Q12. A firm is considering a $200,000 project that will last 3 years and has the following financial data:
- Annual after-tax cash flows are expected to be $90,000.
- Target debt/equity ratio is 0.4.
- Cost of equity is 14%.
- Cost of debt is 7%.
- Tax rate is 34%.
Determine the project's payback period and net present value (NPV).
Payback Period NPV
A) 2.43 years $18,716
B) 2.22 years $18,716
C) 2.22 years $21,872
Correct answer is B)
Payback Period
$200,000 / $90,000 = 2.22 years
NPV Method
First, calculate the weights for debt and equity
wd + we = 1
we = 1 ? wd
wd / we = 0.40
wd = 0.40 × (1 ? wd)
wd = 0.40 ? 0.40wd
1.40wd = 0.40
wd = 0.286, we = 0.714
Second, calculate WACC
WACC = (wd × kd) × (1 ? t) + (we × ke) = (0.286 × 0.07 × 0.66) + (0.714 × 0.14) = 0.0132 + 0.100 = 0.1132
Third, calculate the PV of the project cash flows
90 / (1 + 0.1132)1 + 90 / (1 + 0.1132)2 + 90 / (1 + 0.1132)3 = $218,716
And finally, calculate the project NPV by subtracting out the initial cash flow
NPV = $218,716 ? $200,000 = $18,716
Q13. The process of evaluating and selecting profitable long-term investments consistent with the firm’s goal of shareholder wealth maximization is known as:
A) financial restructuring.
B) monitoring.
C) capital budgeting.
Correct answer is C)
In the process of capital budgeting, a manager is making decisions about a firm’s earning assets, which provide the basis for the firm’s profit and value. Capital budgeting refers to investments expected to produce benefits for a period of time greater than one year. Financial restructuring is done as a result of bankruptcy and monitoring is a critical assessment aspect of capital budgeting.
Q14. A company is considering the purchase of a copier that costs $5,000. Assume a cost of capital of 10 percent and the following cash flow schedule:
- Year 1: $3,000
- Year 2: $2,000
- Year 3: $2,000
Determine the project's NPV and IRR.
NPV IRR
A) $883 20%
B) $243 20%
C) $883 15%
Correct answer is A)
To determine the NPV, enter the following:
PV of $3,000 in year 1 = $2,727, PV of $2,000 in year 2 = $1,653, PV of $2,000 in year 3 = $1,503. NPV = ($2,727 + $1,653 + $1,503) ? $5,000 = 883.
You know the NPV is positive, so the IRR must be greater than 10%. You only have two choices, 15% and 20%. Pick one and solve the NPV. If it is not close to zero, then you guessed wrong; select the other one.
[3000 ÷ (1 + 0.2)1 + 2000 ÷ (1 + 0.2)2 + 2000 ÷ (1 + 0.2)3] ? 5000 = 46 This result is closer to zero (approximation) than the $436 result at 15%. Therefore, the approximate IRR is 20%.
Q15. Which of the following statements about the payback period is FALSE?
A) The payback period provides a rough measure of a project's liquidity and risk.
B) The payback method considers all cash flows throughout the entire life of a project.
C) The payback period is the number of years it takes to recover the original cost of the investment.
Correct answer is B)
The payback period does not take any cash flows after the payback point into consideration. | 
发表于 2010-6-21 10:24
| 
