BAUD 306
–
Midterm I
Practice Problems
Chapter 9
You are analyzing a proposed project and have compiled the following information:
Year
Cash flow
0
$145,000
1
$ 33,400
2
$ 70,500
3
$ 82,100
Required payback period
3 years
Required return
9.50 percent
1.
What is the net present value of the proposed project?
a. $6,239.12
b. $6,831.84
c. $8,221.29
d. $8,376.91
2.
What is the discounted payback period?
3.
Should the project be accepted based on the internal rate of return (IRR)? Why or why not?
4.
Should the proposed project be accepted based on the profitability index (PI)? Why or why not?
5.
Should the proposed project be accepted based on the payback period? Why or why not?
a. yes; The payback period is greater than the required payback period.
b. yes; The payback period is less than the required payback period.
c. no; The payback period is greater than the required payback period.
d. no; The payback period is less than the required payback period.
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Chapter 10
1.
You just purchased some new equipment costing $459,000. The equipment is classified as 7year property for
MACRS. What is the total accumulated depreciation expense at the end of year 2?
MACRS 7year property
Year
Rate
1
14.29%
2
24.49%
3
17.49%
4
12.49%
5
8.93%
6
8.93%
7
8.93%
8
4.45%
2.
A proposed project is expected to decrease accounts receivable by $10,000, decrease inventory by $4,000, and
increase accounts payable by $6,000. What is the amount of the initial cash flow for this project?
3.
Last year, Bottlers, Inc. purchased land located beside their factory at a price of $1,500,000 plus $250,000 in
real estate fees. Today, the land has a market value of $2,000,000. The company is now considering building a new
warehouse on that land. The construction cost of the warehouse is estimated at $675,000. In addition, $90,000 worth
of grading will be required to prepare the construction site. What is the initial cash flow of this project?
4.
You are analyzing a proposed 4year project. You expect to sell 20,000 units per year at an average selling
price of $5 per unit. The initial cash outlay for fixed assets will be $120,000. These assets will be depreciated using
straightline depreciation to a zero book value over the life of the project. The fixed assets will be worthless at the
end of the project. Fixed costs are expected to be $8,000 and variable costs should be $1.90 per unit. The project
requires an initial investment in net working capital of $10,000 which will be recovered in full at the end of the
project’s life. What is the total project cash flow at the end of year 4 if the tax rate is 35 percent?
a. $24,000
b. $34,000
c. $45,600
d. $55,600
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 Spring '07
 Selvili
 Finance, Depreciation, Net Present Value, Internal rate of return

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