Practice Exam_FIN3CFI_Solutions.pdf - LA TROBE UNIVERSITY...

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1 LA TROBE UNIVERSITY PRACTICE EXAM PAPER I have just included 7 question in this PRACTICE EXAM paper. Please look at the revision lecture to understand the type of Questions you will have in the final exam. ALLOWABLE MATERIALS Number Description 2 Non‐programmable calculator permitted. 18 Students from non‐English speaking backgrounds can bring unmarked, non‐electronic translation dictionaries into the examination (non‐subject specific). INSTRUCTIONS TO CANDIDATES 1 CANDIDATES SHOULD ANSWER ANY FIVE (5) QUESTIONS FROM SEVEN (7) QUESTIONS. 2. EACH QUESTION IS WORTH 20 MARKS. ALLOW ABOUT 36 MINUTES FOR EACH QUESTION. 3. PLEASE, TICK THE NUMBER OF THE QUESTION THAT HAS BEEN ANSWERED ON THE FRONT OF EACH ANSWER BOOK. This paper MUST NOT BE REMOVED from the examination venue
2 ANSWER ANY FIVE (5) QUESTIONS FROM SEVEN (7) QUESTIONS Question One (a) Year T=0 T=1 T=2 T=3 Machine Costs -60000 Maintenance Costs -5000 -5000 -5000 Tax benefit on Maintenance Costs 1500 1500 1500 Tax benefit on Depreciation 6000 6000 6000 NCF 2500 2500 2500 NPV = -54196 EAC = -54196/2.3216 = -23344 (b) (i) The base-case NPV is: NPV = $ 1,800,000 + $ 420,000(PVIFA 16%,10 ) NPV = $ 229,955.54 (ii) We would abandon the project if the cash flow from selling the equipment is greater than the present value of the future cash flows. We need to find the sale quantity where the two are equal, so: $ 1,400,000 = ( $ 60)Q(PVIFA 16%,9 ) Q = $ 1,400,000/[ $ 60(4.6065)] Q = 5,065 Abandon the project if Q < 5,065 units, because the NPV of abandoning the project is greater than the NPV of the future cash flows. iii) If the project is a success, present value of the future cash flows will be: PV future CFs = $ 60(9,000)(PVIFA 16%,9 ) PV future CFs = $ 2,487,533.69 If the quantity sold is 4,000, we would abandon the project, and the cash flow would be $ 1,400,000. Since the project has an equal likelihood of success or failure in one year, the expected value of the project in one year is the average of the success and failure cash flows, plus the cash flow in one year, so: Expected value of project at year 1 = [( $ 2,487,533.69 + $ 1,400,000)/2] + $ 420,000 Expected value of project at year 1 = $ 2,363,766.85 The NPV is the present value of the expected value in one year plus the cost of the equipment, so: NPV = $ 1,800,000 + ( $ 2,363,766.85)/1.16 NPV = $ 237,730.04 If we couldn ’t abandon the project, the present value of the future cash flows when the quantity is 4,000 will be: PV future CFs = $ 60(4,000)(PVIFA 16%,9 )
3 PV future CFs = $ 1,105,570.53 The gain from the option to abandon is the abandonment value minus the present value of the cash flows if we cannot abandon the project, so: Gain from option to abandon = $ 1,400,000 1,105,570.53 Gain from option to abandon = $ 294,429.47 We need to find the value of the option to abandon times the likelihood of abandonment. So, the value of the option to abandon today is: Option value = (.50)( $ 294,429.47)/1.16 Option value = $ 126,909.25 Question Two (a) (i) 200,000 is the sunk cost, ignore it Time=0 (Initial Cash flow) Cost of new machine (17.6) M Cost of Land (1.5) M NWC (4) M NET CASH FLOW (23.1) M (ii) In Million (M) T=1 T=2 T=3 T=4 T=5 T=6 T=7 Revenue 48 48 48 48 48 48 48 Variable costs 26.4 26.4 26.4 26.4 26.4 26.4 26.4 Fixed Costs 5.4 5.4 5.4 5.4 5.4 5.4 5.4 Depreciation 2.2 2.2 2.2 2.2 2.2 2.2 2.2 EBIT 14 14 14 14 14 14 14 - Taxes (30%) 4.2 4.2 4.2 4.2 4.2 4.2 4.2 EBIAT 9.8 9.8 9.8 9.8 9.8 9.8 9.8 + Depreciation 2.2 2.2 2.2 2.2 2.2 2.2 2.2 NET CASH FLOW 12 12 12 12 12 12 12 (iii) Time = 8 (Terminal cash flow) ($M) Salvage Value 4.7

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