WEEK 3 QUIZ b

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American Military University **We aren't endorsed by this school
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FINANCE FINC600
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Finance
Date
Oct 22, 2023
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4
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WEEK 3 QUIZ 1. A 5-year project requires $65,000 of fixed assets that will be depreciated using straight-line depreciation to a zero book value over the life of the project. If the firm requires a minimum average accounting return of 11.65 percent, what must be the minimum average net income for the project to be accepted? Multiple Choice $8,001.29 $3,786.25 Correct $7,572.50 Incorrect $5,504.73 $4,029.14 Explanation Average accounting return = .1165 = Average net income / ($65,000 + 0) / 2 Average net income = $3,786.25 2. It will cost $28,900 to acquire a small ice cream cart. Cart sales are expected to be $10,500 a year for three years. After the three years, the cart is expected to be worthless. What is the payback period? Multiple Choice 2.75 years Correct 2.46 years 2.07 years Never 2.68 years Explanation Payback period = $28,900 / $10,500 = 2.75 years 3. The payback method
Multiple Choice requires each firm to set a firmwide cash flow cutoff period. ignores the time value of money. Correct is superior to the NPV method. considers all relevant cash flows. discounts all cash flows properly. 4. Thornley Co. is considering a 3-year project with an initial cost of $636,000. The equipment is classified as MACRS 7-year property. The MACRS table values are .1429, .2449, .1749, . 1249, .0893, .0892, .0893, and .0446 for Years 1 to 8, respectively. At the end of the project, the equipment will be sold for an estimated $279,000. The tax rate is 35 percent, and the required return is 17 percent. An extra $23,000 of inventory will be required for the life of the project. Annual sales are estimated at $379,000 with costs of $247,000. What is the total cash flow for Year 3? Multiple Choice $406,208.19 $423,008.24 $315,189.32 Correct $319,208.19 Explanation Depreciation Year 3 = $636,000 × .1749 = $111,236.40 Operating cash flow 3 = ($379,000 − $247,000 − $111,236.40)(1 − .35) = $13,496.34 Book Value Year 3 = $636,000 × (1 − .1429 − .2449 − .1749) = $278,122.80 Aftertax salvage value = $279,000 − .35 × ($279,000 − $278,122.80) = $278,692.98 C0 3 = $13,496.34 + $23,000 + $278,692.98 = $315,189.32 5. A project requires $1.08 million of new equipment that will be depreciated straight-line to zero over the project's 4-year life. The equipment is expected to be sold at the end of the project for 33 percent of its original cost. Net working capital equal to 12 percent of sales is required and will be recouped at the end of the project. Annual sales are projected at $487,500 with annual costs of $302,400. What is the recovery amount attributable to net working capital at the end of the project?
Multiple Choice $58,500 Correct $25,555 $42,550 $22,212 $40,100 Explanation NWC recapture = .12 × $487,500 = $58,500 6. Data, Inc., purchased some fixed assets four years ago at a cost of $21,650 and is selling them today at a price of $4,500. The assets are classified as 5-year property for MACRS. The MACRS table values are .2000, .3200, .1920, .1152, .1152, and .0576 for Years 1 to 6, respectively. What is the current book value of these assets? Multiple Choice $6,309.19 $4,016.67 $3,741.12 Correct $1,247.04 $8,420.02 Explanation Book value Year 4 = $21,650 × (1 − .2 − .32 − .192 − .1152) = $3,741.12 7. Denver Mart is considering a project with a life of five years and an initial cost of $136,000. The discount rate is 11 percent. The firm expects to sell 2,200 units a year with a cash flow per unit of $26. The firm will have the option to abandon this project after three years at which time it expects it could sell the project for $48,000. The firm is interested in knowing how the project will perform if the sales forecast for Years 4 and 5 of the project are revised such that there is a probability of 50 percent that the sales will be 1,000 units and a probability of 50 percent they will be 2,500 units a year. What is the net present value of this project given your sales forecasts? Multiple Choice $62,025 Correct
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