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Exam2 Solutions_11Spring

# Exam2 Solutions_11Spring - F301 Financial Management Exam 2...

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F301 Financial Management Exam 2 Solutions Spring 2011 You can click on a cell to see the formula and cell references used. Version A Tax rate 39% 0 1 2 3 4 7-year MACRS OCF (given) 50,000 60,000 60,000 60,000 14.29% 24.49% NWC in place 10,000 25,000 25,000 25,000 0 17.49% NWC cash flow -10,000 -15,000 0 0 25,000 12.49% 8.93% Cap spending -275,000 8.93% Market value 90,000 8.93% Book value 85,910 4.45% Gain or loss 4,090 Tax on gain or loss -1,595 Total terminal cash flow 88,405 Total cash flows -285,000 35,000 60,000 60,000 173,405 Answers: 1. -285,000 2. 173,405 Tax rate 40% 0 1 Investment -40,000 Sales 30,000 Costs -8,000 Depreciation -10,000 EBIT 12,000 Tax on EBIT -4,800 Add back depreciation 10,000 OCF 17,200 Sell investment 32,000 Book 30,000 Gain 2,000 Tax on gain -800 Net cash flow 31,200 Total Year 1 48,400 Rate 15% NPV = 2,087 12% 0 1 2 3 4 -10,000 2,000 4,000 6,000 6,000 PVs 1,786 3,189 4,271 3,813 Sum of PVs 9,245 Needed out of next discounted cash flow 755 Fraction of next discounted cash flow 0.20 Discounted payback period = 3.20 years Use the following information to answer questions 1 and 2. Your division manager has asked for your help in evaluating a proposal to open a new branch sales office. This will be a four-year analysis. Furniture, shelving and vehicles to equip the branch will cost \$275,000. The 7-year MACRS depreciation schedule applies, and at the end of four years, this equipment will have a market value of \$90,000. Additional inventory and other net working capital items will be \$10,000 at Time Zero, and an another \$15,000 will be added Year 1. After that, there will be no further increases in NWC. All NWC will be recovered at the end. OCF already has been calculated, but NWC and capital spending cash flows have not. OCF is forecast to be \$50,000 in the first year and \$60,000 per year in all other years. Assume the tax rate is 39%. 1. (13 points) If this project is accepted, what is the after-tax initial cash flow (at Time Zero)? 2.

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Exam2 Solutions_11Spring - F301 Financial Management Exam 2...

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