FIN 630 EXAM 1,

Alagie Darboe
2/15/2014
Q 1)
Information from the Question:
Initial Investment
$100,000
Req. Rate of Return
14%
Compute the payback period, discounted payback period and the net present value.
Should the project be accepted?
Year
Cash flow

1
10,000

Answer:
Payback Period
Initial Investment
Net cash flow

2
20,000

3
25,000

Year
100,000
10,000
90,000
20,000
70,000
25,000
45,000
27,000
18,000
32,000
4.56 years

Net cash flow

Net cash flow
Net cash flow
Net cash flow
Payback Period

0.56

Discounted Payback Period

Year
Initial Investment
$

$100,000
8,771.93

4
27,000

5
6
7
32,000 45,000 48,000

8
50,000

$91,228.07
$
15,389.35
$75,838.72
$
16,874.29
$58,964.43
$
15,986.17
$42,978.26
$
16,619.80
$26,358.47
$
20,501.39
$5,857.07
$
19,182.59
Discounted Payback Period

Cash Flow
1
2
3
4
5
6
7
8

$
$
$
$
$
$
$
$

Cash
($100,000)
10,000.00
20,000.00
25,000.00
27,000.00
32,000.00
45,000.00
48,000.00
50,000.00

The NPV =
$ 130,853.47
The Project should be accepted

0.31
6.31 Years

Cummulative
Cash flow
$
$
$
$
$
$
$
$

10,000.00
30,000.00
55,000.00
82,000.00
114,000.00
159,000.00
207,000.00
257,000.00

PV
$
$
$
$
$
$
$
$

8,771.93
15,389.35
16,874.29
15,986.17
16,619.80
20,501.39
19,182.59
17,527.95

Cummulative PV
$
8,771.93
$ 24,161.28
$ 41,035.57
$ 57,021.74
$ 73,641.53
$ 94,142.93
$ 113,325.52
$ 130,853.47

FIN 630 EXAM 1,

Alagie Darboe
2/15/2014
Q 2) Smith Corporation:
Cost of Capital
Acc. Rate of Return
Asset life
Straight line Depreciation
Corporate Tax
TOY Line
X
Y
Z

23.7
Informtion from the Question:
12%
20%
5 years
35%
Investment
5,000
7,500
4,000

Year 1
800
1,250
600

Year 2
1,000
3,000
1,200

Year 3
Year 4 Year 5
350
1,250
3,000
2,500
5,000
5,000
1,200
2,400
3,000

a) Calculate the accounting rate of return on the toy line. Which toy lines are acceptable according
to this criterion?
Answer:
Project X Project Y Project Z
Total at Cash Flow
6,400
16,750
8400
Total Depreciation
5,000
7,500
4,000
Net Income
1,400
9,250
4,400
Average Net Income
280
1850
880
Account rate of income =
5.60%
24.67%
22.00%
Projects Y and Z are acceptable based on on a 20% accounting rate of return.
b) Calculate the payback period for all the toy lines. All toy line with payback period of fewer than
4 years are acceptable. Which is acceptable using this criterion?
Toy Line
Initial Investment

Year

X
5,000

Y
7,500

Z
4,000

Cash Flow

Cash Flow

Cash Flow

Cash Flow

Cash Flow

800
4,200
1,000
4,200
350
3,850
1,250
2,600
3,000

Payback Period
Projects Y and Z are acceptable using this criterion

1
1
1
1

1,250
6,250
3,000
3,250
2,500
750
5,000

1
1
1
0.15

Year
1
2
3
4
5

NPVs
Projects Y and Z are acceptable.

1
1
1
0.42

0.87
4.87

3.15

c) Calculate all the toy line's NPV's. Which are acceptable according to this criterion?
Answer:
Assuming Depreciation has already been incorporated, the NPVs are as computed below:
Project

600
3,400
1,200
2,200
1,200
1,000
2,400

X
Y
Z
$ (5,000) $ (7,500) $ (4,000)
800
1,250
600
1,000
3,000
1,200
350
2,500
1,200
1,250
5,000
2,400
3,000
5,000
3,000
($742.72) $3,801.83 $1,574.01

d) Calculate all the toy line's IRR's. Which are acceptable according to this criterion?
Toy Line
X
Y
Z
IRRs =
7.00%
27.00%
23.37%
Projects Y and Z are acceptable
e) Which toy line (s) should chosen?
Using the NPV rule, the Firm should accept projects Y and Z

3.42

FIN 630 EXAM 1

Alagie Darboe
2/15/2014
Q 3) Gilford, Inc.
Cost of Capital
Tax Rate
Straight line Depreciation used
Cost of New Tracking System
ITC
Old Tracking can be sold for
Cost of Old Tracking System
It is aged
Life
Year
$

Information from the Question:

10%
35%
5 years
$ 1,400,000.00
15%
$ 250,000.00
1,000,000
3 years
5 years
1
2
3
250,000.00 250,000.00 200,000.00

Dep/Year

Dep/Year

280,000

200,000

4
200,000.00

5
200,000.00

a) What is the net investment required in the new tracking system?

Answer:
Net Investment = Cost - Salvage(old) + Tax from sale of old
cost of new Tracking System
sale price of old Tracking System
tax from sale of old
Net Investment

1,400,000
(250,000)
(52,500)
$ 1,097,500.00

b) What are the incremental operating cash flows associated with new system?
Answer:

Book value of old Tracking System

cost of Old
3 yrs old SL D/E
Book value of old Tracking
Old Tracking System can be sold for
proceeds/loss
tax rate
tax

1,000,000
600,000
400,000
250,000
(150,000)
35%
(52,500)

Incremental CF's = after tax savings + (tax x net depreciation)

discount rate
10%

Net Before Tax cost Savings

Tax at 35% tax rate
ITC tax credit yr 1
after tax savings
add: (tax x depre) of new Tracking
CF
Salvage value of new machine
tax on salvage value
Incremental CF's
PV =
Net Investment
NPV =

Year
$

1
250,000
87,500
210,000
(47,500)
98,000
50,500

2
250,000
87,500
210,000
(47,500)
98,000
50,500

3
200,000
70,000

4
200,000
70,000

5
200,000
70,000

130,000
98,000
228,000

130,000
98,000
228,000

50,500

50,500

228,000

228,000

130,000
98,000
228,000
90,000
31,500
349,500

$631,683.47
(1,097,500.00)
($465,816.53) The new Tracking System should not be purchased

c. If the new Tracking System's salvage value at the end of 5 years is projected to be
$90,000, should Gilford purchase it?
Answer:
salvage value
$
90,000
Book Value
cost
1,400,000
5 yr life D/E
1,400,000
Book value
Pay tax on:
tax rate
tax amt

90,000 salvage - BV
35%
31,500

1
1
1
1
3
10
4
21

0.79

23.7

FIN 630 EXAM 1,

Alagie Darboe
2/15/2014

Q 4) HP
Information from the Question:
Duration of the project
10 years
Sales Revenue
$
200,000.00
Growth rate of Sale Rev.
10% per year
until the
Revenue will decline by
15% per year
until the
Cost of product is
65% of Sales
Expenses are projected at
15% of Sales
at start
and projected to decline to
10% of Sales
in all years after 3 years (start year 4
Avertising cost expected at
40% of Sales
in year 1 -3 and then
Decline to
10,000 per year
in years 4 - 6 then zero after that
Cost of Initial Investment
$
250,000.00
Installation cost
$
10,000.00
Deprecition over the life of the project
No Salvage value
Company tax
35%
Cost of Capital
10%
a) Calculate the net income and operating cash flow associated with this project
Answer:
Discount Rate
Equipment purchase
Installation costs
Revenue/Sales
COGS @ 65% of sales
Gross Margin
SG&A start@ 15% sale and Decline
to 10% of sale in all yrs after 3yrs
Advertising cost
D/E on equipment; 10 yr life, SL
D/E on installation, 5 yr life, SL
Initial costs/expenses on equipment
EBIT
Taxes @ 35%
Net Income
Add back:
Deprec
OCF's
PV =

10%
0
(250,000)
(10,000)

$161,564.43

$ 200,000 $
(130,000)
70,000

220,000
(143,000)
77,000

(30,000)
(80,000)
(25,000)
(2,000)

(33,000)
(88,000)
(25,000)
(2,000)

(67,000)
23,450
(43,550)

(71,000)
24,850
(46,150)

27,000
(16,550)

27,000
(19,150)

b) What is the NPV of the project?

Answer:
Cost today:
Equipment cost
Installation
Initial expensed costs
Tax on the exp initial costs
Net Investment
PV
Less: investment
NPV:

250,000
10,000
250,000 given
(87,500)
422,500
$161,564.43
(422,500)
($260,936) The project should be rejected.

c) What is the IRR of the project?

Answer:
Initial Investment cost
Cash Flows
IRR =

(260,000)
349,123
34%

d) Is the project acceptable? Which method did you base your answer on?
Answer:
Base on the NPV, the project should be rejected
e) Assume 3% rate of inflation for all variabe items in the P&L. Calculate the net income, operating cash
flow, NPV and IRR of the project? Is the project acceptable with inflation?
Answer:
Discount Rate
Equipment purchase
Installation costs
Revenue/Sales
COGS @ 65% of sales
Gross Margin
SG&A start@ 15% sale and Decline
to 10% of sale in all yrs after 3yrs
Advertising cost (3% inflation)
D/E on equipment; 10 yr life, SL
D/E on installation, 5 yr life, SL
Initial costs/expenses on equipment
EBIT
Taxes @ 35%
Net Income

10%
0
(250,000)
(10,000)

$ 200,000 $
(130,000)
70,000

220,000
(143,000)
363,000

(30,000)
(80,000)
(25,000)
(2,000)

(33,000)
(82,400)
(25,000)
(2,000)

(67,000)
23,450
(43,550)

220,600
(77,210)
143,390

Add back:
Deprec
OCF's
PV =

27,000
(16,550)

27,000
170,390

$1,243,484

What is the NPV of the project with inflation @ 3%?

Cost today:
Equipment cost
Installation
Initial expensed costs
Tax on the exp initial costs
Net Investment

PV
Less: investment
NPV:

250,000
10,000
250,000 given
(87,500)
422,500
$1,243,484
(422,500)
$820,984 The project should be accepted.

What is the IRR of the project with inflation @ 3%?

Initial Investment cost
Cash Flows
IRR =
The project is acceptable with inflation.

(260,000)
2,226,163
756%

final two
years
the termination of the project

years after 3 years (start year 4)

ar 1 -3 and then
ars 4 - 6 then zero after that

$ 242,000 $ 266,200 $ 292,820 $ 322,102 $ 354,312.20 $ 389,743

(157,300)
(173,030)
(190,333)
(209,366)
(230,303)
(253,333)
84,700
93,170
102,487
112,736
124,009
136,410
(36,300)
(96,800)
(25,000)
(2,000)

(26,620)
(10,000)
(25,000)
(2,000)

(29,282)
(10,000)
(25,000)
(2,000)

(32,210)
(10,000)
(25,000)

(35,431)
0
(25,000)

(38,974)
0
(25,000)

(75,400)
26,390
(49,010)

29,550
(10,343)
19,208

36,205
(12,672)
23,533

45,526
(15,934)
29,592

63,578
(22,252)
41,326

72,436
(25,353)
47,083

27,000
(22,010)

27,000
46,208

27,000
50,533

25,000
54,592

25,000
66,326

25,000
72,083

be rejected.

he net income, operating cash

$ 242,000 $ 266,200 $ 292,820 $ 322,102 $ 354,312.20 $ 389,743

(157,300)
(173,030)
(190,333)
(209,366)
(230,303)
(253,333)
399,300
439,230
483,153
531,468
584,615
643,077
(36,300)
(84,872)
(25,000)
(2,000)

(26,620)
(87,418)
(25,000)
(2,000)

(29,282)
(90,041)
(25,000)
(2,000)

(32,210)
(92,742)
(25,000)
0

(35,431)
(95,524)
(25,000)
0

(38,974)
(98,390)
(25,000)
0

251,128
(87,895)
163,233

298,192
(104,367)
193,825

336,830
(117,891)
218,940

381,516
(133,531)
247,986

428,660
(150,031)
278,629

480,712
(168,249)
312,463

27,000
190,233

be accepted.

27,000
220,825

27,000
245,940

25,000
272,986

25,000
303,629

25,000
337,463

10

$ 331,281.91 $ 281,590
(215,333)
(183,033)
115,949
98,556
(33,128)
0
(25,000)

(28,159)
0
(25,000)

57,820
(20,237)
37,583

45,397
(15,889)
29,508

25,000
62,583

25,000
54,508

10

$ 331,281.91 $ 281,590
(215,333)
(183,033)
546,615
464,623
(33,128)
(101,342)
(25,000)
0

(28,159)
(104,382)
(25,000)
0

387,145
(135,501)
251,644

307,082
(107,479)
199,603

25,000
276,644

25,000
224,603

FIN 630 EXAM 1,

Alagie Darboe
2/15/2014
Q 5) Hamond Company:
Summary of Information from the question:
Price of New Machine
$ 1,300,000.00
Sales Revenu before New Machine
$ 1,800,000.00
Sales Revenu with New Machine
$ 2,200,000.00 annually for the next five years
Before tax and before depreciation
profit margin on sales, old and new is
30%
Working capital after new machine
20%
Overhead cost will be cut by
$
20,000.00 per year for the next five years
Working capital will also be captured at the end of the five years
Old equipment was purchased for
$ 900,000.00
3 years ago and being depreciated on
straight-line basis over a 5 year life
and expected to be sold today for
$ 200,000.00
New equipment will also be depreciated over a five year period
Company Tax rate is
35%
Cost of Capital is
14%
Investment tax credit equals to
10% of purchase price of the new equipment
a) What is the net investment required in this new equipment? (assume bothe pieces of equipment
are being depreciated to zero salvage value)
Answer:
Cost of new Equipment
1,300,000
depre/yr
ITC
10% first year
ITC reduces Hemond's taxes by an amt = to 10% of equipment purchase price
old Equipment can be sold for
200,000
cost of old computer
900,000 3 years old depre/yr
life
5 yrs
both Machines have -0- salvage value

260,000
130,000 ITC amt yr 1
180,000

no ITC on old Machine

Net Investment = Cost - Salvage(old) + Tax from sale of old
Cost of new Machine
Sale price of old Machine
Tax from sale of old
Net Investment

Book value of old Machine

Cost of Old
3 yrs old SL D/E
Book value of old Machine
Old Machine can be sold for
proceeds/loss
Tax rate
Tax

1,300,000
200,000
(56,000)
$ 1,444,000.00

900,000
540,000
360,000
200,000
(160,000)
35%
(56,000)

b) What are the operating cash flows for each of the next five years?
Answer:
Sales
Before Tax & Dep. Profit Margin
Depre. Of Old Machine
Depre. Of New Machine
Net Depreciation
Profit Before Tax
Tax at 35% tax rate
ITC tax credit yr 1
after tax savings
add: dep.
Working Capital @ 20%
Expected Proceeds of Old Machine
OCF

Without New

With New
Year 1
Year 2
Year 3
1,800,000 2,200,000 2,200,000
540,000.0
660,000
660,000
180,000
180,000
260,000
260,000
80,000
80,000
580,000
580,000
189,000.00
203,000
203,000
130,000
333,000
377,000
80,000
80,000

413,000

457,000

c) Taking your analysis into account, based on the information, Should Hamond Company replace
its current equipment?

Answer: Based on my analysis Hamond Company she replace the current Equipment.

2,200,000
660,000
180,000
260,000
80,000
580,000
203,000

Year 4
Year 5
2,200,000 2,200,000
660,000
660,000
180,000
180,000
260,000
260,000
80,000
80,000
580,000
580,000
203,000
203,000

377,000
80,000

377,000
80,000

457,000

457,000

377,000
80,000
440,000
200,000
1,097,000

FIN 630 EXAM 1,

Alagie Darboe
2/15/2014
Q 6) Big G Copper Mining Company:
Price for Copper
Cost to produce Copper
Gross margin on Copper
Average Production per year
Estimated life of mine
Req. rate of return on Copper mines

Summary of Information from the question:

$
4.00 per pound
$
2.50 per pound
$
1.50 per pound
100,000 pounds
10 yrs.
15%

part b)
yr 1
y2 y2
$ 4.00 $ 4.00
$ 3.25 $ 4.23
$ 0.75 $ (0.23)

a) What is the value of the copper mine?

10 years of payments at $1.50/pound
G.M on Copper
Average Production per year
GM on Copper for 1 yr.
PVIFA
Value of the Mine

1.50
100,000 pounds
$150,000
5.0188
$ 752,820

15% and 10 yrs.

http://www.miniwebtool.com/pvifa-calculator/?r=15 & n=10

b) What value of the mine ifthe cost to produce increases by 30% per year, every year. And no change
in the price of copper? The required rate of return for the copper mine also increases to 18%
We will only run the mine yr 1, as lose money yr 2 thereafter
10 years of payments at $1.50/pound
Gross margin on Copper
$
0.75
Average Production per year
100,000 pounds
GM on Copper for 1 yr.
$75,000
PVIFA
4.4941
Value of the Mine
$ 337,058

18 and 10 yrs.
http://www.miniwebtool.com/pvifa-calculator/?r=18 & n=10