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Quiz_1_Version_A_Answers_Fin_351_Fall_2010[1]

Quiz_1_Version_A_Answers_Fin_351_Fall_2010[1] - FIN 351...

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FIN 351 Quiz 1 Version A Student: ___________________________________________________________________________ Table 1 Year 0 1 2 3 Cash Flow -30,000 10,000 15,000 15,000 Use Table 1 to answer questions 1-5. Assume a 10% discount rate. Round if needed. 1. What is the IRR? A. 12% B. 13% C. 14% D. 15% 2. What is the NPV? 3. What is the Profitability Index? 4. What is the discounted payback period? 5. Invest or do not invest? A. Do not invest since IRR is greater than the cost of capital. B. Invest since PI is less than 1. C. Invest since IRR is greater than the cost of capital. D. Do not invest since PI is greater than 1.
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As a financial analyst you are considering two replacement projects with the following cash flows: Table 2 Year 0 1 2 3 4 Cash Flow A -5,000 4,000 3,000 Cash Flow B -10,000 6,000 3,000 2,000 3,000 Assume a discount rate of 8%. Use Table 2 to answer questions 6 and 7. 6. If project A and B are independent which project(s) would you select? 7. If project A and B are mutually exclusive which project(s) would you select? 8. In what manner does depreciation expense affect investment projects? 9. You are interested in investing in a new computer. The cost today is $1,000. The cost next year is $980. The present value of the savings is $1,100. The discount rate is 25%. Should you buy today or next year? A. Buy today. B. Buy next year. Questions 10 to 12 refer to the following information. You are an analyst with Smith Securities. One of the companies that you follow is Mac Company. Mac Company is considering the purchase of a new 400-ton stamping press for an expansion project. The press costs $45,000. The press will depreciate straight line to 0 over a three-year life. The press will generate $35,000 in revenues each year and $10,000 in expenses. The press will be sold for $20,000 after 3 years. An inventory investment of $5,000 is required during the life of the investment. Mac is in the 40 percent tax bracket. The cost of capital is 10%.
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