MU - S2 2003 - Business Finance

MU - S2 2003 - Business Finance - Office Use Only Monash...

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Office Use Only Monash University Semester Two Examinations 2003 Faculty of Business and Economics EXAM CODES: AFC2140 TITLE OF PAPER: BUSINESS FINANCE EXAM DURATION: 180 minutes writing time READING TIME 10 minutes THIS PAPER IS FOR STUDENTS STUDYING AT: (tick where applicable) ± Berwick ; Clayton ± Malaysia ± Distance Education ± Open Learning ± Caulfield ± Gippsland ± Peninsula ± Enhancement Studies ± Other (specify) INSTRUCTIONS TO CANDIDATES: This paper contains 8 questions. Students must answer ALL questions. Begin each question on a fresh page of the examination script book. A formula sheet is included which can be detached. Candidates are reminded that they should have no material on their desks unless their use has been specifically permitted by the following instructions: AUTHORISED MATERIALS CALCULATOR WITH NON-ALPHABETIC KEYBOARD ; YES ± NO OPEN BOOK/NOTES ± YES ; NO SPECIFICALLY PERMITTED ITEMS ± YES ; NO If yes, items permitted are: Candidates must complete this section if required to answer in this paper STUDENT ID __ __ __ __ __ __ __ __ DESK NUMBER __ __ __ __ SURNAME .............................................................. SIGNATURE. ............................................. OTHER NAMES (in full) . ............................................................................................................. Page 1 of 7
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QUESTION 1 A company is currently evaluating an investment opportunity. It has estimated the incremental operating net cash flows expected to be generated by the investment opportunity, and converted these in to present values by applying the appropriate required rate of return of 10% as the discount rate. Netting off the investment’s initial (and only) required outlay from the present value sum has produced an estimated net present value (NPV) of $100,000. (a) Explain what the NPV of $100,000 means for the company’s investors, both in present and future value terms. (b) An opportunity cost is a special case of an incremental cash flow. Explain what is meant by “incremental” cash flow in the context of opportunity costs. Provide a suitable example to aid your explanation. [4 + 4 = 8 marks] QUESTION 2 (a) A proposed project has an economic life of 8 years and a net present value of $250,000, assuming a discount rate of 12% per annum. (i) What is the equivalent annual value (EAV) of this project? (ii) What does EAV mean? (iii) How would the magnitude of the project’s EAV have compared to your answer to (a) if a discount rate of 10% per annum had instead been assumed? Explain. [2 + 1 + 1 = 4 marks] (b) The Carryaway supermarket chain is considering embarking upon an ambitious advertising campaign in the hope of increasing its market share. Advertising executives have proposed that an initial investment of $400,000 may well significantly increase Carryaway’s market share to the extent that Carryaway will increase its net cashflow by
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This note was uploaded on 08/25/2008 for the course AFF 3111 taught by Professor Smith during the Three '08 term at Monash.

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MU - S2 2003 - Business Finance - Office Use Only Monash...

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