Exam 2 Sample Questions

Exam 2 Sample Questions - Exam 2 Finance 470 1 When is EAC...

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Exam 2 Finance 470 1. When is EAC analysis appropriate for comparing two or more projects? Why is this method used? Are there any implicit assumptions required by this method that you find troubling? Explain. The EAC approach is appropriate when comparing mutually exclusive projects with  different   lives   that   will   be   replaced   when   they   wear   out.   This   type   of   analysis   is  necessary  so that the projects  have  a  common life span over which  they can be  compared; in effect, each project is assumed to exist over an infinite horizon of N-year  repeating projects. Assuming that this type of analysis is valid implies that the project  cash flows remain the same forever, thus ignoring the possible effects of, among other  things: (1) inflation, (2) changing economic conditions, (3) the increasing unreliability of  cash flow estimates that occur far into the future, and (4) the possible effects of future  technology improvement that could alter the project cash flows. 2. The Army has requested a bid for multiple use digitizing devices (MUDDs). They will require the winner of the bid to deliver 4 units each year for the next 3 years. You have estimated that labor and materials costs will be $10,000 per unit. Production space can be leased for $12,000 per year. The project will require $50,000 in fixed assets with expected salvage of $10,000 at the end of the project (depreciate straight-line to salvage value) and an initial $10,000 increase in NWC. Your marginal tax rate = 34% and the required return = 15%. What is your minimum bid? NPV = 0 = -60,000 + OCF(PVIFA 15%,3 ) + 20,000(PVIF 15%,3 ) NPV = 0 = -60,000 + (NI + Dep)(2.2832) + 20,000(0.6575) NPV = 0 = -60,000 + [(S – VC – FC - Dep)(1 – T) + Dep](2.2832) + 13,150.32 46,849.68 = [(4P – 4(10,000) – 12,000 – 13,333.33)(1 - .34) + 13,333.33](2.2832) 20,519.31 = (4P – 65,333.33)(0.66) + 13,333.33 7,185.98 = (4P – 65,333.33)(0.66)
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10,887.85 = 4P – 65,333.33 76,221.18 = 4P 19,055.21  = P 3. As a shareholder of a firm that is contemplating a new project, would you be more concerned with the accounting break-even point, the cash break-even point, or the financial break-even point? Why? From the shareholder perspective, the financial break-even point is the most important.  A project can exceed the accounting and cash break-even points but still be below the  financial break-even point. This causes a reduction in shareholder (your) wealth. 4. In an effort to capture the large jet market, Airbus invested $13 billion developing its A380, which is capable of carrying 800 passengers. The plane has a list price of $280 million. In discussing the plane, Airbus stated that the company would break even when 249 A380s were sold. a.
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Exam 2 Sample Questions - Exam 2 Finance 470 1 When is EAC...

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