buad306 midterm 2

buad306 midterm 2 - BUAD 306 Spring 2008 Business Finance...

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BUAD 306 Business Finance Spring 2008 Midterm II INSTRUCTIONS You have one hour and fifty minutes to complete this exam. There are 22 questions . This exam is closed book and closed notes . You can use one two-sided formula sheet. Calculators are allowed. IMPORTANT : Provide your Student ID Number (or SSN) on both sides of the Scantron sheet. Copy all of your final answers onto the Scantron sheet. Please mark or erase properly to avoid mis-grades. Hand in questions, Scantron and formula sheet. This exam is taken under the Student Conduct Code, which stipulates: Any use of external assistance during an examination shall be considered academically dishonest unless expressly permitted by the instructor. The following are considered unacceptable examination behaviors: communicating with fellow students during an exam, copying material from another student’s exam, allowing another student to copy from an exam, possession or use of unauthorized notes, calculator, or other materials during exams and/or any behavior that defeats the intent of an exam or other classwork. Please sign your name below to acknowledge and accept the Student Conduct Code. SIGNATURE: (Please sign) NAME: KEY (Please print) STUDENT ID (or SSN):
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1. Elderkin & Martin is considering an investment which will cost $200,000. The investment produces no cash flows for the first year. In the second year, the cash inflow is $55,000. This inflow will increase to $120,000 and then $200,000 for the following two years before ceasing permanently. The firm requires a 14 percent rate of return and has a required discounted payback period of four years. The firm should _____ the project because the discounted payback period is _____ years. Accept or reject this project? Why? A. accept; 2.26 B. accept; 2.49 C. accept; 3.65 D. reject; 3.26 E. reject; 3.96 Year Cash Flow Discounted Cash Flow Cumulative DCF 1 0 0 0 2 55,000 42,320.71 42,320.71 3 120,000 80,996.58 123,317.30 4 200,000 118,416.06 241,733.35 5 200,000 103,873.73 345,607.08 The remainder after 3 years is 200,000 123,317.30 = 76,682.70. It is covered over 76,682.70/118,416.06 = 0.65 of the year. The payback is therefore 3.65. The required payback period is higher at 4 years. Accept the project 2. You are considering the following two mutually exclusive projects. The required rate of return is 10.75 percent for project A and 12 percent for project B. Which project should you accept and why? A. project A; because it has the lower required rate of return B. project A; because its NPV is about $796 more than the NPV of project B C. project B; because it has the larger NPV D. project B; because it returns all its cash flows within two years E. project B; because it is the largest sized project NPV A = $14,610.09, NPV B = $13,814.92 therefore A has about $796 more in NPV. 3. The discounted payback period of a project will decrease whenever the:
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buad306 midterm 2 - BUAD 306 Spring 2008 Business Finance...

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