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# PracticeFinalExam - Business Finance 620 Practice Final...

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1 Business Finance 620 Practice Final Exam ____ 1. Your firm has a portrait of the company founder that originally cost \$250, has an undepreciated book value of zero, and is worth an estimated \$175,000 because the artist is famous. Last week, the Ann Arbor Museum of Art offered your firm \$150,000 for the portrait. Ignoring taxes, what opportunity cost should be used for this work of art in capital budgeting decisions? A. \$25,000 B. \$175,000 C. \$150,000 D. Zero ____ 2. At current prices and a 13.7% hurdle rate, a seven-year R&D project's NPV is \$187,460. By what minimum amount must the initial cost of the project change before management can justify waiting three years to invest? Assume the project’s annual after-tax cash flows will remain unchanged in the future, and the firm’s marginal income tax rate is 35%. ____ 3. A five-year investment project has fixed costs of \$800, depreciation expense of \$900, a 60% variable cost ratio, a 35% marginal tax rate, and a 15% cost of capital. Project assets are depreciated straight line over the life of the project to a zero tax basis. What is the project’s economic break-even revenue? ____ 4. All the following statements concerning the cost of capital are correct EXCEPT: ____ 5. An investment project will give a firm a one-time after-tax profit of \$247,500 today. How much should management be willing to pay for this project? Assume the firm's marginal tax bracket is 35%, and its WACC is 12.85%. A. \$416,000 B. \$247,500 C. \$447,000 D. The answer cannot be determined from the information provided.

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Business Finance 620 Practice Final Exam 2 ____ 6. A three-year R&D investment project has the following annual after-tax cash flows (realized at the end of the year): > \$67,500 the first year, > \$82,300 the second year, and > \$77,400 the third year. If the project’s cost of capital is 12.5%, and its payback period is 2.4 years, how much can managers afford to spend on the initial investment and still justify launching the project? ____
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PracticeFinalExam - Business Finance 620 Practice Final...

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