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##### method of capital budgeting

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solution

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method of capital budgeting;1. The following procedure is recommended when creating financial statements in Excel, in order to minimize error and make the statements easier to read when provided to others;a. Use custom number formats;b. Make excel do as little work as possible by avoiding the use of formulas;c. Use as many fonts and colors as possible in order to separate line items and subheadings;d. Hide data you do not want others to see before distributing a worksheet;2. You are thinking of buying a miniature golf course to operate. It is expected to generate cash flows of $40,000 per year in years one through four and $50,000 per year in years five through eight. If the appropriate discount rate is 10%, what is the present value of these cash flows?;a. $285,288;b. $167,943;c. $235,048;d. $828,230;3. The intrinsic value of an asset is;a. The price which a marginal investor is willing to pay for an asset;b. The required rate of return demanded by an investor;c. The price of an asset less its accumulated depreciation;d. The present value of expected future cash flows provided by the asset;4. Using the Net Present Value method of capital budgeting will always lead you to the economically correct decision because_____, however it can be misleading when comparing projects of ____.;a. NPV represents the change in shareholder wealth that accompanies the acceptance of an investment, differing size;b. NPV considers the time value of money, differing payback periods;c. NPV considers the time value of money, differing size;d. NPV can be greater than, equal to, or less than zero, differing payback periods;?;5. In calculating the risk associated with two potential projects (A & B), which of the following statistical calculations indicates that the projects are equally risky?;I. The standard deviation of A is 100, and the coefficient of variation of A is 80.912;II. The standard deviation of B is 1,000, and the coefficient of variation of B is 809.12;III. The variance of A?s possible outcomes is 258.10, and the standard deviation of A is 100;IV. The variance of B?s possible outcomes is 2,581, and the standard deviation of B is 1,000;a. III and IV;b. II and III;c. I and II;d. I and IV;e. None of the above;6. The value for "a" in the regression equation Y = a + b(X) + e is shown in Excel as;a. the slope;b. the forecasted variable;c. the intercept;d. the independent predictor variable;e. none of the above;7. The best example of a useful function macro created by a financial analyst might be to;a. Insert a standard header on a worksheet for a weekly expense summary report;b. Calculate the IRR of various investment opportunities as they arise throughout the fiscal year;c. Format a monthly financial report prior to internal distribution;d. Summarize a column of sales data by product;e. B and C;8. As a bank loan officer, you want to reference detailed columnar loan portfolio data with a list of past-due loans. Which of the following is the most effective tool for doings so?;a. Pivot table;b. H Lookup;c. Search function;d. Scatter plot;e. V Lookup;Use the information below for the next problem, No 9.;9. Calculate the free cash flow;Use the following information for the next problem, No. 10;10. What is the expected return for Security X?;Use the following information for the next three problems, Nos. 11-13;PV;Year Cash Flow Cash Flows;1 $14,000 $12,726;2 $14,000 $11,564;3 $10,000 $7,510;4 $10,000 $6,830;5 $8,000 $4,968;11. What is the NPV of above project if the initial investment was $35,000?;12. Calculate the IRR;13. and MIRR of the project, respectively, assuming a cost of capital of 10%.;14. Suppose that you are approached with an offer to purchase an investment that will provide cash flows of $1,200 per year for 15 years. The cost of purchasing this investment is $9,800. You have an alternative investment opportunity, of equal risk, that will yield 8% per year. What is the NPV that makes you indifferent between the two options?;15. The Claustrophobic Solution, Inc., a residential window and door manufacturer, has the following historical record of earnings per share (EPS) from 2011 to 2007;2011 2010 2009 2008 2007;EPS $1.10 $1.05 $1.00 $0.95 $0.90;The company?s payout ratio has been 60% over the last five years and the last quoted price of the firm?s share of stock was $10. Flotation costs for new equity will be 7%. The company has 30,000,000 of common shares of stock outstanding and a debt-equity ratio of 0.5.;If dividends are expected to grow at the same arithmetic average growth rate of the last five years, what is the dividend payment in 2012?;16. The following are the company sales from 2000-2009;Year Goggles;1 $225;2 $568;3 $989;4 $1,678;5 $3,189;6 $6,138;7 $10,604;8 $16,594;9 $21,795;10;Fit an exponential trend curve to the data and calculate the projected sales in 2010.;?;17. THE FINAL PROBLEM IS A CALCULATION PROBLEM.;Frozen Turkeys Scenario;Cost of Land $ 200,000;Cost of Buildings & Equipment $ 350,000;MACRS Class 20;Life of Project (Years) 5;Terminal Value of Land $ 300,000;Terminal Value of Buildings & Equipment $ 175,000;First year sales (pounds) 250,000;Price per Pound $3.50;Unit Sales Growth Rate 7.0%;Variable Costs as % of Sales 62%;Fixed Costs 75,000;Tax Rate 35%;WACC 10.0%;1. Prepare a statement of annual cash flows for years 0 through 5. Cash flows in year 0 are your expenses for building and land.;Sales growth is based on the annual growth rate in units.;Assume no changes in fixed or variable costs.;Depreciate the project cost for 5 years, with the cash flow in year 5 to include the terminal cash flow of ending the investment.;2. Calculate the NPV, profitability index, IRR, MIRR, payback and discounted payback of the cash flows in part 1.;3. Using scenario manager find best case, worst case, base case of NPV based on sales in pounds, price per pound, and variable cost percent.

Paper#29246 | Written in 18-Jul-2015

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