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FIN322 Sample Exam I Solutions Winter 2011 - Copy

FIN322 Sample Exam I Solutions Winter 2011 - Copy - FIN322...

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FIN322 Sample Exam I Solutions Winter 2011 Problem 1 Take project 1 because it has the highest NPV. Problem 2 The IRR is 20% because that is the break-even cost of capital. Take the project because NPV > 0 at the actual cost of capital (also IRR > cost of capital). Problem 3 It is not sufficient to look only at profits. You need to earn more than the cost of capital to create shareholder value. Problem 4 DATA Year 0 1 2 Sales 0 500,000 500,000 Costs 0 200,000 200,000 Inventory 100,000 100,000 0 Accounts receivable 0 100,000 0 Accounts payable 0 40,000 0 ANALYSIS Year 0 1 2 Net working capital 100,000 160,000 - Change in NWC 100,000 60,000 (160,000) Year 0 1 2 Sales 500,000 500,000 Costs (200,000) (200,000) Depreciation (100,000) (100,000) Income before taxes 200,000 200,000 Taxes (80,000) (80,000) Net income 120,000 120,000 Depreciation add-back 100,000 100,000 Cap Ex (200,000) - Less change in NWC (100,000) (60,000) 160,000 Net cash flow (300,000) 160,000 380,000 PV factor 100% 89% 80% PV of net cash flow (300,000) 142,400 304,000 NPV 146,400 Make the investment, because it has a positive NPV. 1
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