ADMS3530-Final-F05-Sol

ADMS3530-Final-F05-S - AK/ADMS 3530 Fall 2005 Final Exam Solutions Please note The order of questions in this solution is based on the order of

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1 AK/ADMS 3530 Fall 2005 Final Exam Solutions Please note: The order of questions in this solution is based on the order of questions in the type A exam. The corresponding question number in the type B exam is shown in the parentheses. 1. (Q. 5 in B) When comparing projects of different lives, we should: a) Use the discounted payback rule. b) Choose the project which has the lowest IRR. c) Choose the project that has the lowest equivalent annual cost. d) Choose the project which has the highest profitability index. Answer: C Questions 2 to 5 are based on the following information ; A firm is considering the following three projects. Its opportunity cost of capital is 8%. Project Initial Investment Cash Flow Year 1 Cash Flow Year 2 Cash Flow Year 3 Cash Flow Year 4 A -3,000 1,200 1,000 3,000 0 B -1,000 0 1,200 0 1,000 C -5,000 1,000 1,000 3,000 2,000 2. (Q. 1 in B) Given that you wish to use the payback rule with a cutoff period of 2 years, which project(s) would you accept? a) project A only b) project B only c) project C only d) none of the projects Answer: B For the detailed solutions to Questions 2-5, refer to the table inserted after Question 5. 3. (Q. 2 in B) If you use a cutoff period of 3 years with the discounted payback period rule, which project(s) would you accept? a) project A only b) projects A and B c) projects A and C d) none of the projects Answer: B 4. (Q. 3 in B) Which project(s) have a positive NPV? a) project A only
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2 b) project B only c) projects A and C d) all of the projects Answer: D 5. (Q. 4 in B) Which project(s) would you choose under the IRR rule? a) projects A and B b) projects B and C c) all of the projects d) none of the projects Answer: C CF's Discounted at 8% Cumul. DCF Project A 0 -3000 -3000 -3000 1 1200 1111.11 -1888.89 2 1000 857.34 -1031.55 3 3000 2381.50 1349.95 4 0 0.00 1349.95 NPV= 1349.95 IRR= 27.57% Project B 0 -1000 -1000.00 -1000.00 1 0 0.00 -1000.00 2 1200 1028.81 28.81 3 0 0.00 28.81 4 1000 735.03 763.84 NPV= 763.84 IRR= 32.90% Project C 0 -5000 -5000.00 -5000.00 1 1000 925.93 -4074.07 2 1000 857.34 -3216.74 3 3000 2381.50 -835.24 4 2000 1470.06 634.82 NPV= 634.82 IRR= 12.78%
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3 6. (Q. 12 in B) A company owns a building that is totally paid for. This building has been sitting idle for the past three years. Now the company is trying to analyze a project that would include the use of this building. Which of the following costs should be included in that analysis? I. The property taxes paid on the building over the past three years II. The insurance paid on the building over the past three years III. The current market value of the building IV. The cost to survey the lot to construct a drainage pond required for the project a) I and II only b) III and IV only c) I, II, and III only d) I, II, and IV only Answer: B Use the following information to answer Questions 7-9 7. (Q. 13 in B) You are considering investing in a piece of equipment to implement a cost-cutting proposal. The pre-tax cost reduction is expected to equal $41.67 for each of the three years of the project's life. The equipment has an initial cost of $125 and belongs in a 20% CCA class.
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This note was uploaded on 01/26/2010 for the course ADMS 3530 taught by Professor Unknown during the Spring '09 term at York University.

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ADMS3530-Final-F05-S - AK/ADMS 3530 Fall 2005 Final Exam Solutions Please note The order of questions in this solution is based on the order of

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