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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 sevenyear 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 aftertax cash flows will remain unchanged in
the future, and the firm’s marginal income tax rate is 35%.
____
3.
A fiveyear 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 breakeven revenue?
____
4.
All the following statements concerning the cost of capital are correct EXCEPT:
____
5.
An investment project will give a firm a onetime aftertax 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
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6.
A threeyear R&D investment project has the following annual aftertax 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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 Spring '12
 BUSFIN620
 Depreciation, Corporate Finance, Net Present Value, Practice Final Exam

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