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Material Type: Exam; Professor: Hodges; Class: Intermediate Corporate Finance; Subject: Finance; University: University of West Georgia; Term: Fall 2003;
Typology: Exams
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Exam 3 Fall 2003 FINC 4531 Your Name ______________________
Instructions:
Most important = Why?
a. Internal Rate of Return b. Cost of Capital c. Return on Investment d. Return on Equity e. None of the above.
a. Project B because it has a higher NPV. b. Project A because it has a smaller initial investment. c. Either one, they are both good investments. d. You cannot choose because the internal rates of return are the same. e. Not enough information to choose between the two projects.
Consider the following possible problems that arise in using alternative capital budgeting decision rules, such as IRR or NPV, etc. Then, in the next three problems, choose the problems associated with the technique identified.
I. Ignores time value of money II. Ignores the more distant flows III. May give ambiguous results, e.g., multiple answers IV. May not correctly distinguish among mutually exclusive projects
Exam 3 Fall 2003 FINC 4531 Your Name ______________________
Instructions:
The part of the exam is open book and open notes.
Point values are listed with the question.
Show your work in order to have the possibility of partial credit.
(12 points) The following series of cash flows occur for t = 0, 1, 2, 3, 4, 5, and 6, respectively: -$285,500, $108,500, $108,500, $108,500, $68,500, $68,500, and $108,500. The appropriate risk-adjusted discount rate is 8%.
What is the NPV?
What is the IRR?
What is the payback period?
What is the Profitability Index?
Project: A B C D E F G H I Initial Cost: 15 20 25 30 35 30 35 10 15 NPV: 2.0 3.5 3.6 3.2 2.8 3.8 4.2 .7.
(Fill in the blanks for 2 points) At a discount rate of _________% the NPV of this project is $___________. For 18 points show how the previous two answers are correct.
Two friends are considering opening a driving range for golfers. Because of the popularity of golf, they estimate that they could rent 20,000 buckets at $3 a bucket in the first year, and that rentals will grow by 750 buckets a year thereafter. The price will remain at $3 per bucket for the life of the project. Equipment, listed below, is 5-year MACRS and is expected to have a salvage value of 10% of cost after 6 years. Expenditures for balls and buckets are $3,000 for year 1. The cost of replacing balls and buckets will grow at 5% per year (e.g. $3150 in year 2). Net working capital needs are $3,000 to start. The relevant tax rate is 15 percent. The required rate of return is 15 percent. The Equipment Requirements are; a Ball Dispensing Machine at 2,000, a Tractor and Accessories at 8,000, a Ball Pickup Machine at 8,000, for a Total or 18,000. The Operating Costs per Year are; Land Lease at 12,000, Water at 1,500, Electricity at 3,000, Seed & Fertilizer at 2,000, Labor (Salaried) at 30,000, Gasoline at 1,500, Maintenance at 1,000, Insurance at 1,000, Miscellaneous at 1,000, for a Total of 53,000.00. The friends will finance the 18,000 in equipment with a bank loan that has a 6% interest rate. The loan is to be repaid when the project ends in 6 years. In addition, at the end of year 3, the company will begin to pay a total dividend to your friends of $2,000 and this amount will increase by $1,000 per year until the project ends.
Evaluate the project for 6 years. Should your friends proceed with the project?