FIN322 Sample Exam I Winter 2011 - Copy

FIN322 Sample Exam I Winter 2011 - Copy - FIN 322...

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1 FIN 322 Intermediate Managerial Finance Sample Exam I 1. You have a choice between two projects. You can only take one. You have access to sufficient capital to fund either. Your cost of capital is 12%. The IRR of the first project is 15% and its NPV is $2 million. The IRR of the second project is 20% and its NPV is $1 million. Which project should you take? 2. The following graph shows the NPV of a project as a function of the cost of capital. Your actual cost of capital is 12%. a. What is the IRR of the project? b. Should you take the project? Explain. 3. You are considering the purchase of equipment for $1,000,000. If you buy it, your annual revenues will rise by $300,000 and your annual operating costs will rise by $100,000. The equipment – and these revenues and costs – will last for ten years. Assume there is no inflation. The equipment would be depreciated on a straight-line basis over the ten years. Explain whether the following is sound reasoning: Annual profits before depreciation and taxes will be $200,000 ($300,000 - $100,000). Depreciation will be $100,000 per year. Therefore profits before tax will be $100,000. Since this will be a profitable investment, I should take it. (100,000) (50,000) - 50,000 100,000 150,000 0% 10% 20% 30% 40% 50% Cost of Capital Net Present Value
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2 4. You are considering the purchase of equipment for $200,000. It will be depreciated straight-line over two years (just to simplify your calculations). The equipment will be worthless at the end of year 2. The equipment would be used to produce a new product with the following sales, costs, and working capital requirements. Your cost
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FIN322 Sample Exam I Winter 2011 - Copy - FIN 322...

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