Capital Budgeting3

# Capital Budgeting3 - B. C. D. E. 18. \$624.29 \$656.38...

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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

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Old Exam Questions - Capital Budgeting Page 17 of 55 Pages Year Initial Investment OCF Investment In NWC Recpture Of NWC Salvage Taxes On Salvage FCF PV Of FCF 0 -\$200,000 -\$25,000 -\$225,000-\$225,000.00 1 2 3 4 5 6 A. \$7,298.83 B. \$6,874.69 C. \$7,016.74 D. \$6,552.78 E. \$6,681.15 20. Project A has the cash flows indicated below. If we assume infinite replication and if the appropriate cost of capital is 9 percent, then what is the net present value (NPV) of this infinitely replicated project using the equivalent annual annuity approach? Year Project A 0 -\$2,200.00 1 \$ 700.00 2 \$ 700.00 3 \$ 700.00 4 \$ 700.00 A. \$265.28 B. \$211.37 C. \$232.54 D. \$254.91 E. \$287.65 21. Your company is thinking about taking on an investment project that will require an initial outlay of \$1,500,000 at time period zero. You believe that this project will produce expected after-tax cash flows (point estimates) of \$560,000 each year for 4 years (Years 1-4): specifically, there is a 40 percent probability that the cash flow will be \$200,000, and a 60 percent chance that the cash flow would be \$800,000. Given a cost of capital for this project of 8 percent, and using the point estimates of the cash flows, you can calculate that the expected NPV for this project is \$354,791.03 and that its IRR is 18.22 percent.
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## This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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Capital Budgeting3 - B. C. D. E. 18. \$624.29 \$656.38...

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