Blue Bison Corporation is considering development of a user-
friendly online test bank which would make all old exams for
sections of Finance 405 taught in the past 5 years available
to students for study and preparation. Under current budget
crisis circumstances, however, students would have to pay a
$250 one-time fee to gain database access. Still, the demand
forecast by an $89,000 independent marketing firm survey is
expected to be brisk across the technology's four-year life:
1150 units in year one; 1380 units in the second year; 1600
subscriptions are expected in year three; 1425 in year four.
Due to techno-compatibility issues, project adoption would
force delayed sale of near-obsolete servers until EOY four,
which are estimated to have a market value of $ 25,000.
Fixed costs will equal $68,000 per year; and variable costs
are forecast at $115 per unit. Physical equipment (PP&E) t=0
initial outlays will require $276,000, to be depreciated on
straight-line basis to zero book value at end-of-year four.
However, actual salvage value of server & related machinery
is predicted to be $32,000 at that time. The project has an
initial(t=0) working capital requirement of $35,000; added
infusions may be needed each year to maintain overall NWC
stockpiles at 15% of annual subscription sales. Blue Bison
faces a 36% marginal corporate tax rate; its project cost of
capital(discount rate) is expected to be equal to 14%.
4. Test Bank project EBIT forecast for year four equals:
a. $124,375 b. $63,375 c. $35,440 d. $55,375 e. $101,773
5. What is operating cash flow (OCF) expected in year three?
a. $94,080 b. $119,560 c. $109,883 d. $163,080 e. $116,680
6. Changes in Net Working Capital expected in year two are:
a. +$51,750 b. -$8,625 c. +$8,625 d. +$9641 e. +$43,625
7. The after-tax salvage value (ATSV) of the project's assets is:
a. $20,480 b. $32,000 c. $11,250 d. $22,742 e. $25,770
8/9. What's the net present value(NPV) of the Test Bank project?
a. -$10,591 b. +$7,998 c. -$2,200 d. -$37,725 e. -$14,326
10. According to the "NPV rule", the Test Bank project:
a. should be rejected, since it has a negative NPV
b. adds to Blue Bison firm value, and thus should be accepted
c. has a misleading accept/reject signal, due to ususal CF's
d. if accepted, would be a project consistent with SWM
e. haven't the foggiest... but sure sounds like a good idea
The answer is... View the full answer