Week07_TutorialQuestions

# Week07_TutorialQuestions - SCHOOL OF BANKING AND FINANCE...

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FINS 1613 Tutorial Questions 1 SCHOOL OF BANKING AND FINANCE FINS1613 BUSINESS FINANCE Semester 2, 2011 TUTORIAL QUESTIONS WEEK 7 – Capital Budgeting Applications II Please note that some answers are exact when rounded to 2 or 3 decimal places because of the use of PV tables rather than calculators. Multiple-choice Questions 1. Consider the following proposal to enter a new line of business: The new business will require the company to purchase additional fixed assets that will cost \$600,000 at t = 0. For tax and accounting purposes, these costs will be depreciated on a straight- line basis over three years. (Annual depreciation will be \$200,000 per year at t = 1, 2, and 3.). At the end of three years, the company will get out of the business and will sell the fixed assets at a salvage value of \$100,000. The project will require a \$50,000 increase in net operating working capital at t = 0, which will be recovered at t = 3. The new business is expected to generate \$2 million in sales each year (at t = 1, 2, and3). The operating costs excluding depreciation are expected to be \$1.4 million per year. The project's cost of capital is 12 percent. The company's marginal tax rate is 35 percent. What is the project's net present value (NPV)? a. \$536,697 b. \$ 86,885 c. \$ 81,243 d. \$ 56,331 e. \$561,609

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FINS 1613 Tutorial Questions 2 2. (Note: This question may give you more information than you need. So you should only use the relevant information.) Mr Suds is considering introducing a new detergent. The firm has collected the following information about the proposed product from various divisions within the firm and through a market research survey that cost \$45,000. The project has an anticipated economic life of 4 years. The company will have to purchase a new machine to produce the detergent. The machine has an up-front cost (t = 0) of \$2 million. The machine will be depreciated on a straight-line basis over 4 years (that is, the company's depreciation expense will be \$500,000 in each of the first four years (t = 1, 2, 3, and 4). The company anticipates that the machine will last for four years, and that after four years, its salvage value will equal zero.
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## This note was uploaded on 10/20/2011 for the course COMMERCE 3502 taught by Professor All during the One '11 term at University of New South Wales.

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Week07_TutorialQuestions - SCHOOL OF BANKING AND FINANCE...

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