AK/ADMS 3530.03 Finance Final Exam Winter 2007 Solutions Type A Exam Numerical questions (2 points each) 1. (Q. 5 in B) What is the present value of the following payment stream, discounted at 8 percent annually: $1,000 at the end of year 1, $2,000 at the end of year 2, and $3,000 at the end of year 3? A) $5,022.11 B) $5,144.03 C) $5,423.87 D) $5,520.00 Answer A PV = [pic] = $925.93 + $1,714.68 + $2,381.50 = $5,022.11 2. (Q. 6 in B) What is the present value of a four-year annuity of $100 per year that begins two years from today if the discount rate is 9 percent? A) $297.22 B) $323.86 C) $356.85 …show more content…
A) $2.00 B) $2.20 C) $4.00 D) $6.00 Answer A [pic] 15% = [pic] Dividend = $2. 9. (Q. 13 in B) Because of its age, your car costs $4,000 annually in maintenance expense. You could replace it with a newer vehicle costing $8,000. Both vehicles would be expected to last four more years. If your opportunity cost is 8 percent, what would be the maximum annual maintenance expense on the newer vehicle to still justify its purchase? A) $1,250 B) $1,585 C) $2,000 D) $2,415 Answer B $8,000 = Annuity [pic] = Annuity [3.3121] = $2,415.39 When combined with the annuitized cost of the vehicle, any annual expense over $1,584.61 would place the total annual expense of the new vehicle over $4,000. 10. (Q. 14 in B) The profitability index for a project costing $40,000 and returning $15,000 annually for four years at an opportunity cost of capital of 12 percent is: A) 0.139 B) 0.320 C) 0.500 D) 0.861 Answer A PV = $15,000 [pic] = $15,000 [3.0373] = $45,560 and NPV = $45,560 - $40,000 = $5,560. Profitability index = $5,560 / $40,000 = 0.139. 11. (Q. 15 in B) What is the minimum number of years that an investment costing $500,000 must return
B. The present value of an annuity is unaffected by the number of the annuity payments.
effective cost of { [ (1 + .15/365)^365 ] - 1 } * 100 = 16.18% per year.
b. What is the present value of this annuity if the opportunity cost rate is 10% annually? 10% compounded semiannually?
EEC calculated the amount of time involved the anticipation of its cost ($3 million). The timeline in recovering their cost of investment ($2 million) initially for the foundation of this investment any profit made in the future of this investment will be justified as a profit for the company. If EEC can anticipate a fast return on its investment it is a profitable wise decision in making the investment financial, it is considered to be an easier way of formulating investments financially. On the basis of one year all cash flows is added together equal to the sum of $2 million originally invested, then it is divided by the annual cash flow of $500,000. The calculation of the payback period would equal four years. After this time frame any financial proceeds will be considered profitable for the company. I conclude that the timeframe is adequate in comparison of the investment in this worthwhile investment financial venture for the company.
Alternative 1: Keep the old machine and have it overhauled. If the old machine is overhauled, it will be kept for another five years and then sold for its salvage value.
18) You are considering purchasing a new truck that will cost you $34,000. The dealer offers you 1.9% APR
"e. What is each project's MIRR at a cost of capital of 12%? At r = 18%? (Hint: Consider Period 7 as the end of
Estimate the project’s operating cash flows for each year of the project’s economic life. (Hint: Use Table 2 as a guide)
14. How close does the terminal value in part 2 get to the present value using the growing annuity formula in part 3?
9. You want to purchase a business with the following cash flows. How much would you pay for this business today assuming you needed a 14% return to make this deal?
Calculate the Nominal Payback, the Discounted Payback, the Net Present Value and the IRR assuming:
b.What are the amounts and timing of the acquisition investment’s free cash flow from 2013 through 2022?
5. The project is assumed to end in year 4. Do you think that this is realistic? Can you estimate the value of the project’s operating cash flows beyond year 4? State any assumptions you made.
income is $26.03 for year 1. Similarly, the present value of the firm at time 1 is
Assume that the annual payments in the sixth year is equal to the rental payment in the fifth year ( 112.9 and 86.0) and the remainder of the lump sum values (54.6 and 17.8) is due in the seventh year. With a discount rate of 5.4%, the present values of the rental payments for the years 2006 and 2007 are as follows: