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BUSI 320 Corporate Finance Online Exam Week 6

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Question;Assignment Print View 7/29/14;10:57 PM;award;1. 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;Learning;Objective: 12-02 Cash flow rather;Worksheet Difficulty;Basic than earnings is used in the;capital;budgeting;decision.;award;2. 1.00;point;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;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;Learning;Objective: 12-03 The payback;Worksheet Difficulty;Basic method considers the importance of;liquidity;but fails to consider the time value;of money.;award;3. 2.00;points;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;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;Learning Objective: 12-03 The payback;Worksheet method;considers the importance of liquidity, but fails to consider the time value;of money.;Learning Objective: 12-04 The net present;Difficulty: Basic value and internal rate of return are;generally the preferred methods of capital;budgeting analysis.;award;4. 1.00;point;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;Learning;Objective: 12-04 The net present;Worksheet Difficulty;Basic value and internal rate of return;are;generally;the preferred methods of capital;budgeting;analysis.;award;5. 1.00;point;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 %;b. With a;cost of capital of 15 percent, should the equipment be purchased?;Yes;No;Learning;Objective: 12-04 The net present;Worksheet Difficulty;Basic value and internal rate of return;are;generally;the preferred methods of capital;budgeting;analysis.;award;6. 2.00;points;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;Learning;Objective: 12-04 The net present;Worksheet Difficulty;Intermediate value and internal rate of;return are;generally;the preferred methods of capital;budgeting;analysis.;award;7. 1.00;point;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;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;Learning;Objective: 12-04 The net present;Worksheet Difficulty;Intermediate value and internal rate of;return are;generally;the preferred methods of capital;budgeting analysis.;award;8. 2.00;points;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 $;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;Learning;Objective: 12-04 The net present;Worksheet Difficulty;Challenge value and internal rate;of return are;generally;the preferred methods of capital;budgeting;analysis.;award;9. 4.00;points;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;three-year 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.);Earnings;before depreciation and taxes $ Year 1 $ Year 2 $ Year;3 $ Year;4;Depreciation;Earnings;before taxes $ $ $ $;Taxes;$;Earnings;after taxes $ $ $;Depreciation;Cash;flow $ $ $ $;View;Hint #1;Learning;Objective: 12-02 Cash flow rather;Worksheet Difficulty: Challenge than;earnings is used in the capital;budgeting;decision.;award;10. 2.00 points;The Summitt Petroleum;Corporation will purchase;an asset that;qualifies for three-year;MACRS;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;Learning;Objective: 12-04 The net present;Worksheet Difficulty;Challenge value and internal rate;of return are;generally;the preferred methods of capital;budgeting analysis.;award;11. 2.00 points;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;Learning;Objective: 12-02 Cash flow rather;Worksheet Difficulty;Challenge than earnings is used in;the capital;budgeting;decision.;award;12. 3.00 points;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;Kd (aftertax) Weights;Debt 8.20% 25%;Preferred stock Kp 12.80 15;Common equity Ke;(retained earnings) 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.);Depreciation Percentage Annual;Year Base Depreciation 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;http://ezto.mheducation.com/hm.tpx Page 8 of 18;Assignment Print View 7/29/14;10:57 PM;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.;award;13. 5.00 points;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 $;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.);Depreciation Percentage Annual;Year Base Depreciation 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.);Depreciation Percentage Annual;Year Base Depreciation 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;to the nearest whole dollar.);Depreciation Depreciation;on;New on;Old Incremental Tax Shield;Year Equipment Equipment Depreciation Tax Rate 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.);Aftertax;Year Savings (1 ? Tax Rate) 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.);Tax;Shield;Benefits;from Aftertax Total Annual;Year Depreciation Cost Savings 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?;Yes;No;View Hint #1;Learning;Objective: 12-04 The net present;Worksheet Difficulty;Challenge value and internal rate;of return are;generally;the preferred methods of capital;budgeting analysis.;award;14. 2.00 points;Assume you are risk-averse and have the following three;choices.;Expected Standard;Value 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.);Coefficient;of;Projects Variation;A;B;C;b. Which project will you select?;Project;B;Project;C;Project;A;View Hint #1;Learning;Objective: 13-02 Most investors;Worksheet Difficulty;Basic are risk-averse, which means they;dislike;uncertainty.;award;15. 2.00 points;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 Sales;in;Market Reaction Units Probabilities;Low response 30.30;Moderate response 45.20;High response 50.30;Very high response 75.20;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;Learning;Objective: 13-01 The concept of;risk;is based on uncertainty about future;Worksheet Difficulty;Basic outcomes. It requires the;computation of;quantitative;measures as well as qualitative;considerations.;award;16. 3.00 points;Shack Homebuilders Limited is evaluating a new promotional;campaign that could increase home sales. Possible outcomes and probabilities of;the outcomes are shown next.;Additional;Possible Outcomes 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;Learning;Objective: 13-01 The concept of;risk;is based on uncertainty about future;Worksheet Difficulty;Basic outcomes. It requires the;computation of;quantitative;measures as well as qualitative;considerations.;award;17. 2.00 points;Five investment alternatives have the following returns and;standard deviations of returns.;Returns: Standard;Alternatives Expected;Value Deviation;A $ 1,820 $ 550;B 860 1,030;C 5,900 1,200;D 1,980 540;E 61,000 22,100;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.);Coefficient;of;Alternatives Variation Rank;A;(Click;to select);B;(Click;to select);C;(Click;to select);D;(Click;to select);E;(Click;to select);Learning;Objective: 13-01 The concept of;Worksheet risk;is based on uncertainty about future;Difficulty;Basic outcomes. It requires the;computation of;quantitative;measures as well as qualitative;considerations.;award;18. 2.00 points;Tim Trepid is highly risk-averse while Mike Macho actually;enjoys taking a risk.;Returns: Standard;Investments Expected;Value 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.;a-2.;Compute the coefficients of variation. (Round your answers;to 3 decimal places.);Coefficient of;Variation;Buy stocks;Buy bonds;Buy commodity futures;Buy options;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;Learning;Objective: 13-02 Most investors;Worksheet Difficulty;Basic are risk-averse, which means they;dislike;uncertainty.;award;19. 2.00 points;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.;Returns: Standard;Projects Expected;Value 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;Learning;Objective: 13-02 Most investors;Worksheet Difficulty;Basic are risk-averse, which means they;dislike;uncertainty.;award;20. 2.00 points;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;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;Learning;Objective: 13-03 Because;Worksheet Difficulty;Intermediate investors dislike;uncertainty, they will;require;higher rates of return from risky;projects.;award;21. 2.00 points;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;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;Learning;Objective: 13-03 Because;Worksheet Difficulty;Intermediate investors dislike uncertainty;they will;require;higher rates of return from risky;projects.;award;22. 2.00 points;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;Learning;Objective: 13-01 The concept of;Worksheet Difficulty;Intermediate risk is based on uncertainty;about future;outcomes.;It requires the computation of;quantitative;measures as well as qualitative;considerations.;award;23. 2.00 points;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;Learning;Objective: 13-01 The concept of;risk;is based on uncertainty about future;Worksheet Difficulty;Challenge outcomes. It requires the;computation of;quantitative;measures as well as qualitative;considerat

 

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