Finance 258

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Finance 258
2011-01-31 22:22:19
Midterm Review

Finance Midterm Review 9-11
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  1. The internal Rate of return on a project is 11.24%.
    If the project is assigned a 9.5% discount rate....
    1) The profitability index will be greater than 1.0

    2) The initial investment is less than the market value of the project.

    3) The project will have a positive effect on shareholders if it is accepted.
  2. The primary idea behind the net present value rule is that an investment:
    is worthwhile if it created value for the owners
  3. The payback method:
    Is prejudiced towards short-term projects.
  4. The following statements are are true concerning the comparison between payback and discounted payback:
    1) From a financial point of view, the discounted payback method is preferred over the payback method

    2) The discounted method is more difficult to computer and this is not as widely used as the payback method.

    3) Both methods are biased towards liquidity.
  5. As the required rate of return increases, the:
    Profitability index decreases
  6. (Written Question)
    You are considering two independent projects both of which have been assigned a discount rate of 9%. Based on the profitability index, what is your recommendation concerning these projects?

    Project A: Year 0 -$42,500 : Year 1 $24,000 : Year 2 $24,000
    Project B: Year 0 -$45,000 ; Year 1 $15,000 : Year 2 $38,000
    PI A : 0.9934

    PI B : 1.02

    Project B is better
  7. (Written Question)
    Company is considering expanding its current line of business and has developed the following expected cash flows for the project. Should this project be accepted based on the discounting approach to the modified internal rate of return if the discount rate is 9.6%

    Year 0 -$487,900 : Year 1 $187,200 : Year 2 $229,900 : Year 3 -$27,300 : Year 4 $246,800
    MIRR = 20,736.29

    IRR = 11.87%

    Accept because the IRR is greater than 9.6%
  8. The cash flow from projects for a company is:
    The sum of the incremental operating cash flow, capital spending, and new working capital expenses incurred by the project
  9. The cash flow tax savings generated as a result of a firm's tax deductible depreciation expense is called:
    Depreciation tax shield
  10. The annual annuity stream of payments with the same present value as a project's costs is called the project's:
    Equivalent annual cost.
  11. Incremental cash flows are defined as:
    The changes in the firm's future cash flows that are a direct consequence of accepting a project.
  12. (Written Question)
    A project will increase the sales of Joe's shop by $50,000 and increase cash expenses by $36,000. The project will cost $30,000 and be depreciated using straight-line to a zero book value over the 3 year life of the project. The company has a marginal tax rate of 35%. What is the operating cash flow of the project using the tax shield approach?
    OCF = EBIT + Deprn - Taxes

  13. (Written Question)
    A project will produce operating cash flows of $60,000 a year for four years. During the life of the project, inventory will be lowered by $20,000 and accounts receivable will increase by $25,000. Accounts payable will decrease by $10,000. The project requires the purchase of equipment at an initial cost of $200,000. The equipment will depreciation straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating a $30,000 after tax cash flow. At the end of the project, net working capital will return to its normal level. What is the net present value of the project, given the required return of 12%?
  14. We calculated NPV based on a projects forecast cash flows. When doing what-is analysis, this initial estimate is called:
    Base case
  15. If you see a worst case scenario for a project, the analysis is likely using:
    Scenario analysis.
  16. A financial manager reviewing a project is concered about the level of forecasting risk in the project's estimated cash flows. The manager should use _________ to identify the variable that presents the highest degree of forecasting risk.
    Sensitivity analysis.
  17. What is NOT correct regarding break-even?
    If there is depreciation the cash break-even will exceed the accounting break even
  18. THe higher the degree of operating leverage.....
    1) The greater the risk of forecasting error

    2) The higher the break even point, regardless of how it is measured
  19. (Written Question)
    A project has an accounting break-even point of 1,600 units. The fixed costs are #3,200 and the depreciation expense is $200. The projected variable cost per unit is $20.50. What is the projected sales price?
  20. (Written Question)
    A company is considering expanding their operations. Fixed costs are estimated at $86,000 a year. The variable cost per unit is estimated at $18,50. The estimated sales price is $34.00 per unit. What is the cash break even point?
    5,548 units
  21. A company is considering a project with a discounted payback just equal to the project's life. The projections include a sales price of $13, variable cost per unit of $10.50 an fixed costs of $5,000. THe operating cash flow is $6,300. What is the break even quantity?
    4,520 units
  22. The fixed costs of a project are $6,000. The depreciation expense is $4,500 and the operating cash flow is $18,000. What is the degree of operating leverage for this project?
    DOL = 1.33