Old Exam Questions - Capital Budgeting
Page 16 of 55 Pages
B.
$624.29
C.
$656.38
D.
$685.73
E.
$642.65
18.
Assume that you are given the following cash flows for Project A and that the
appropriate cost of capital for Project A is 12 percent. What is the Modified Internal
Rate of Return for Project A?
Year
Project A
0
- 500.00
1
150.00
2
175.00
3
200.00
4
250.00
A.
16.12%
B.
15.35%
C.
15.80%
D.
15.97%
E.
15.59%
19.
Your company is considering taking on a new project that will cost $200,000. It is
estimated that the system will increase sales/revenues by $150,000 annually for Years
1-6. Operating expenses, other than depreciation, are expected to be equal to 60
percent of sales in each year. The system will be depreciated on a MACRS basis over
5 years (depreciation rates are contained in Appendix D, Chapter 12, of the exam
handout packet) to a zero book value, but the expected salvage at Year 6 is $40,000.
The firm will also be required to invest $25,000 in net working capital at Year 0, but will
recapture this amount at Year 6. You may assume that the tax rate on ordinary
income is 40 percent (record negative taxes as a positive cash flow). As you can
calculate, the IRR for this project is 13.02%. If we assume that the firm’s cost of
capital for this project is 12 percent, then what is the NPV for this project?
Sample tables (with some data provided) are given to help you arrange the data.
Year
Revenue
Operating
Less
Deprec.
EBT
Taxes
Net
Income
Plus
Deprec.
OCF
1
$150,000
-$40,000
$40,000
2
$150,000
-$64,000
$64,000
3
$150,000
-$38,000
$38,000
4
$150,000
-$24,000
$24,000
5
$150,000
-$22,000
$22,000
6
$150,000
-$12,000
$12,000