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Unformatted text preview: Finance 302 Exam 2 Study Guide For Exam :- Covers: the rest of Ch. 6, Ch. 10, Ch. 12, and Ch. 22- Ch. 6: o Nothing complicated on NPV o Likely a problem with computing after tax sale price for sale of asset Use Net revenue from sale of asset formula o Likely a problem with valuing a project with unequal lives with spreadsheets, will give you the spreadsheet, you have to pick which one is set up right—the correct solution on which to accept the project o No after-tax CF calculations - Ch. 12: 15+ questions on agency costs- Ch. 10: Sensitivity analysis- Ch. 22: Real options - Problems: o Ch. 6: Sprockets, Gadgets, Widgets (solutions on BB) o Ch. 10: # 3(all except E), 4, 13, 14, 18 (don’t worry about #14) especially review #13 o Ch. 12: Review questions at end of study guide - Review on BB: o Solutions to Sprockets, Gadgets, Widgets o Monte Carlo Simulation Example o Supplemental Real Options Problems o Excel Real Options Solutions (understand a correctly set-up excel) Cont. Chapter 6 We left off at the end of Exam 1 material with valuation techniques and NVP analyses—review those notes. NPV = present value of inflows – present value of outflows Other Issues:- What to use: allocated vs. actual revenue use actual- You use overhead that is occurring as a result of your project being accepted that wouldn’t occur otherwise- use actual o Your initial outlay is depreciated so it cannot be expensed. Review—taxes from asset sale:- Initial outlay, change in NWC not subject to taxation 1- Asset sales revenue (at end of project) are taxable- but only the amount of the capital gain- Capital gain (sales price – book value) - Ex: if the book value is $500, yet you only sell it for $200—this is like a tax- savings because you sell it at a capital loss. Net Revenue from sale of asset = Sales Price – T c [Sales price – book value] Practice Problems See excel representations of each on BlackBoard Practice Problem 1: SPROCKETS Compute the NPV of the following project: A project to manufacture SPROCKETS is being considered. a) Initial outlay is $100,000 to be depreciated straight line down to $0 in 10 years. The machine will be sold in year 5 for 50,000 and the project will end at that time . b) Revenues are expected to be $50,000 in year 1, and decrease at a rate of 5% per year. c) Variable expenses associated with the project are expected to be 20% of sales (revenues) for each year. d) Working capital will increase by $15,000 at time 0, increase by another $13,000 in year 1, and decrease by $28,000 at the end of 5 years. e) This project will decrease the sales revenue of the WIDGET division by $10,000 (before tax) per year but will increase sales of the GADGET division by $20,000 per year (before tax). All expenses associated with these divisions will remain unchanged....
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- Spring '11