exam3a.ch9ch10ch12ch13ch14ch15 - Name Webct User Name...

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Name __________________________________ Webct User Name __________________________________ University of Houston C. T. Bauer College of Business Finance 3332 Principles of Financial Management Fall, 2008 Exam 3a To receive full credit, show all work—equations in variable form, equations with numbers plugged in—and clearly indicate your answer. All inputs must be shown when using financial functions. An investment project requires a net investment of $7 million. The project is expected to generate annual net cash flows of $1 million for the next 20 years. The firm's cost of capital is 16 percent. 1. Calculate the NPV of the project, and determine whether or not to accept the project. (4) 2. Use the IRR method to determine whether or not the project should be accepted. (4) 3. A project with an installed cost of $500,000 requires an additional working capital investment of $2000 and has an estimated salvage value of $10,000. The project replaces a piece of equipment that has an estimated salvage value of $6000 and a book value of $4000. The firm’s marginal tax rate is 40 percent, and a return of 17 percent is required on projects of this type. What is the Net Investment for this project? (4) Use the following information to answer questions 4 – 6. You are considering adopting a capital expenditure project to expand a unit at your manufacturing facility. The equipment cost is $320 million, shipping is $2 million, and installation is estimated at $18 million. The unit will have a 10 year life and at the end of the project, the equipment is expected to have a $1 million salvage value. As a result of the expansion, revenues are forecasted to increase by $50 million per year and expenses will increase by $8 million per year. An additional increase of $5 million in working capital is also expected. The firm has a 40% marginal tax rate and requires a 14% rate of return of investments of this type. 4. What is the Net Investment of this project? (6) 5. What are the after-tax Net Cash Flows from operations each year of the project? (6) 6. What are the one-time, end of project cash flows from the project, if any? (4) 7. Using the data in the following table, construct a correctly labeled marginal cost of capital curve. Show all calculations. (6)
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Component Costs of Capital Before tax cost of debt
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exam3a.ch9ch10ch12ch13ch14ch15 - Name Webct User Name...

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