Quiz.Chapter.9.Solutions.April 2006
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Quiz.Chapter.9.Solutions.April 2006

Course Number: CHAPTER 9 432, Spring 2012

College/University: DeVry Phoenix

Word Count: 320

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Accounting 202 Spring 2006 Quiz 9 Chapter 9 April 13, 2006 ANSWERS Last Name:______________________ 1. First Name: ____________________ A project will require an initial investment of $750,000 and will return $200,000 each year for five years. If taxes are ignored and the required rate of return is 9%, what is the projects net present value? Based on this analysis, should the company proceed with the project?...

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202 Spring Accounting 2006 Quiz 9 Chapter 9 April 13, 2006 ANSWERS Last Name:______________________ 1. First Name: ____________________ A project will require an initial investment of $750,000 and will return $200,000 each year for five years. If taxes are ignored and the required rate of return is 9%, what is the projects net present value? Based on this analysis, should the company proceed with the project? Answer ($200,000 * 3.8897) - $750,000 = $27,940 Yes, since the net present value is greater than zero, the company should proceed with the project. 2. A project will require an initial investment of $600,000 and is expected to generate the following cash flows: Year 1 $100,000 Year 2 $250,000 Year 3 $250,000 Year 4 $200,000 Year 5 $100,000 a) What is the projects payback period? Answer $100,000 + $250,000 + $250,000 = $600,000, so the payback period is three years. b) If the required rate of return is 20% and taxes are ignored, what is the projects net present value? Answer: ($600,000) * 1.000 = $100,000 * 0.8333 = $250,000 * 0.6944 = $250,000 * 0.5787 = $200,000 * 0.4823 = $100,000 * 0.4019 = Net present value ($600,000) 83,330 173,600 144,675 96,460 40,190 ($61,745) 3. An investment of $185,575 is expected to generate returns of $65,000 per year for each of the four next years. What is the investments internal rate of return? Answer $185,575 / $65,000 = 2.855 at 4 years = 15% 4. Ski Company had revenues of $900,000 and expenses of $700,000 last year. The expenses included $120,000 of depreciation expense. The company pays taxes at the 35% rate. What is the companys cash flow? Answer $900,000 - $700,000 [(0.35) * ($900,000 $700,000)] + $120,000 = $250,000 5. Sun Company is considering an investment that will generate cash revenues of $100,000 per year for 8 years, and have cash expenses of $70,000 per year for 8 years. The cost of the asset is $80,000, and it will be depreciated using straightline depreciation over its 8 year life. Sun pays income taxes at a rate of 30%. The cost of capital is 12% a) Prepare a schedule showing the annual after tax cash flow associated with this asset. Answer Cash Revenues -Cash Expenses -Depreciation Income before tax -Tax Net income +Depreciation Cash flow $ $ $ $ $ $ $ $ 100,000 70,000 10,000 20,000 6,000 14,000 10,000 24,000 b) Compute the net present value of this investment using the cash flow you computed in par (a) above. Answer: -80,000 + (24,000 *4.9676) = $39,222 c) Compute the accounting rate of return on average investment for this project. Answer: 14,000/((80,000 + 0)/2) = 35%
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