Final Exam F09 Solution On line.doc

FINANCE 320?FALL, 2009 Final Exam NAME:______________________________________ How many Euros can you get for $2,100 if one euro is worth $1.2762? (10 points) $2,100 (?1/$1.2762) = ?1,645.51 If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:  Mutually exclusive What is the net present value of a project that has an initial cash outflow of $34,900 and the following cash inflows? The required return is 15.35 percent. (10 points)    With Financial calculator: CF0 = -$34,900; CF1 = $12,500; CF2 = $19,700; CF3 = 0; CF4 = $ 10,400; I/YR = 15.35%; Shift Solve for NPV = -$3,383.25 Page 2 Final Exam Finance 320 Fall 09 You are analyzing a project and have gathered the following data:     Compute the NPV and explain what you would recommend accepting or rejecting the project. (15 points) With Financial calculator: CF0 = -$175,000; CF1=$56,400; CF2 = $61,800; CF3 = $72,000; CF 4 = $75,000; I/YR = 14.5%, NPV = $12,995.84 Accept as it adds value to the firm. A firm evaluates all of its projects by applying the IRR rule. The required return for the following project is 21 percent.      What is the IRR and should the firm accept or reject the project? (10 points) 26.30 percent; acceptFinancial Calculator: CF0 = -$28,463; CF1 = $21,000; CF2 = $16,000; Cf3 = $4,000 Solve for IRR= 26.30% Accept. Page 3 Final Exam Finance 320 Fall 09 A project will produce an operating cash flow of $14,600 a year for 8 years. The initial fixed asset investment in the project will be $48,900. The net aftertax salvage value is estimated at $11,000 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 12 percent? (15 points) CF0= -$48,900; CF1-8 = $14,600; I/YR = 12%; Solve for NPV = $23,627.54 But we still have some value (salvage) at the end of year 8 so we have to discount this back to its present value and add it to the NPV of the cash flows FV = -$11,000 N=8 I/YR=12% Solve for PV = $4,442.72 Total NPV = $28,070.26 Jefferson & Sons is evaluating a project that will increase annual sales by $138,000 and annual costs by $94,000. The project will initially require $110,000 in fixed assets that will be depreciated straight-line to a zero book value over the 4-year life of the project. The applicable tax rate is 32 percent. What is the operating cash flow for this project? (10 points) OCF = ($138,000 - $94,000)(1 - 0.32) + ($110,000/4)(0.32) = $38,720 If we paid $1,200 to repair a machine last year, what is this an example of? (10 points) Sunk costs. On Friday evening, Bank A loans Bank B Eurodollars that must be repaid the following Monday morning. What is the most likely interest rate called to be charged on this loan? (10 points) LIBOR EXTRA CREDIT (5 points) According to your instructor, what is the most important financial concept you should have learned in this course? The power of the time value of money.