Quiz7_A(Answers)

Quiz7_A(Answers) - BADM 115 – Section 11 Prof Isabelle...

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Unformatted text preview: BADM 115 – Section 11 Prof. Isabelle Bajeux‐Besnainou Fall 2008 Form A QUIZ #7 1. (3 points) Kennedy air Services is now in the final year of a project. The equipment originally cost $33 million, of which 65 percent has been depreciated. Kennedy can sell the used equipment today for $14 million, and its tax rate is 35 percent. What is the equipment’s after tax net salvage value? ANSWER: Equipment’s original cost $33,000,000 Depreciation (65%) 21,450,000 Book value $11,550,000 Gain on sale = $14,000,000 – $11,550,000 = $2,450,000. Tax on gain = $2,450,000(0.35) = $857,500. AT net salvage value = $14,000,000 – $857,500 = $13,142,500. 2. (4 points) A firm with a WACC of 9 percent is considering the following mutually exclusive projects: 0 1 2 3 4 5 | | | | | | Project A ‐$200 $25 $25 $25 $185 $185 Project B ‐$1000 $225 $225 $350 $350 $400 Which project would you recommend? Explain. ANSWER: Project A: Using a financial calculator, enter the following data: CF0 = ‐200; CF1‐3 = 25; CF4‐5 = 185; I/YR = 9. Solve for NPV = $114.58. Project B: Using a financial calculator, enter the following data: CF0 = ‐1000; CF1‐2 = 225; CF3‐4 = 350; CF5 = 400; I/YR = 9. Solve for NPV = $173.99. The decision rule for mutually exclusive projects is to accept the project with the highest positive NPV. In this situation, the firm would accept Project B since NPVA = $114.58 compared to NPVB = $173.99. 3. (3 points) A project has annual cash flows of $4,500 for the next 11 years and then $6,000 each year for the following 7 years. The IRR of this 18‐year project is 14 percent. If the firm’s WACC is 11 percent, what is the project’s NPV? ANSWER: Since the IRR is the discount rate at which the NPV of a project equals zero, the project’s inflows can be evaluated at the IRR and the present value of these inflows must equal the initial investment. A ‐ 1 Using a financial calculator enter the following: CF0 = 0; CF1 = 4500; Nj = 11; CF1 = 6000; Nj = 7; I/YR = 14. NPV = $30,625.42. Therefore, the initial investment for this project is $30,625.42. Using a calculator, the project's NPV at the firm’s WACC can now be solved. CF0 = ‐30625.42.11; CF1 = 4500; Nj = 11; CF1 = 6000; Nj = 7; I/YR = 11. NPV = $6,274.51 A ‐ 2 ...
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This note was uploaded on 01/02/2010 for the course BADM 115 taught by Professor Bajeux during the Fall '08 term at GWU.

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