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Unformatted text preview: NAME: FIN 3100
Practice Exam 3
Dr. Lucy Ackert You may use a calculator and formula sheet. You must turn your formula sheet in with
your exam. No other materials are permitted. Part 1: Multiple Choice (4 points each). Please circle only one answer or all will be
counted incorrect. 1. A ﬁveyear project is expected to generate revenues of $1,400,000, variable costs of
$950,000, and ﬁxed costs of $50,000. The annual depreciation is $300,000 and the tax
rate is 34 percent. What is the annual operating cash ﬂow? a. $185,000
b. $399,000
c. $333,000
(1. $366,000
e. $238,000 2. Miller Co. is considering a project that requires $500,000 of ﬁxed assets that are
classiﬁed as 7year property for MACRS. What is the book value of these assets at the
end of year 4? Year 1 2 3 4 5 6 7 8
Percent 14.29 24.49 17.49 12.49 8.93 8.93 8.93 4.45
a. $200,000
b. $111,550
c. $153,055
(1. $156,200
e. $43,715
3. The criteria answers one basic question: How soon will I recover my initial
investment?
a. payback period
b. proﬁtability index
c. NPV
d. IRR
e. None of the above. 4. You are considering a project with an internal rate of return that is greater than the
required return. This means that the a. net present value is negative. b. project is returning the minimal amount that is acceptable to you.
c. proﬁtability index is less than one. d. the project will be accepted using the payback criteria. e. project will increase the value of the ﬁrm. 5. cash ﬂow is the increase in cash generated by a new project above the
current cash ﬂow without the new project. a. Incremental b. Discounted c. Current d. Future e. Opportunity cost 6. P010 Enterprises is currently considering a project that will produce cash inﬂows of $25,000 a year for 10 years. The cost of the project is $90,000. What is the NPV if the discount rate is 10
percent? a. 102,774
b. 92,834
0. 63,615
d. 22,986
6. 83,515 7. As in the previous question, Polo Enterprises is currently considering a project that will
produce cash inﬂows of $25,000 a year for 10 years. The cost of the project is $90,000. What is
the proﬁtability index if the discount rate is 10 percent? a. 0.75
b. 1.49
c. 0.072
d. 1.777
e. 1.707 8. MACRS stands for modiﬁed accelerated cost recovery system and classiﬁes the “life”
of an asset for use in determining the depreciation cost each year. a. True
b. False 9. Consider the NPV proﬁles below for projects X and Y. If the ﬁlm’s required rate of
return is 17% and the projects are mutually exclusive, your recommendation would be that only project X should be accepted. only project Y should be accepted. both projects should be accepted. the projects should be rejected unless better information can be obtained. you are unable to make any decision. 99957!» 10. Again consider the NPV proﬁles below for projects X and Y. If the firm’s required
rate of return is 10% and the projects are independent, your recommendation would be that only project X should be accepted. only project Y should be accepted. both projects should be accepted. the projects should be rejected unless better information can be obtained. you are unable to make any decision. 99.0.65» 11. Once again consider the NPV proﬁles for projects X and Y provided below. What is
the crossover rate? a 0%.
b. 8%.
c. 12%
d 16%. e impossible to determine. ' NPV 12. Consider the NPV proﬁle for a project provided below. If the ﬁrm’s required rate of
return is 8%, a. the project should be rejected.
b. the project should be accepted.
c. we are unable to make any decision. 13. Consider the NPV proﬁle for a project provided below. If the ﬁrm’s required rate of
return is 25%, a. the project should be rejected.
b. the project should be accepted.
0. we are unable to make any decision. 14. Again consider the NPV proﬁle provided below. The project’s correct IR is a 0%.
b. 10%.
c. 20%
d either 10% or 20%  whatever you want to use.
e impossible to determine. NPV 15. An asset costs $300,000 and is depreciated straightline to zero over its 6year life.
The asset will be used for a fouryear project and after 4 years it will be sold for $60,000.
If the tax rate is 35%, what is the aftertax cash ﬂow from the sale of the asset? a. $39,000
b. $46,000
c. $60,000
d. $56,500
e. $74,000 16. The internal rate of return is the: rate of return needed for a project to payback within the allotted time period.
rate of return required by a ﬁrm’s management for a particular project.
discount rate that causes the net present value of a project to equal zero. rate computed by discounting the cash inﬂows and dividing by the initial cost.
rate computed by dividing the ﬁrst year’s cash inﬂows by the initial cost of a
project. 9999*? 17. One problem with the IRR criterion is that if the cash ﬂow is not standard, there is a
possibility of multiple IRRs for a single project. a. True
b. False 18. Bounce Time Amusements has decided to expand by building on a vacant lot they
own. The land was purchased ﬁve years ago at a cost of $100 thousand. Today, the land
could be sold for $250,000. The company will build a new building at an estimated cost
of $1 .2 million. The ﬁrm will spend another $50 thousand on the parking and access
roads. They will also need to add to the landscaping at a cost of $20 thousand. Finally,
the CFO has allocated $100,000 in existing executive salaries to the project. What is the
cost of this expansion project? $1.72 million
$135 million
$1.62 million
$1.52 million
$1.53 million sap.0572» 19. A project has the following cash ﬂows. What is the payback period? Year 0 1 2 3
Cash ﬂow $20,000 $12,500 $5,500 $5,000 1.75 years
2.60 years
1.60 years
2.25 years
2.40 years 921.09”? 20. A project has cash ﬂows of 8,000, 4,300, 2,700, and 3,800 in years 0, 1, 2, and 3,
respectively. What is the NPV if the required return is 13%? a. $982.23
b. $748.20
c. $2,800.00
d. $249.32
e. $553.40 Part 2: Problems. Show all work for partial credit. 1. (20 points) A fouryear project has an initial requirement of $600,000 for ﬁxed
assets and $50,000 for net working capital. The ﬁxed assets will be depreciated using
straightline depreciation to a zero book value over the 4year life of the project. The
estimated salvage value is $100,000. All of the net working capital will be recouped at
the end of the 4 years. The annual operating cash ﬂow is $180,000 and the discount rate
is 12 percent. The tax rate is 35 percent. a. What are the project’s cash ﬂows for years 0, 1, 2, 3, and 4? b. What is the project’s net present value? Should the project be accepted? c. What is the project’s payback period? If the ﬁrm requires a payback of 3 years, will
this project be accepted? ...
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 Spring '11
 Rodney

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