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Unformatted text preview: 6% Fin a] Exam
October 23, 2007 Name: ‘ UMID: Please note that there are 5 problems T this exam, for a total of 100 points. Point values are indicated next to each‘problem — please take these into consideration as you
budget your time during the exam. If you are having difﬁculty with a question, sometimes it is
beneﬁcial to work on another question, and then come back. You must show your work in order to receive full credit. Clearly identify your ﬁnal answers
(with a box, etc.) . . l . . .
This Is a closed book, closed notes ex ; you are perrmtted to use the followuig 1n the exam: 0 One sheet of singlesided, self ‘ ade notes
 Calculator, without the ability ﬁe transmit data 0 Pens, pencil, erasers, etc. You are obligated to comply with the Honor Code of the College of Engineering. You are not
allowed to receive or give aid on this examination; in particular, you are not allowed to discuss
this exam with anyone who may be taking it at a later date. After you have completed the
examination, please write the following Honor Pledge: “I have neither given nor received aid on
this examination,” and sign your namebelow. Instructors are not required to grade tests in
which the signed Honor Pledge does not appear. Signature: Point Summary Question 1 (25 points) Your boss has asked you to complete an analysis of three mutually exclusive projects. He needs
the information right away, and the e i loyee who started this analysis is out sick. Your boss
has given you all of the information th t he has about the different options in the table below.
Any cell with an “X” represents missing information. The “AB” column contains the cash
ﬂows of project A minus the cash ﬂows of project B for each year along with the IRR for that
column of numbers. All of the project pairs are compared in the same manner. Your company’s
MARR is 12%. “I!!! as I!
II
an“
m“
—__ 
m—  Your bossed has asked to for the following information: a) What is the present worth of Project A? (Please show your work.) ‘ 3.0373
mom)  —/a?,mo+ saw/PM. we) _ /= #3, 7724] b) Calculate the amount of Project B’s initial investment. (Please show your work.)
LCM} 1.6?0/ 0.797.? 3537—  x +l\000 (Pm, .2070,g)+ 5ROD(?/f\,l70~.Q)(P/E12003) l><= arr”... c) What is the [RR when projects A and B are compared? Please show your work. (Note:
Comparing AB and BA will give the same IRR value so you only need to calculate this once.)
_. 5800 5800
M’ 400 1‘ Ha 7‘ {/ﬂ')z : £5 07¢¥x=t — m, we +saoox + €800X“ =ﬂ x =  5300 : 5300‘*4(§8ooY«/0, goo)
07/5800) c — 5300 I 16,293.47 ___________.__——— Zjﬂﬂl mgafme 1/4144: (.5 =/p, 57,, I d) Assuming that the information you have been given is accurate, which project should you
recommend to your boss? How did you make this decision? [1/7003 I: pray (of C. ﬂn marmch MFR aim/75x5 mm! 45 aya/ 7; (m r6 ypy n;qu svbfmrf ’9er eff W/f/D Aw” mn‘mf m”: fm/nf £9771 7%? prﬂ (5f “17%
7% hrjﬁfi’ #7”er x/arfrbwnt. Smcc MegaA 313.217 M/M’R aﬁmma/efroJrcf A. f’nCC /KRCB 5 {limingtz Pimch B
and (ﬂock; C Question 2 (10 points) a) Consider the following sensitivity graph. What variable or variables are most critical to
the project’s success? Explain your answer. nsitivity Graph + Inﬂation rate
—I— Revenue + Variable Cost
0— Tax rate .I:
t
O
3
H
r:
2
ta
.2
a
u
I“
E
:1
c
I:
< —15% 10% 5% 0% 5% 10% 15%
Deviation from Base (%) 73¢ midi/mm M134 and Wide (4. dose are 7%: mosf (VI/754] ﬂirted“. 7%é’rr ﬁnes Ad"
74M ska/orsf e/ofxs. {ﬁg/7ch In 7%!56 ﬂue Var/a5!” 5444/ my: ﬁlly/44%.:ﬁ //}7/ﬂ#f>’v
%%4 [Myra1‘3 ﬂﬂnmaf [rial/LIGW/ b) Your boss has asked you to analyze a series of cash ﬂows using a risk—adjusted discount
rate. She tells you that the project’s risk premium is 5% and the inﬂation premium is 2.5%. You look up the interest rate on a 10 year government bond and learn that it is currently
4.33%. What discount rate should you use to analyze the cash ﬂows? : ﬁnk/(ﬂ mt: a7: joy Adina/1* f/sk prawn/m giskdﬁf/ufft’d m 1‘2 Question 3 (15 points) You have calculated the net present worth of a project under three different scenarios. — MostLikeI
mm 44,050 83,000 You estimate that the Most Likely Scenario has a 60% chance of occurring, the WorstCase
Scenario has a 25% chance of occurring, and the Best—Case Scenario has a 15% chance of occurring. a) What is the expected net present worth of this project? Based on this value, should you
invest in the project? {[NpWE 3 i PULL
I .455, ooo(o.gs)+44oso(o. 19+ Mono/0.5) 17W .‘Smcc [flaw/170) mveshn ﬂip/ova? b) What is the standard deviation of the net present worth? 0’ = z/xc‘ — 5(0):“
' (455,000— :ao)3(o.25)+ {aft/prob #3020,b)+/83,000l30)2/0,IE) ___.———r Question 4 (20 points) Katrina typically purchases 5 specialtyl coffee drinks each week from her favorite coffee shop,
which has recently raised its prices to 3.00 per cup. A local department store is having a sale on
espresso machines. She can purchase a semiautomatic espresso machine for $199 and a coffee
grinder for $27. If she wants to make her favorite drinks, she will also need to buy coffee beans,
milk, and coffee ﬂavoring. Katrina estimates that these ingredients will cost her $1.10 per cup of
coffee. Her bank account gives her an interest rate of 8% compounded quarterly. a) Over an analysis period of one .ear, how many cups of coffee would Katrina have to
make each week in order to br ak even with the cost of her current habit of buying 5 cups
of coffee per week? M = 4 campaundmﬁ pan d5 9H L11”
C: yi5 Compoundmj meo‘lsper Pdﬁr'fh‘i' period Mk
fw:(]+%\)t’_l 02d X‘i‘fgéupS‘ﬁa‘féé’Mg/{cﬂf Lw . {H '5,( /9?+a7+/./ox(?/A,a.usaa,5ab=5.oo(5)(P/A,0.I529o.59) 5.2 2
 Jgé41/ox[l 06151) ! _ Lootefsl
Lu): 0. 150015;?{1'00'5502  i5g’w'waowszfa
0739 i “ox (49.44%) = 15(4196110
X = 9. 5 days ,9” amt/L b) If Katrina wants to continue to drink 5 cups of coffee per week, is it more economical for
her to buy or make her coffee? Explain your answer. 2? xi mnc (comm/(bf 6V ﬁt? b make Coffee,
356 (Mn MALL of 7‘5 4' CUPS F0” batik/2nd
M, wad/5% [ySﬁ be: 7/746?!) hf/ ﬂdéf‘!’ 43 buy/ray 5 LuPS pf? LuceL Question 5 (30 points) The hospital you work for has decided lto purchase a new magnetic resonance imaging (MRI)
machine. The machine will cost $1.25l million dollais, and you will pay an additional $25,000 to have software installed to support this new machine. The hospital wants to keep up with changes
in technology so this machine will be replaced at the end of 6 years. You think you will be able
to sell the MR] machine for $600,000 at that time. For tax purposes, this machine falls under a
5year MACRS class. For this class, the depreciation percentages are: I.“  20.00 32.00 19.20 11.52 Use this information to solve the following questions: a) Calculate the depreciation amount in each year that you own the machine.
ﬂay/(crazﬁm $436 —‘ #350 K + 625 [L : ﬁ/é? 75%
yea r Depl’a’m m 1’1
, o. a (2:75) r .265 M d Deanne) 2 5‘0? K 5 5. 1420376) = 07443 K, ll 011520275): Mags K,
5 Alibi (/0375) = 146.32 K
l" WWW}: 75) = 75.44 L b) A member of the accounting department estimates that the hospital will have to pay
$210,000 in gains taxes when the machine is sold. What tax rate did they use to calculate the gains taxes? goo’poop — 310, 000 meet c) The new MRI machine will be able to produce clearer images in a shorter period of time. As
a result, you expect to treat an additional 100 patients each year, and you bill $4,500 per
patient. You will pay an annual equipment service fee of $150,000, and hire a new technician
to run the machine. The technician’s salary will be $35,000 per year. The hospital will also
invest an additional $75,000 in working capital. Calculate the net income and net cash ﬂow
for this project using the following two tables. Assume the hospital’s marginal tax rate and
capital gains tax rate is the same amount calculated in part b). Note: Al! cash ﬂows are shown in $Kl
Income statement I A
I
I
I Year 450 450 .3}.
1.)!
O 450 4‘).
Ln
O
.lh
U1
CD Revenues Expenses
146. 88 150 146.88
150 255.00 408.00 244.80
150 150 150 73.44
150 Depreciation
Service fee Salary l43.00
—S0.05 20.20
7.07 118.12
41.342 191.56
67.046 10.00
3.5 118.12
41.342 Taxable Income Income taxes  DJ
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LA
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La.)
LII
b)
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9.)
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m
_  
I 210 \J
U] Working Capital Net Cash Flow 223.658 223.658 662.954 d) Assuming a MARR of 20%, should the hospital purchase this machine? Explain your answer. NPV[903):"35° Ta *(my Hm): ” 7/72)" 223.?!» 449.95
(In) ’L (1.12)“ N W (30°70)  354+ .27 K PV £0J Mu hoode Shanda!” "é
bug Ti” maul/M. Since N ...
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This note was uploaded on 11/14/2009 for the course IOE 201 taught by Professor Maull during the Winter '07 term at University of Michigan.
 Winter '07
 Maull

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