Relevant cash flows and NPV analysis test bank problems(1).docx

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FNAN 303 Test bank problems – relevant cash flows and NPV analysis 1. Kwon Jewelers is evaluating a 1-year project that would involve an initial investment in equipment of $27,000 and an expected cash flow of $34,500 in 1 year. The project has a cost of capital of 8.74 percent and an internal rate of return of 27.78 percent. If Kwon Jewelers were to use $27,000 in cash from its bank account to purchase the equipment, the net present value of the project would be $4,727. However, Kwon Jewelers has no cash in its bank account, so using money from its account is not possible. Therefore, the firm would need to borrow money to raise the $27,000. If Kwon Jewelers were to borrow money to raise the $27,000, the interest rate on the loan would be 12.36 percent. Kwon Jewelers would receive $27,000 at the start of the project and would pay $30,337 one year later. What is the NPV of the project if Kwon Jewelers borrows $27,000 to pay for the project? (Spring 2014, test 4, question 1) (Spring 2015, final, question 15) (Fall 2015, final, question 11) (Fall 2017, test 3, question 4) 2. Striped Potato is evaluating a project that would require the purchase of a piece of equipment for $365,000 today. During year 1, the project is expected to have relevant revenue of $216,000, relevant costs of $57,000, and relevant depreciation of $84,000. Striped Potato would need to borrow $365,000 today to pay for the equipment and would need to make an interest payment of $14,000 to the bank in 1 year. Relevant net income for the project in year 1 is expected to be $44,000. What is the tax rate expected to be in year 1?(Fall 2011, test 4, question 1)(Fall 2012, final, question 14)(Spring 2013, final, question 14)(Spring 2015, test 3, question 1)(Fall 2016, test 3, question 6)(Spring 2017, final, question 11)3. Celebrity Food is evaluating the kale crisper project. During year 1, the kale crisper project is expectedto have relevant revenue of $256,000, relevant variable costs of $87,000, and relevant depreciation of $11,000. In addition, Celebrity Food would have one source of fixed costs associated with the kale crisper project. Celebrity Food just signed a deal with Lights Camera Action to develop a advertising campaign for use in the project. The terms of the deal require Celebrity Food to pay Lights Camera Action either $18,000 in 1 year if the project is pursued or $34,000 in 1 year if the project is not pursued. Relevant net income for the kale crisper project in year 1 is expected to be $112,000. What is the tax rate expected to be in year 1?(Fall 2011, final, question 14)(Fall 2017, test 3, question 5)4. Water’s Edge Resorts is evaluating a project that would require an initial investment in equipment of $500,000 and that is expected to last for 4 years. MACRS depreciation would be used where the depreciation rates in years 1, 2, 3, 4, and 5 are 25%, 45%, 15%, 10%. and 5%, respectively. For each yearof the project, Water’s Edge Resorts expects relevant annual revenue associated with the project to be $648,000 and relevant annual costs associated with the project to be $472,000. The tax rate is 50 percent.What is (X plus Y) if X is the relevant operating cash flow (OCF) associated with the project expected in

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