Question : Exhibit 9-2 The following data projected for a possible investment project: 1 2 3  : 1325708

 

 

Exhibit 9-2

The following data are projected for a possible investment project:

 

1     2     3     4

Revenues$120,000$140,000$160,000$180,000

Cost of Goods Sold$  36,000$  42,000$  48,000$  54,000

Depreciation$  80,000 $  60,000 $  40,000 $  20,000

EBIT$    4,000  $  38,000 $  72,000 $106,000

 

 

22.Refer to Exhibit 9-2. The project requires an initial investment of $300,000. Working capital is anticipated to be variable at 10% of revenues; the working capital investment must be made at the beginning of each period, and will be recaptured in full at the end of year 4. The tax rate is 40%.

 

What is the initial cash outlay?

a.$300,000

b.$312,000

c.$232,000

d.$220,000

 

 

 

23.Refer to Exhibit 9-2. The project requires an initial investment of $300,000. Working capital is anticipated to be variable at 10% of revenues; the working capital investment must be made at the beginning of each period, and will be recaptured in full at the end of year 4. The tax rate is 40%.

 

What is the net cash flow to the firm in year 1?

a.$400

b.$82,400

c.$68,400

d.$80,400

e.$2,400

 

 

 

24.Refer to Exhibit 9-2. The project requires an initial investment of $300,000 on equipment. Working capital is anticipated to be variable at 10% of revenues; the working capital investment must be made at the beginning of each period, and will be recovered in full at the end of year 4. Equipment will be sold at its book value at the end of year 4. The tax rate is 40%.

 

What is the net cash flow to the firm in year 4?

a.$101,600

b.$201,600

c.$183,600

d.$161,600

 

 

 

25.Refer to Exhibit 9-2. The project requires an initial investment of $300,000 on equipment. Working capital is anticipated to be variable at 10% of revenues; the working capital investment must be made at the beginning of each period, and will be recovered in full at the end of year 4. Equipment will be sold at its book value at the end of year 4. The tax rate is 40%.

 

What is the net present value of the project if the firm’s discount rate is 10%?

a.-$20,225

b.-$41,731

c.$24,155

d.$26,570

 

 

 

26.Future Semiconductor is considering the purchase of photolithography equipment that will cost $3 million. The equipment requires maintenance of $5,000 at the end of each of the next five years. After five years it will be sold for $500,000. Assume a cost of capital of 15% and no taxes. What is the present value of the cost of the equipment? What is the equivalent annual cost of the equipment?

a.$3,016,761; $899,947

b.$2,516,760; $750,789

c.$2,407,106; $718,077

d.$2,768,172; $825,789

 

 

 

27.Sam’s Insurance must choose between two types of printers. Both printers meet the firm’s quality standard. Printer A costs $3,500 and is expected to last 3 years with operating costs of $380 per year. Printer B costs $2,500 and is expected to last 2 years with operating costs of $400 per year. Assume a discount rate of 10%. Which printer should Sam’s Insurance purchase? What is the equivalent annual cost of this machine?

a.Printer B; $3,194

b.Printer A; $1,625

c.Printer B; $2,904

d.Printer A; $1,787

 

 

 

28.Arizona Truck Company (ATC) is considering the replacement of an old truck. The old truck can be sold for $7,800 now. If it is sold in one year, the resale price will be $5,500, but ATC will spend $2,500 just before selling the truck to make it attractive to a buyer. Assume a cost of capital of 12%. What is the total cost of keeping the old truck for one more year? Express the cash flow in terms of its future value one year from now.

a.$5,121

b.$5,736

c.$4,800

d.$5,376

e.None of the above

 

 

 

29.A firm that manufactures DVD players for automakers currently has excess capacity. The firm expects that it will exhaust its excess capacity in three years. At that time it will have to invest $2 million to build new capacity. Suppose that the firm can accept additional work as a subcontractor for another company. By doing so, the firm will receive a net cash inflow of $120,000 immediately and in each of the next two years. However, the firm will have to begin expansion two years earlier than originally planned to bring new capacity on line. Assume a discount rate of 10%.

 

What is the NPV if the firm accepts the subcontractor job?

a.$328,264

b.-$18,843

c.$12,712

d.$298,422

 

 

 

30.A project generates the following sequence of cash flows over two years:

 

YearCash Flow ($ in millions)

0-40.00

18.00

210.00

 

Assume that cash flows after the second year grow at 2% annually in perpetuity, and the discount rate is 12%. What is the NPV of the project?

a.$56.4m

b.$54.8m

c.$47.7 m

d.$50.4m

 

 

 

31.Kelley Group is considering an investment of $2 million in an asset with an economic life of four years. The cash revenues and expenses in year 1 are expected to be $1.8m and $0.5m respectively. Both revenues and expenses are expected to grow at 3 percent per year. The asset will be fully depreciated to zero using the straight line method over its economic life. The salvage value of the asset is expected to be $0.3m at the end of the fourth year. Kelley Group also needs to add net working capital of $0.1m immediately, and this capital will be recovered in full at the end of the project’s life. The tax rate is 40%. What is the investment’s cash flow in year 4?

a.$1.1323m

b.$1.4523m

c.$1.3323m

d.$1.3579m