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BUSI 320 Corporate Finance Quiz 2014 Solution

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The change in real GDP resulting from an initial change in spending can be calculated by;A. Dividing the multiplier by the initial change in spending;B. Dividing the initial change in spending by the multiplier;C. Multiplying the multiplier by the initial change in spending;D. Adding the initial change in spending to the multiplier;The simple multiplier formula assumes the following, except;A. The economy has excess capacity and room to expand output;B. Firms will raise prices as buyers buy more of their output;C. People will spend more if they earn additional income;D. Business firms will increase production if demand for their output increases;In 2008, the Federal government provided tax rebate checks to taxpayers in the hope that;A. C would shift down;B. C would shift up;C. G would shift down;D. G would shift up;When the Federal government provides tax rebate checks to taxpayers, as it did in 2008, the intent is to push the aggregate expenditures schedule in the economy upwards.;A. True;B. False;The multiplier measures the change in real GDP that results from a given change in the price level.;A. True;B. False;When the Federal government provides tax rebate checks to taxpayers, as it did in 2008, the intent is to push the aggregate expenditures schedule in the economy upwards.;A. True;B. False;In the Great Recession of 2007-2009, the sector of the economy that decreased the most was G.;A. True;B. False;An economy characterized by high unemployment is likely to be;A. Experiencing a high rate of economic growth;B. Experiencing hyperinflation;C. In a recessionary expenditure gap;D. In an inflationary expenditure gap;A commercial bank has checkable-deposit liabilities of $500,000, reserves of $150,000, and a required reserve ratio of 20 percent. The amount by which a single commercial bank and the amount by which the banking system can increase loans are respectively;A. $30,000 and $150,000;B. $50,000 and $250,000;C. $50,000 and $500,000;D. $100,000 and $500,000;Lowering the reserve ratio;A. increases the discount rate.;B. decreases the discount rate.;C. changes required reserves to excess reserves.;D. decreases the amount of excess reserves banks must keep.;The economy is experiencing a low rate of economic growth and the Fed decides to pursue an expansionary money policy. Which set of actions by the Fed would be most consistent with this policy?;A. Selling government securities and lowering the discount rate;B. Selling government securities and raising the discount rate;C. Buying government securities and raising the discount rate;D. Buying government securities and lowering the discount rate;Inflationary pressure is a growing problem for the economy. Therefore, the Federal Reserve decides to pursue a policy to reduce the inflationary pressure. Which policy changes by the Fed would reinforce each other to achieve that objective?;A. Selling government securities and raising the discount rate;B. Selling government securities and lowering the discount rate;C. Buying government securities and lowering the discount rate;D. Buying government securities and lowering the reserve ratio;The Federal Reserve Banks are owned by the;A. federal government.;B. Board of Governors.;C. U.S. Treasury. Assignment Print View 7/29/14, 10:57 PM;http://ezto.mheducation.com/hm.tpx Page 1 of 18;1. award;1.00 point;2. award;1.00 point;Assume a corporation has earnings before depreciation and taxes of $102,000, depreciation of $40,000;and that it has a 35 percent tax bracket.;a. Compute its cash flow using the following format. (Input all answers as positive values.);Earnings before depreciation and taxes $;Depreciation;Earnings before taxes $;Taxes;Earnings after taxes $;Depreciation;Cash flow $;b. How much would cash flow be if there were only $12,000 in depreciation? All other factors are the same.;Cash flow $;c. How much cash flow is lost due to the reduced depreciation from $40,000 to $12,000?;Cash flow lost $;View Hint #1;Worksheet Difficulty: Basic;Learning Objective: 12-02 Cash flow rather;than earnings is used in the capital;budgeting decision.;The Short-Line Railroad is considering a $120,000 investment in either of two companies. The cash flows;are as follows;Year Electric Co. Water Works;1 $ 60,000 $ 30,000;2 30,000 30,000;3 30,000 60,000;4 ? 10 20,000 20,000;Assignment Print View 7/29/14, 10:57 PM;http://ezto.mheducation.com/hm.tpx Page 2 of 18;3. award;2.00 points;a. Compute the payback period for both companies. (Round your answers to 1 decimal place.);Payback Period;Electric Co. years;Water Works years;b. Which of the investments is superior from the information provided?;Water Works;Electric Co.;rev: 04_16_2014_QC_48106;Worksheet Difficulty: Basic;Learning Objective: 12-03 The payback;method considers the importance of;liquidity, but fails to consider the time value;of money.;X-treme Vitamin Company is considering two investments, both of which cost $44,000. The cash flows are;as follows;Year Project A Project B;1 $46,000 $38,000;2 17,000 18,000;3 13,000 15,000;Use Appendix B for an approximate answer but calculate your final answer using the formula and financial;calculator methods.;a-1. Calculate the payback period for Project A and Project B. (Round your answers to 2 decimal;places.);Payback Period;Project A year(s);Project B year(s);a-2. Which of the two projects should be chosen based on the payback method?;Project A;Project B;b-1. Calculate the net present value for Project A and Project B. Assume a cost of capital of 8 percent. (Do;not round intermediate calculations and round your final answers to 2 decimal places.);Net Present Value;Project A $;Project B $;b-2. Which of the two projects should be chosen based on the net present value method?;Project A;Project B;Assignment Print View 7/29/14, 10:57 PM;http://ezto.mheducation.com/hm.tpx Page 3 of 18;4. award;1.00 point;5. award;1.00 point;c. Should a firm normally have more confidence in the payback method or the net present value;method?;Net present value method;Payback method;View Hint #1;Worksheet;Learning Objective: 12-03 The payback;method considers the importance of;liquidity, but fails to consider the time value;of money.;Difficulty: Basic;Learning Objective: 12-04 The net present;value and internal rate of return are;generally the preferred methods of capital;budgeting analysis.;You buy a new piece of equipment for $30,204, and you receive a cash inflow of $4,100 per year for 14;years. Use Appendix D for an approximate answer but calculate your final answer using the financial;calculator method.;What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a;percent rounded to 2 decimal places.);Internal rate of return %;View Hint #1;Worksheet Difficulty: Basic;Learning Objective: 12-04 The net present;value and internal rate of return are;generally the preferred methods of capital;budgeting analysis.;Home Security Systems is analyzing the purchase of manufacturing equipment that will cost $95,000. The;annual cash inflows for the next three years will be;Year Cash Flow;1 $ 48,000;2 46,000;3 41,000;Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the financial;calculator method.;a. Determine the internal rate of return. (Do not round intermediate calculations. Enter your answer;as a percent rounded to 2 decimal places.);Internal rate of return %;Assignment Print View 7/29/14, 10:57 PM;http://ezto.mheducation.com/hm.tpx Page 4 of 18;6. award;2.00 points;7. award;1.00 point;b. With a cost of capital of 15 percent, should the equipment be purchased?;Yes;No;Worksheet Difficulty: Basic;Learning Objective: 12-04 The net present;value and internal rate of return are;generally the preferred methods of capital;budgeting analysis.;The Pan American Bottling Co. is considering the purchase of a new machine that would increase the;speed of bottling and save money. The net cost of this machine is $69,000. The annual cash flows have the;following projections. Use Appendix B and Appendix D for an approximate answer but calculate your final;answer using the formula and financial calculator methods.;Year Cash Flow;1 $ 29,000;2 29,000;3 29,000;4 34,000;5 20,000;a. If the cost of capital is 13 percent, what is the net present value of selecting a new machine? (Do not;round intermediate calculations and round your final answer to 2 decimal places.);Net present value $;b. What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a;percent rounded to 2 decimal places.);Internal rate of return %;c. Should the project be accepted?;Yes;No;rev: 04_08_2014_48104;View Hint #1;Worksheet Difficulty: Intermediate;Learning Objective: 12-04 The net present;value and internal rate of return are;generally the preferred methods of capital;budgeting analysis.;Turner Video will invest $84,500 in a project. The firm?s cost of capital is 6 percent. The investment will;provide the following inflows. Use Appendix A for an approximate answer but calculate your final answer;Assignment Print View 7/29/14, 10:57 PM;http://ezto.mheducation.com/hm.tpx Page 5 of 18;8. award;2.00 points;using the formula and financial calculator methods.;Year Inflow;1 $ 28,000;2 30,000;3 34,000;4 38,000;5 42,000;The internal rate of return is 12 percent.;a. If the reinvestment assumption of the net present value method is used, what will be the total value of;the inflows after five years? (Assume the inflows come at the end of each year.) (Do not round;intermediate calculations and round your answer to 2 decimal places.);Total value of inflows $;b. If the reinvestment assumption of the internal rate of return method is used, what will be the total value;of the inflows after five years? (Use the given internal rate of return. Do not round intermediate;calculations and round your answer to 2 decimal places.);Total value of inflows $;c. Which investment assumption is better?;Reinvestment assumption of IRR;Reinvestment assumption of NPV;View Hint #1;Worksheet Difficulty: Intermediate;Learning Objective: 12-04 The net present;value and internal rate of return are;generally the preferred methods of capital;budgeting analysis.;Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving;equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value;profile in comparing the projects. The investment and cash flow patterns are as follows: Use Appendix B for;an approximate answer but calculate your final answer using the formula and financial calculator methods.;Project E Project H;($52,000 investment) ($47,000 investment);Year Cash Flow Year Cash Flow;1 $ 10,000 1 $ 27,000;2 14,000 2 19,000;3 24,000 3 15,000;4 31,000;a. Determine the net present value of the projects based on a zero percent discount rate.;Net Present Value;Project E $;Project H $;Assignment Print View 7/29/14, 10:57 PM;http://ezto.mheducation.com/hm.tpx Page 6 of 18;9. award;4.00 points;10. award;2.00 points;b. Determine the net present value of the projects based on a discount rate of 9 percent. (Do not round;intermediate calculations and round your answers to 2 decimal places.);Net Present Value;Project E $;Project H $;c. If the projects are not mutually exclusive, which project(s) would you accept if the discount rate is 9;percent?;Project E;Project H;Both H and E;Worksheet Difficulty: Challenge;Learning Objective: 12-04 The net present;value and internal rate of return are;generally the preferred methods of capital;budgeting analysis.;Telstar Communications is going to purchase an asset for $620,000 that will produce $300,000 per year for;the next four years in earnings before depreciation and taxes. The asset will be depreciated using the threeyear;MACRS depreciation schedule in Table 12?12. (This represents four years of depreciation based on the;half-year convention.) The firm is in a 30 percent tax bracket.;Fill in the schedule below for the next four years. (Input all amounts as positive values. Round your;answers to the nearest whole dollar amount.);Year 1 Year 2 Year 3 Year 4;Earnings before depreciation and taxes $ $ $ $;Depreciation;Earnings before taxes $ $ $ $;Taxes;Earnings after taxes $ $ $ $;Depreciation;Cash flow $ $ $ $;View Hint #1;Worksheet Difficulty: Challenge;Learning Objective: 12-02 Cash flow rather;than earnings is used in the capital;budgeting decision.;The Summitt Petroleum Corporation will purchase an asset that qualifies for three-year MACRS;Assignment Print View 7/29/14, 10:57 PM;http://ezto.mheducation.com/hm.tpx Page 7 of 18;11. award;2.00 points;depreciation. The cost is $160,000 and the asset will provide the following stream of earnings before;depreciation and taxes for the next four years: Use Table 12-12.;Year 1 $ 90,000;Year 2 101,000;Year 3 46,000;Year 4 44,000;The firm is in a 30 percent tax bracket and has a cost of capital of 16 percent. Use Appendix B for an;approximate answer but calculate your final answer using the formula and financial calculator methods.;a. Calculate the net present value. (Negative amount should be indicated by a minus sign. Do not;round intermediate calculations and round your answer to 2 decimal places.);Net present value $;b. Under the net present value method, should Summitt Petroleum Corporation purchase the asset?;Yes;No;View Hint #1;Worksheet Difficulty: Challenge;Learning Objective: 12-04 The net present;value and internal rate of return are;generally the preferred methods of capital;budgeting analysis.;An asset was purchased three years ago for $200,000. It falls into the five-year category for MACRS;depreciation. The firm is in a 40 percent tax bracket. Use Table 12?12.;a. Compute the tax loss on the sale and the related tax benefit if the asset is sold now for $23,060. (Input;all amounts as positive values. Do not round intermediate calculations and round your answers;to whole dollars.);Tax loss on the sale $;Tax benefit $;b. Compute the gain and related tax on the sale if the asset is sold now for $72,060. (Input all amounts as;positive values. Do not round intermediate calculations and round your answers to whole;dollars.);Taxable gain $;Tax obligation $;View Hint #1;Assignment Print View 7/29/14, 10:57 PM;http://ezto.mheducation.com/hm.tpx Page 8 of 18;12. award;3.00 points;Worksheet Difficulty: Challenge;Learning Objective: 12-02 Cash flow rather;than earnings is used in the capital;budgeting decision.;DataPoint Engineering is considering the purchase of a new piece of equipment for $400,000. It has an;eight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of;$220,000 in nondepreciable working capital. Seventy-five thousand dollars of this investment will be;recovered after the sixth year and will provide additional cash flow for that year. Income before depreciation;and taxes for the next six are shown in the following table. Use Table 12?11, Table 12?12. Use Appendix B for an;approximate answer but calculate your final answer using the formula and financial calculator methods.;Year Amount;1 $ 233,000;2 192,000;3 162,000;4 147,000;5 111,000;6 101,000;The tax rate is 30 percent. The cost of capital must be computed based on the following;Cost;(aftertax) Weights;Debt Kd 8.20% 25%;Preferred stock Kp 12.80 15;Common equity;(retained earnings) Ke 17.00 60;a. Determine the annual depreciation schedule. (Do not round intermediate calculations. Round your;depreciation base and annual depreciation answers to the nearest whole dollar. Round your;percentage depreciation answers to 3 decimal places.);Year;Depreciation;Base;Percentage;Depreciation;Annual;Depreciation;1 $ $;2;3;4;5;6;$;b. Determine the annual cash flow for each year. Be sure to include the recovered working capital in Year;6. (Do not round intermediate calculations and round your answers to 2 decimal places.);Year Cash Flow;1 $;2;3;Assignment Print View 7/29/14, 10:57 PM;http://ezto.mheducation.com/hm.tpx Page 9 of 18;13. award;5.00 points;4;5;6;c. Determine the weighted average cost of capital. (Do not round intermediate calculations. Enter;your answer as a percent rounded to 2 decimal places.);Weighted average cost of capital %;d-1. Determine the net present value. (Use the WACC from part c rounded to 2 decimal places as a;percent as the cost of capital (e.g., 12.34%). Do not round any other intermediate calculations.;Round your answer to 2 decimal places.);Net present value $;d-2. Should DataPoint purchase the new equipment?;No;Yes;View Hint #1;Worksheet Difficulty: Challenge Learning Objective: 12-05 The discount or;cutoff rate is normally the cost of capital.;Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $64,000.;The equipment falls into the five-year category for MACRS depreciation and can currently be sold for;$27,800.;A new piece of equipment will cost $154,000. It also falls into the five-year category for MACRS;depreciation.;Assume the new equipment would provide the following stream of added cost savings for the next six;years. Use Table 12?12. Use Appendix B for an approximate answer but calculate your final answer using the;formula and financial calculator methods.;Year Cash Savings;1 $65,000;2 57,000;3 55,000;4 53,000;5 50,000;6 39,000;The firm?s tax rate is 35 percent and the cost of capital is 8 percent.;a. What is the book value of the old equipment? (Do not round intermediate calculations and round;your answer to the nearest whole dollar.);Book value $;Assignment Print View 7/29/14, 10:57 PM;http://ezto.mheducation.com/hm.tpx Page 10 of 18;b. What is the tax loss on the sale of the old equipment? (Do not round intermediate calculations and;round your answer to the nearest whole dollar.);Tax loss $;c. What is the tax benefit from the sale? (Do not round intermediate calculations and round your;answer to the nearest whole dollar.);Tax benefit $;d. What is the cash inflow from the sale of the old equipment? (Do not round intermediate;calculations and round your answer to the nearest whole dollar.);Cash inflow $;e. What is the net cost of the new equipment? (Include the inflow from the sale of the old equipment.);(Do not round intermediate calculations and round your answer to the nearest whole dollar.);Net cost $;f. Determine the depreciation schedule for the new equipment. (Round the depreciation base and;annual depreciation answers to the nearest whole dollar. Round the percentage depreciation;factors to 3 decimal places.);Year;Depreciation;Base;Percentage;Depreciation;Annual;Depreciation;1 $ $;2;3;4;5;6;$;g. Determine the depreciation schedule for the remaining years of the old equipment. (Round the;depreciation base and annual depreciation answers to the nearest whole dollar. Round the;percentage depreciation factors to 3 decimal places.);Year;Depreciation;Base;Percentage;Depreciation;Annual;Depreciation;1 $ $;2;3;4;h. Determine the incremental depreciation between the old and new equipment and the related tax shield;benefits. (Enter the tax rate as a decimal rounded to 2 decimal places. Round all other answers;Assignment Print View 7/29/14, 10:57 PM;http://ezto.mheducation.com/hm.tpx Page 11 of 18;to the nearest whole dollar.);Year;Depreciation;on New;Equipment;Depreciation;on Old;Equipment;Incremental;Depreciation Tax Rate;Tax Shield;Benefits;1 $ $ $ $;2;3;4;5;6;i. Compute the aftertax benefits of the cost savings. (Enter the aftertax factor as a decimal rounded;to 2 decimal places. Round all other answers to the nearest whole dollar.);Year Savings (1 ? Tax Rate);Aftertax;Savings;1 $65,000 $;2 57,000;3 55,000;4 53,000;5 50,000;6 39,000;j-1. Add the depreciation tax shield benefits and the aftertax cost savings to determine the total annual;benefits. (Do not round intermediate calculations and round your answers to the nearest whole;dollar.);Year;Tax Shield;Benefits from;Depreciation;Aftertax;Cost Savings;Total Annual;Benefits;1 $ $;2;3;4;5;6;j-2. Compute the present value of the total annual benefits. (Do not round intermediate calculations;and round your answer to the nearest whole dollar.);Total annual benefits $;k-1. Compare the present value of the incremental benefits (j) to the net cost of the new equipment (e).;(Do not round intermediate calculations. Negative amount should be indicated by a minus sign.;Round your answer to the nearest whole dollar.);Net present value $;k-2. Should the replacement be undertaken?;Assignment Print View 7/29/14, 10:57 PM;http://ezto.mheducation.com/hm.tpx Page 12 of 18;14. award;2.00 points;15. award;2.00 points;Yes;No;View Hint #1;Worksheet Difficulty: Challenge;Learning Objective: 12-04 The net present;value and internal rate of return are;generally the preferred methods of capital;budgeting analysis.;Assume you are risk-averse and have the following three choices.;Expected;Value;Standard;Deviation;A $1,830 $ 970;B 2,760 1,850;C 1,680 1,330;a. Compute the coefficient of variation for each. (Round your answers to 3 decimal places.);Projects;Coefficient of;Variation;A;B;C;b. Which project will you select?;Project B;Project C;Project A;View Hint #1;Worksheet Difficulty: Basic;Learning Objective: 13-02 Most investors;are risk-averse, which means they dislike;uncertainty.;Myers Business Systems is evaluating the introduction of a new product. The possible levels of unit sales;and the probabilities of their occurrence are given next;Possible;Market Reaction;Sales in;Units Probabilities;Low response 30.30;Moderate response 45.20;High response 50.30;Very high response 75.20;Assignment Print View 7/29/14, 10:57 PM;http://ezto.mheducation.com/hm.tpx Page 13 of 18;16. award;3.00 points;17. award;2.00 points;a. What is the expected value of unit sales for the new product? (Do not round intermediate calculations;and round your answer to the nearest whole unit.);Expected value units;b. What is the standard deviation of unit sales? (Do not round intermediate calculations. Round your;answer to 2 decimal places.);Standard deviation units;View Hint #1;Worksheet Difficulty: Basic;Learning Objective: 13-01 The concept of;risk is based on uncertainty about future;outcomes. It requires the computation of;quantitative measures as well as qualitative;considerations.;Shack Homebuilders Limited is evaluating a new promotional campaign that could increase home sales.;Possible outcomes and probabilities of the outcomes are shown next.;Possible Outcomes;Additional;Sales in Units Probabilities;Ineffective campaign 50.30;Normal response 110.30;Extremely effective 130.40;Compute the coefficient of variation. (Do not round intermediate calculations. Round your answer to 3;decimal places.);Coefficient of variation;View Hint #1;Worksheet Difficulty: Basic;Learning Objective: 13-01 The concept of;risk is based on uncertainty about future;outcomes. It requires the computation of;quantitative measures as well as qualitative;considerations.;Five investment alternatives have the following returns and standard deviations of returns.;Alternatives;Returns;Expected Value;Standard;Deviation;A $ 1,820 $ 550;B 860 1,030;C 5,900 1,200;D 1,980 540;E 61,000 22,100;Assignment Print View 7/29/14, 10:57 PM;http://ezto.mheducation.com/hm.tpx Page 14 of 18;18. award;2.00 points;Calculate the coefficient of variation and rank the five alternatives from lowest risk to the highest risk by;using the coefficient of variation. (Round your answers to 3 decimal places.);Alternatives;Coefficient of;Variation Rank;A (Click to select);B (Click to select);C (Click to select);D (Click to select);E (Click to select);Worksheet Difficulty: Basic;Learning Objective: 13-01 The concept of;risk is based on uncertainty about future;outcomes. It requires the computation of;quantitative measures as well as qualitative;considerations.;Tim Trepid is highly risk-averse while Mike Macho actually enjoys taking a risk.;Investments;Returns;Expected Value;Standard;Deviation;Buy stocks $ 8,880 $ 6,030;Buy bonds 7,720 2,050;Buy commodity futures 17,200 23,200;Buy options 18,700 12,900;a-1. Compute the coefficients of variation. (Round your answers to 3 decimal places.);Coefficient of;Variation;Buy stocks;Buy bonds;Buy commodity futures;Buy options;a-2. Which one of the following four investments should Tim choose?;Buy bonds;Buy stocks;Buy commodity futures;Buy options;b. Which one of the four investments should Mike choose?;Buy bonds;Buy stocks;Buy commodity futures;Buy options;View Hint #1;Assignment Print View 7/29/14, 10:57 PM;http://ezto.mheducation.com/hm.tpx Page 15 of 18;19. award;2.00 points;20. award;2.00 points;Worksheet Difficulty: Basic;Learning Objective: 13-02 Most investors;are risk-averse, which means they dislike;uncertainty.;Mountain Ski Corp. was set up to take large risks and is willing to take the greatest risk possible. Lakeway;Train Co. is more typical of the average corporation and is risk-averse.;Projects;Returns;Expected Value;Standard;Deviation;A $269,000 $143,000;B 734,000 462,000;C 153,000 120,000;D 163,000 298,000;a-1. Compute the coefficients of variation. (Round your answers to 3 decimal places.);Coefficient of;Variation;Project A;Project B;Project C;Project D;a-2. Which projects should Mountain Ski Corp. choose?;Project A;Project B;Project D;Project C;b. Which one of the four projects should Lakeway Train Co. choose based on the same criteria of using;the coefficient of variation?;Project B;Project A;Project C;Project D;View Hint #1;Worksheet Difficulty: Basic;Learning Objective: 13-02 Most investors;are risk-averse, which means they dislike;uncertainty.;Waste Industries is evaluating a $53,800 project with the following cash flows.;Years Cash Flows;1 $ 9,240;2 15,900;3 22,600;4 21,300;5 33,000;Assignment Print View 7/29/14, 10:57 PM;http://ezto.mheducation.com/hm.tpx Page 16 of 18;21. award;2.00 points;The coefficient of variation for the project is.975.;Coefficient of;Variation Discount Rate;0?.25 4%;.26?.50 9%;.51?.75 10%;.76? 1.00 12%;1.01? 1.25 18%;Use Appendix B for an approximate answer but calculate your final answer using the formula and financial;calculator methods.;a. Select the appropriate discount rate.;4%;9%;10%;12%;18%;b. Compute the net present value. (Negative amount should be indicated by a minus sign. Do not;round intermediate calculations and round your answer to 2 decimal places.);Net present value $;c. Based on the net present value should the project be undertaken?;No;Yes;View Hint #1;Worksheet Difficulty: Intermediate;Learning Objective: 13-03 Because;investors dislike uncertainty, they will;require higher rates of return from risky;projects.;Dixie Dynamite Company is evaluating two methods of blowing up old buildings for commercial purposes;over the next five years. Method one (implosion) is relatively low in risk for this business and will carry a 11;percent discount rate. Method two (explosion) is less expensive to perform but more dangerous and will call;for a higher discount rate of 16 percent. Either method will require an initial capital outlay of $102,000. The;inflows from projected business over the next five years are given next.;Years Method 1 Method 2;1 $32,100 $17,600;2 38,500 25,500;3 47,800 40,400;4 35,100 37,000;5 20,600 72,200;Assignment Print View 7/29/14, 10:57 PM;http://ezto.mheducation.com/hm.tpx Page 17 of 18;22. award;2.00 points;Use Appendix B for an approximate answer but calculate your final answers using the formula and financial;calculator methods.;a. Calculate net present value for Method 1 and Method 2. (Do not round intermediate calculations and;round your answers to 2 decimal places.);Net Present Value;Method 1 $;Method 2 $;b. Which method should be selected using net present value analysis?;Method 1;Method 2;Neither of these;View Hint #1;Worksheet Difficulty: Intermediate;Learning Objective: 13-03 Because;investors dislike uncertainty, they will;require higher rates of return from risky;projects.;Debby?s Dance Studios is considering the purchase of new sound equipment that will enhance the;popularity of its aerobics dancing. The equipment will cost $26,300. Debby is not sure how many members;the new equipment will attract, but she estimates that her increased annual cash flows for each of the next;five years will have the following probability distribution. Debby?s cost of capital is 12 percent. Use Appendix;D for an approximate answer but calculate your final answers using the formula and financial calculator;methods.;Cash Flow Probability;$ 3,890.2;5,190.3;7,550.4;9,800.1;a. What is the expected value of the cash flow? The value you compute will apply to each of the five years.;Expected Cash Flow $;b. What is the expected net present value? (Negative amount should be indicated by a minus sign. Do;not round intermediate calculations and round your answer to 2 decimal places.);Net Present Value $;c. Should Debby buy the new equipment?;Yes;No;View Hint #1;Assignment Print View 7/29/14, 10:57 PM;http://ezto.mheducation.com/hm.tpx Page 18 of 18;23. award;2.00 points;Worksheet Difficulty: Intermediate;Learning Objective: 13-01 The concept of;risk is based on uncertainty about future;outcomes. It requires the computation of;quantitative measures as well as qualitative;considerations.;Highland Mining and Minerals Co. is considering the purchase of two gold mines. Only one investment will;be made. The Australian gold mine will cost $1,694,000 and will produce $359,000 per year in years 5;through 15 and $532,000 per year in years 16 through 25. The U.S. gold mine will cost $2,085,000 and will;produce $295,000 per year for the next 25 years. The cost of capital is 11 percent. Use Appendix D for an;approximate answer but calculate your final answers using the formula and financial calculator methods.;(Note: In looking up present value factors for this problem, you need to work with the concept of a deferred;annuity for the Australian mine. The returns in years 5 through 15 actually represent 11 years, the returns in;years 16 through 25 represent 10 years.);a-1. Calculate the net present value for each project. (Do not round intermediate calculations and;round your answers to 2 decimal places.);Net Present Value;The Australian mine $;The U.S. mine $;a-2. Which investment should be made?;Australian mine;U.S. mine;b-1. Assume the Australian mine justifies an extra 5 percent premium over the normal cost of capital;because of its riskiness and relative uncertainty of cash flows. Calculate the new net present value;given this assumption. (Negative amount should be indicated by a minus sign. Do not round;intermediate calculations and round your answer to 2 decimal places.);Net Present Value;The Australian mine $;b-2. Does the new assumption change the investment decision?;Yes;No;View Hint #1;Worksheet Difficulty: Challenge;Learning Objective: 13-01 The concept of;risk is based on uncertainty about future;outcomes. It requires the computation of;quantitative measures as well as qualitative;considerations.;D. member banks.;In the United States, all money is essentially the debt of government, commercial banks, and thrift institutions.;A. True;B. False;Currency and checkable deposits are;A. debts of the Federal Reserve Banks or of financial institutions.;B. redeemable for gold and silver from the Federal Reserve System.;C. of intrinsic value that determines the relative worth of money.;D. the major components of the M3 definition of the money supply.

 

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