 224549 - 158813 - 208813 May be right Question 17 (1 point) Alpha Inc. is evaluating a new product. The production line for the new product would be set up in an unused plant, which was purchased one year ago at $300,000. The machinery will cost $200,000. The company's inventories would have to be increased by $25,000 to handle the new line and will reverse when the machine is sold. The machinery is in Class 43 with a depreciation rate of 25%. The project is expected to last 3 years with estimated EBIT of $180,000 in each year. The machinery has an expected salvage value of $25,000 at the end of three years. The company's tax rate is 30% and its weighted average cost of capital is 10%. Rounded to the nearest dollar, what is the present value of the tax shields resulting from the salvage of the machine in the terminal year (i.e., year 3)? - 25000 - 98438 - 73438 - 15737 - (-73438) Question 18 Alpha Inc. is evaluating a new product. The production line for the new product would be set up in an unused plant, which was purchased one year ago at $300,000. The machinery will cost $200,000. The company's inventories would have to be increased by $25,000 to handle the new line and will reverse when the machine is sold. The machinery is in Class 43 with a depreciation rate of 25%. The project is expected to last 3 years with estimated EBIT of $180,000 in each year. The machinery has an expected salvage value of $25,000 at the end of three years. The company's tax rate is 30% and its weighted average cost of capital is 10%. Rounded to the nearest dollar, what is the NPV of the project? - 179657 - 275000 - 197623 - 201154 - 221269 Question 19 (1 point)

WFH Corp. just paid (yesterday) a dividend of $1. Dividends are paid annually and are expected to grow in perpetuity at 5%. Data from HooYa! Finance yields an equity beta for its shares of 0.9. The current expected market return is 10%, and the risk-free rate is 2%. If the company has a 20% tax rate, what is its after tax cost of equity capital? - 11.00% - 7.36% - 09.20% - 8.80% Question 20 (1 point) Johnson Electronics purchased a $15,000 machine to replace an old machine that is sold today for $6,000. Both machines are in the same class, with a 20% depreciation rate. The new machine allows the company to hold lower inventory, so the company will decrease inventory by $2,000. What are the initial cash flows associated with this replacement project? 0 - $7,000 O - $11,000 O - $9,000 0 - $8000 21. Consider a project that requires an investment of $1850 in the first year, but will generate a NPV of $110. Calculate the profitability index value of this project. Solution: 110/1850 = 0.06 Question 22 (1 point) VEC Inc. currently has 3220000 zero coupon bonds outstanding, each with a face value of $1,000. The bonds have a maturity of 4 years and they are traded in the market at 87% of par. If the tax rate is 28%, what is its after-tax cost of debt capital? - 3.54% - 2.55% - 0.99% - 3.08% Blank Spreadsheet Question 23 (1 point) TNJ Corp. is considering purchasing one of two lawn mowers to reduce both labour and fuel costs: model Light or model Small. Both mowers cost $75. Model Small generates $90 of savings at the end of the first year and nothing at the end of 2 years. Model Light generates no savings at the end of the first year and $100 of savings at the end of 2 years. Graph the NPV Profiles of each model. When the cost of capital is equal to 11.11%, the NPV for both pipjects is $6.00. The Light project is of higher risk and TNJ applies a 13% cost of capital to the project's

valuation, as opposed to a 10% cost of capital to the valuation of project small. Which of the following statements is correct. - Project Small should be accepted because it has a higher IRR. - The two projects cannot be compared because of differences in risk. - Project Light should be accepted because it has a higher NPV. - Project Small should be accepted because it has a higher Question 24 Consider a project with an immediate investment of 11,000, cash flows of 7,500 at the end of each year for four years, and a cash flow of -20,000 at the end of year five. NPV profile analysis indicates that the project has two Internal Rates of Return (IRRs) at 5.62% and 27.78%. Given a weighted average cost of capital (WACC) of 4% which of the following statements is correct? - Project should be accepted because both IRRs are greater than the WACC. - The project should be accepted because NPV is positive. - The project should be rejected because the NPV is negative. - Unable to come up with a decision because we are dealing with non-normal cash flows. Question 25 (1 point) Using the balance sheet provided for American Imports, determine the weighted average cost of capital. The firm's tax rate is 40%, the preferred stock pays a dividend of $0.45 per share, the beta of the common stock is 1.2, the market risk premium is 8%, and the risk free rate is 5%. Assume that the market value weights are the same as the book value capital structure weights. - 11.58% - 11.24% - 9.93% - 10.77%

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the ________ method to analyze cash flows associated with the project does not consider the time value of money WACC Projects will usually have an initial investment, cash inflows, and a terminal cash flow. True