C214 Financial Management 11-13

What is the NPV of the project? $101,432 $76,235 $58,009 ($174,276)

Answer: $101,432 IO = -400000 Yr 1 = 128000 Yr 2 = 147200 Yr 3 = 126720 Yr 4 = 114400 Yr 5 = 97280+114400 = 211680 Discount @ 13% = NPV = 101432

A project is closing. Equipment is sold for $50,000, even though the book value was $75,000. The tax rate is 30%. The project started with $100,000 in working capital. What is the terminal cash flow? 75,000 152,500 157,500 127,500

1 / 1 (100.0%) Answer: 157,500 50,000 - ((50,000-75,000)*.3) + 100,000 = 157,500

ABC Corp is considering a project requiring the purchase of new equipment. The firm spent $20,000 on a market assessment four months ago as well as $14,000 for a feasibility study a year ago. In order to start the new project, the firm has to replace an old machine with a remaining book value of $25,000 (note: this is the original salvage value of the old machine; as such, it is fully depreciated). While still functional, the machine has no market value and will be scrapped if the new equipment is acquired. The new machine will cost the firm $220,000. In order to put the machine in working condition, ABC will spend $6,000 in installation and $4,000 in shipping. If the new machine is purchased net working capital will be increased by $10,000. The new machine will be depreciated via the straight-line depreciation method to a salvage value of $0. However, at the end of the new machine's five-year life, it can be sold for $30,000. If accepted, the new machine will increase annual revenues by $150,000 and will increase annual operating cost by $45,000. The company has a marginal tax rate of 40% and a cost of capital of 14%. The project will last 5 years. What is the incremental (i.e., total) cash flow in Year 5? $81,400 $121,400 $109,400 $99,400

Answer: $109,400 · Step 1- Operating cash flow: The calculation is as follows (note: depreciation expense = (depreciable base - salvage value)/life = (230k - 0)/(5 = 46k): Revenue . 150,000 Cost (45,000) Depreciation Expense (46,000) EBT 59,000 Tax (40% of EBT) . (23,600) NOPAT 35,400 Add: Depreciation Exp 46,000 Operating Cash Flow 81,400 Total Cash Flow = Operating Cash Flow + Terminal Value = 81400 + 28000 = $109,400

The total cost of a new machine including the shipping and the installation was $250,000. Using the 3-year MACRS schedule, determine the depreciation expense in year 2. The factors for the three-years schedule are: year 1 = 33.33%, year 2 = 44.45%, year 3 = 14.81%, and year 4 = 7.41%. $111,125 $83,325 $18,525 $37,025

Answer: $111,125 Using the tables, depreciation for each year is calculated as: Depr.expense = factori x cost. Hence, for year 2 depreciation expense = .4445 x $250,000 = $111,125.

What is the total cash flow for Year 5? $78,440 $101,440 $111,440 $68,440

Answer: $111,440 Total CF = DiffCF + Terminal CF = 68,440 + 43,000 = 111,440.

What is the differential cash flow in Year 4? $68,400 $128,000 $111,456 $114,400

Answer: $114,400 Year 4 MACRS 11.50% Depreciation Expense 46,000 Revenue 200,000 Cost (40,000) Depreciation Expense (46,000) EBIT 114,000 Tax (45,600) NOPAT 68,400 Add: Depreciation Exp 46,000 Differential Cash Flow 114,400

TippingToys is considering the purchase of a new toy-making machine that will increase revenues by $50,000 a year and annual costs by $10,000. The new machine will replace an outdated machine with a current book vale of $10,000 but if scrapped now can only be sold for $6,000. The new machine will cost $100,000 with shipping and installation fees of $10,000. The machine will be depreciated via 5-year MACRS schedule (20.0%, 32.0%, 19.2%, 11.5%, 11.5%, 5.8%). The firm estimates that the new machine can be sold at the end of its five-year life for $20,000. The new machine will necessitate an investment of $30,000 in working capital that will be fully recovered at the end of the project. Tipping Toys has a 10% cost of capital and a corporate tax rate of 40%. What is the initial outlay? $142,400 $144,000 $132,400 $134,000

Answer: $132,400 Cost of New Machine (100,000) Installation/Shipping (10,000) Depreciable base (110,000) Working Capital (30,000) Price of Old 6,000 BV of Old (10,000) Gain/Loss (4,000) Tax 1,600 Net Sales of Old 7,600 Initial Outlay (132,400) Notes: Note the net cash inflow from the sale of the old equipment is $7600 ($6,000 sale proceeds plus a $1,600 tax shield). The depreciable base is the cost of the asset plus shipping, or $110k. The working capital investment is not included in the depreciable base, but is part of the initial outlay. You can simplify this calculation by thinking of it as: IO = cost + shipping + working cap - sale of old = 100k + 10k + 30k - 7.6k = 132,400 (remember, this is an outflow!)

Active Alarm is replacing its old machine with a new one. The old machine is being sold for $200,000 and it has a book value of $50,000. The tax rate for the firm is 40%. What is the net proceed from the sale of the old machine? $140,000 $150,000 $90,000 $260,000

Answer: $140,000 Net Sale = Sale price - (Sale price - Book Value) x Tax Rate = 200,000 - (200,000 - 50,000) X 0.4 = $140,000

TippingToys is considering the purchase of a new toy-making machine that will increase revenues by $50,000 a year and annual costs by $10,000. The new machine will replace an outdated machine with a current book value of $10,000 but if scrapped now can only be sold for $6,000. The new machine will cost $100,000 with shipping and installation fees of $10,000. The machine will be depreciated via 5-year MACRS schedule (20.0%, 32.0%, 19.2%, 11.5%, 11.5%, 5.8%). The firm estimates that the new machine can be sold at the end of its five-year life for $20,000. The new machine will necessitate an investment of $30,000 in working capital that will be fully recovered at the end of the project. Tipping Toys has a 10% cost of capital and a corporate tax rate of 40%. What is the NPV of the project? $14,755 $18,824 $15,718 $22,206

Answer: $18,824 Note: the total cash flow in year 5 (aka, year 5 free cash flow) of $73,612 consists of the differential (or operating) cash flow of $29,060 plus the terminal cash flow of $44,552

In order to start the new project, the firm has to replace an old machine with a remaining book value of $25,000. However, while still functional, the machine has no market value and will be scrapped if the new equipment is acquired. The new machine will cost the firm $220,000. In order to put the machine in working condition, ABC will spend $6,000 in installation and $4,000 in shipping. If the new machine is purchased net working capital will be increased by $10,000. The new machine will be depreciated via the straight-line depreciation method to a salvage value of $0. However, at the end of the new machine's five-year life, it can be sold for $30,000. If accepted, the new machine will increase annual revenues by $150,000 and will increase annual operating costs by $45,000. The company has a marginal tax rate of 40% and a cost of capital of 14%. The project will last 5 years. What is the initial outlay of this project? $230,000 $240,000 $265,000 $245,000

Answer: $230,000 · Depreciable asset = Cost of New + Install + Ship = 220k + 6k + 4k = 230k · Net cash from sale of old machine = MV of Old -/+ Tax effect = $0 + $10k = 10k o Gain (Loss) = Sale price - BV = $0 - $25k = ($25k) (note: not cash). o Reduces initial outlay! Initial outlay = cost of new + install + ship + increase in WC - net cash from sale of old = 220k + 6k + 4K + 10k - 10k = 230k

What is the differential cash flow given the following? Sales 50,000 Expenses (w/o depn) 30,000 Depreciation 10,000 Taxes (.40) 4,000 50,000 10,000 16,000 6,000

Answer: 16,000 NI + depn 50,000 - 30,000 - 10,000 = 10,000 EBIT - taxes of 4,000 = 6,000 NI + 10,000 depn = 16,000 diff cash flow

XYZ Company is considering the purchase of new equipment. The firm spent $12,000 on consulting several months ago as well as $7,000 on a market study about a year ago. In order to start the new project, the firm has to replace the old machine which has a book value of $0 and will be scrapped. The new machine will cost the firm $220,000. Additionally, XYZ will spend $7,000 in installation and $3,000 in shipping. Since the new machine will produce more, an investment in net working capital of $10,000 is required. The new machine will be depreciated using straight-line depreciation to a salvage value of $0. However, the realizable salvage value of the new machine at year 5 is expected to be $50,000. The project will increase annual revenues by $125,000 and will increase annual operating cost by $45,000. The company has a marginal tax rate of 34%. It has the cost of capital of 14% and the project will last 5 years. What is the initial outlay of this project? $240,000 $220,000 $230,000 $250,000

Answer: $240,000 Initial outlay = Price of New Machine + Shipping/Installation + Required NWC + Net Proceed from Sale of Old Machine = 220,000 + 10,000 + 10,000 + 0 = 240,000

ABC Corp is considering a project requiring the purchase of new equipment. The firm spent $20,000 on a market assessment four months ago as well as $14,000 for a feasibility study a year ago. In order to start the new project, the firm has to replace an old machine with a remaining book value of $25,000 (note: this is the original salvage value of the old machine; as such, it is fully depreciated). While still functional, the machine has no market value and will be scrapped if the new equipment is acquired. The new machine will cost the firm $220,000. In order to put the machine in working condition, ABC will spend $6,000 in installation and $4,000 in shipping. If the new machine is purchased net working capital will be increased by $10,000. The new machine will be depreciated via the straight-line depreciation method to a salvage value of $0. However, at the end of the new machine's five-year life, it can be sold for $30,000. Therefore, "If accepted, the new machine will increase annual revenues by $150,000 and will increase annual operating cost by $45,000. The company has a marginal tax rate of 40% and a cost of capital of 14%. The project will last 5 years If the marginal tax rate is 40%, what is the terminal cash flow of the project? $28,000 $18,000 $40,000 $48,000

Answer: $28,000 Terminal Value = Recap of Working Capital + Net Proceeds from Sale of New Machine = 10000 (WC) + 30000(Price of the machine) - 12000(Tax effect) = $28,000. Remember, terminal cash flow refers to the cash flows associated with "winding down" (or "wrapping up") a project. The final year's operating cash flows are attributable to time 5, but are NOT included in terminal cash flows.

TippingToys is considering the purchase of a new toy-making machine that will increase revenues by $50,000 a year and annual costs by $10,000. The new machine will cost $100,000 with shipping and installation fees of $10,000. The machine will be depreciated via 5-year MACRS schedule (20.0%, 32.0%, 19.2%, 11.5%, 11.5%, 5.8%). The firm estimates that the new machine can be sold at the end of its five-year life for $20,000. The new machine will necessitate an investment of $30,000 in working capital that will be fully recovered at the end of the project. Tipping Toys has a 10% cost of capital and a corporate tax rate of 40%. What is the differential cash flow in Year 3? $31,680 $32,800 $34,168 $32,448

Answer: $32,448 Remember, the terms differential cash flow and operating cash flow are used interchangeably. The calculation is as follows: Year 3 MACRS Factoryear 3 19.20% Depr Expyr3 ($110k x.192) 21,120 Revenue 50,000 Cost (10,000) Depreciation Expense (21,120) EBIT 18,880 Tax (40%) (7,552) NOPAT 11,328 Add: Depreciation Exp 21,120 Differential Cash Flow3 32,448 Total Cash Flow3 32,448 Note: Even though the revenues and costs are constant in all five years of the project's life, the differential cash flow will be different each year because of differing depreciation expense.

Suppose an asset that cost $250,000 is depreciated straight-line over 7 years. The salvage value is assessed as $5,000. What is the depreciation expense in Year 3? $41,823 $35,000 $35,714 $48,000

Answer: $35,000 Depreciation Expense = (250000 - 5000) / 7 = $35,000

The total cost of a new machine, including the shipping and installation, is $250,000. Using the 3-year MACRS schedule, determine the depreciation expense in year 3. Year 3-YR MACRS (%) 1 33.33% 2 44.45% 3 14.81% 4 7.41% $83,325 $111,125 $37,025 $18,525

Answer: $37,025 Year 3-YR MACRS (%) Depreciation Expense 1 33.33% .3333 x $250000 = 83,325 2 44.45% .4445 x 250000 = 111,125 3 14.81% .1481 x 250000 = 37,025 4 7.41% .0741 x 250000 = 18,525

Initial Outlay $(5,000) Year 1 $3,000 Year 2 $3,500 Year 3 $3,200 Year 4 $2,800 Year 5 $2,500 What is the NPV if the discount rate is 20%? $14,137 $4,137 $9,137 $18,237

Answer: $4,137 NPV = -5 + 3/1.21 + 3.5/1.22 + 3.2/1.23 + 2.8/1.24 + 2.5/1.25 = $4.137 (= $4,137)

Use the following information to answer the next three questions. Initial Outlay $ (5,000) Year 1 $ 3,000 Year 2 $ 3,500 Year 3 $ 3,200 Year 4 $ 2,800 Year 5 $ 2,500 What is the NPV if the discount rate is 20%? None of these choices $9,137 $5,000 $4,137

Answer: $4,137 Discount all future cash flows at 20% and subtract $5000.

Use the following information to answer the next three questions. Initial Outlay $ (5,000) Year 1 $ 3,000 Year 2 $ 3,500 Year 3 $ 3,200 Year 4 $ 2,800 Year 5 $ 2,500 What is the NPV if the discount rate is 20%? None of these choices $9,137 $5,000 $4,137

Answer: $4,137 Discount all future cash flows at 20% and subtract $5000.

What is the terminal cash flow of the project? $23,000 $43,000 $60,000 $33,000

Answer: $43,000 Terminal CF = Net Proceed from Sale of New Machine + Recap of WC = 50,000 X(1 - 0.34) + 10,000 = 43,000.

A firm purchased raw materials on June 1st on credit, paid for the materials on June 10th, finished producing and sold the finished product on June 20th, and received payment on June 27th. How many days was the cash cycle? 17 21 13 15

Answer: 17 The firm paid for the materials on June 10 and received cash payment on June 27. This implies the cash cycle was 17 days.

What is the IRR given the following? Investment is $250,000. Yr 1 is $50,000, Yr 2 is $60,000, Yr 3 is $80,000, Yr 4 is $100,000, Yr 5 is $90,000, and the terminal cash flow is $45,000. 13.997% 11.549% 15.949% 17.213%

Answer: 17.213% Make sure to add the TCF to Yr 5 for 135,000.

Suppose a firm has sales of $15 million, variable costs of $4 million, fixed costs of $5 million, and EBIT of $5 million. Given this information, what is the degree of operating leverage? (Round to the nearest hundredth: .00)

Answer: 2.2 DOL: (15 - 4) / 5 = 2.2

TippingToys is considering the purchase of a new toy-making machine that will increase revenues by $50,000 a year and annual costs by $10,000. The new machine will cost $100,000 with shipping and installation fees of $10,000. The machine will be depreciated via 5-year MACRS schedule (20.0%, 32.0%, 19.2%, 11.5%, 11.5%, 5.8%). The firm estimates that the new machine can be sold at the end of its five-year life for $20,000. The new machine will necessitate an investment of $30,000 in working capital that will be fully recovered at the end of the project. Tipping Toys has a 10% cost of capital and a corporate tax rate of 40%. What is the terminal cash flow of the project? $44,552 $30,000 $38,172 $42,000

Answer: $44,552 Remember that "terminal cash flow" refers only to the cash flows that occur because the project concludes (sometimes called 'wrap-up' or 'wind-down' cash flows). The major components are the sale of the "new" equipment purchased at project origination (including any tax implications) plus the recapture of working capital. Note: recall that we are using a 5-year MACRS schedule and have claimed 5 years of depreciation. But, the 5-year schedule has 6 factors. So, to fully depreciate an asset under a 5-year schedule requires 6 years (note: don't look for logic in the tax code!). Since we have claimed only 5 years, there is still 5.8% of the original depreciable base remaining on the books (i.e., the sixth year's depreciation under the 5-year MACRS schedule is 5.8%). That is, at the end of the 5th year the book value of the new equipment = depreciable base x .058 = 110k x .058 = $6,380. This has important implications for the calculation of terminal cash flows. Specifically, if we sell the asset for $20k, the taxable gain will be: 20,000 - 6,380 = $13,620. This creates a tax liability of $5,448 (=13,620 x .4). Hence, the net proceeds from selling the equipment at the end of 5 years = sale price - tax liability = 20,000 - 5448 = $14,552.

XYZ Company is considering the purchase of new equipment. The firm spent $12,000 on consulting several months ago as well as $7,000 on a market study about a year ago. In order to start the new project, the firm has to replace the old machine which has a book value of $0 and will be scrapped. The new machine will cost the firm $220,000. Additionally, XYZ will spend $7,000 in installation and $3,000 in shipping. Since the new machine will produce more, an investment in net working capital of $10,000 is required. The new machine will be depreciated using straight-line depreciation to a salvage value of $0. However, the realizable salvage value of the new machine at year 5 is expected to be $50,000. What is the total cash flow for Year 2? $22,440 $68,440 $70,000 $24,000

Answer: $68,440 CF2 = EBIT X (1 - t) + Depr Exp - Change in NWC = (Revenue - Cost - Depr Exp) X (1-t) + Depr Exp - Change in NWC = (125,000 - 45,000 - 46,000) X (1 - 0.34) + 46,000 - 0 = 68,440 Depreciation Expense Calculation: Depreciable asset: 220000+7000+3000 = 230,000 Annual Depreciation: (230000-0)/5 = 46000

What is the depreciation expense in Year 3? $76,800 $89,280 $84,480 $65,280

Answer: $76,800 The depreciable asset is $400,000 (which is the cost of new machine, installation and shipping), and the depreciation percentage is 19.20% of that. 400000*.192 = 76800

What is the terminal cash flow of the project? $88,000 $60,000 $97,280 $72,480

Answer: $97,280 WC 28,000 Sale of New 100,000 BV of New (5.8%*400000) (23,200) Gain/Loss 76,800 Tax (30,720) Cash from Sale 69,280 Terminal CF 97,280

A firm has EBIT of $126 million and earnings before taxes (EBT) of $101 million. What is the firms degree of financial leverage? (Round to the nearest hundredth: .00)

Answer: 1.25 DFL: 126/101 = 1.25

A firm has EBIT of $14 million and interest expense of $5 million. What is the firm's degree of financial leverage? (Round to the nearest hundredth: .00)

Answer: 1.56 DFL: 14/(14-5)=1.56

Use the following information to calculate the payback period for the project. Initial Outlay $(10,000) Year 1 $6,000 Year 2 $7,000 Year 3 $6,400 Year 4 $5,600 Year 5 $5,000 2.00 years 1.67 years 1.57 years 1.00 year

Answer: 1.57 years After year 1, the project is $4k short of "paying back" the initial investment ($10k initial investment - $6k year 1 inflow). The $4k needed to achieve payback will require 57% of year 2 inflows ($4k/$7k). Hence, the payback is: Payback Period = 1 + (4000/7000) = 1.57 years

Use the following information to answer the question. Initial Outlay $ (5,000) Year 1 $ 3,000 Year 2 $ 3,500 Year 3 $ 3,200 Year 4 $ 2,800 Year 5 $ 2,500 What is the payback period of above cash flows? 1.57 years 1.00 year 1.67 years 2.00 years

Answer: 1.57 years Year 1 cash flow will be used to payback a part of the initial outlay and $2,000 will be left to payback still. Since Year 2 has more cash inflow than needed to achieve payback, payback period can be calculated as: 1 + (2000/3500) = 1.57 years.

A firm has EBIT of $56 million and earnings before taxes (EBT) of $34 million. What is the firms degree of financial leverage? (Round to the nearest hundredth: .00)

Answer: 1.65 DFL: 56/34 = 1.65

Suppose a firm has variable costs of $14 million, fixed costs of $15 million, depreciation of $3 million, and EBIT of $25 million. Given this information, what is the degree of operating leverage? (Round to the nearest hundredth: .00)

Answer: 1.72 Sales: 25+3+15+14 = 57 DOL = (57-14)/25 = 1.72

If the investment is $140,000, what is the net present value, given a total present value of $154,606? -123,420 14,606 -71,448 140,000

Answer: 14,606 154,606 - 140,000 = 14,606

TippingToys is considering the purchase of a new toy-making machine that will increase revenues by $50,000 a year and annual costs by $10,000. The new machine will replace an outdated machine with a current book vale of $10,000 but if scrapped now can only be sold for $6,000. The new machine will cost $100,000 with shipping and installation fees of $10,000. The machine will be depreciated via 5-year MACRS schedule (20.0%, 32.0%, 19.2%, 11.5%, 11.5%, 5.8%). The firm estimates that the new machine can be sold at the end of its five-year life for $20,000. The new machine will necessitate an investment of $30,000 in working capital that will be fully recovered at the end of the project. Tipping Toys has a 10% cost of capital and a corporate tax rate of 40%. What is the IRR of the project? 14.85% 14.05% 12.47% 13.03%

Answer: 14.85% Note: the total cash flow in year 5 (aka, year 5 free cash flow) of $73,612 consists of the differential (or operating) cash flow of $29,060 plus the terminal cash flow of $44,552

From the following information, calculate the terminal cash flow. Proceeds from sale of equipment 100,000 Book value of equipment sold 50,000 Year 3 diff cash flow 225,000 Tax rate 40% Depreciation Yrs 1 to 5 125,000 Working capital return 75,000 175,000 485,000 155,000 125,000

Answer: 155,000 100,000 - 50,000 = 50,000 Net realizable value * tax rate of .4 = 20,000 to be paid in taxes. 100,000 from buyer - taxes paid of 20,000 = 80,000 total salvage value + 75,000 in working capital return = 155,000 terminal cash flow

A firm has sales of $15 million, variable costs of $4 million, fixed costs of $3 million, depreciation of $1 million, interest expense $2 million and taxes of $.5 million. What is the degree of combined leverage? (Round to the nearest hundredth: .00)

Answer: 2.20 DCL: (15-4)/([15-4-3-1]-2) = 2.20

A firm has EBIT of $138 million and interest expense of $77 million. What is the firm's degree of financial leverage? (Round to the nearest hundredth: .00)

Answer: 2.26 DFL: 138/(138-77) = 2.26

Suppose a firm has sales of $56 million, variable costs of $20 million, fixed costs of $16 million, and depreciation of $5 million. Given this information, what is the degree of operating leverage? (Round to the nearest hundredth: .00)

Answer: 2.40 EBIT: 56-20-16-5 $15 million DOL: (56-20)/15 = 2.40

What is the degree of operating leverage given sales of $100,000, variable costs of $75,000, and EBIT of $10,000? 1.00 2.50 2.05 10.00

Answer: 2.50 100,000 - 75,000 / 10,000 = 2.50

Suppose a firm has sales of $102 million, fixed costs of $45 million, depreciation of $13 million, and EBIT of $35 million. Given this information, what is the degree of operating leverage? (Round to the nearest hundredth: .00)

Answer: 2.66 Variable costs: 102-45-13-35=9 DOL: (102-9)/35 = 2.66

What is the equipment cost subject to depreciation from the following initial outlay? Old equipment sells for (net of taxes) 55,000 New equipment at cost 190,000 Installation and shipping 18,000 Working capital 62,000 270,000 197,000 208,000 153,000

Answer: 208,000 190 + 18 = 208

What is the IRR of the project? 3.09% 22.39% 23.90% 20.13%

Answer: 22.39% IO = -400000 Yr 1 = 128000 Yr 2 = 147200 Yr 3 = 126720 Yr 4 = 114400 Yr 5 = 97280+114400 = 211680 IRR = 22%

A piece of equipment is to be sold at the end of the project. Its appraised value is $420,000. A company makes an offer for $350,000. The equipment has a book value of $75,000. The tax rate is 40%. What is the salvage value if the company accepts the offer? 252,000 240,000 350,000 207,000

Answer: 240,000 350,000 - ((350,000 - 75,000) * .4) = 240,000

A firm purchased raw materials on June1st on credit, paid for the materials on June 10th, finished producing and sold the finished product on June 20th, and received payment on June 27th. How many days was the operating cycle? 27 29 23 25

Answer: 27 The operating cycle begins when raw materials are received (June 1) and finishes when payment is received for the finished good (June 27th).

A firm has sales of $101 million, variable costs of $74 million, fixed costs of $9 million, depreciation of $6 million, interest expense $3 million and taxes of $.5 million. What is the degree of combined leverage? (Round to the nearest hundredth: .00)

Answer: 3.00 DCL: (101-74)/([101-74-9-6]-3)= 3.00

Suppose a firm was provided an option to purchase $100 of raw materials according to a 3/15 net 45 discount policy. What is the 30 day interest rate in percent on this effective loan? (round to the nearest hundredth: .00).

Answer: 3.09 .03*100 = $3. (100-97)/97 = 3.09%

A company has a degree of operating leverage of 1.5 and a degree financial leverage of 2.2. What is the company's degree of combined leverage? (Round to the nearest hundredth: .00)

Answer: 3.30 DCL: (1.5*2.2) =3.30

What is the degree of combined leverage when EBIT is $700,000, interest expense is $100,000, sales are $3,500,000, and variable costs are $1,200,000? 2.917 5.000 0.462 3.833

Answer: 3.833 (3,500-1,200) / (700-100) = 3.833

A firm purchased raw materials on April 1st on credit, paid for the materials on April 15th, finished producing and sold the finished product for cash on May 15th. How many days was the cash cycle? 25 30 15 20

Answer: 30 The firm paid for the materials on April 15th and received cash payment on May 15th. This implies the cash cycle is one month or 30 days.

A firm has sales of $150 million, variable costs of $61 million, EBIT of $44 million, and interest expense of $22 million. What is the degree of combined leverage? (Round to the nearest hundredth: .00)

Answer: 4.05 DCL: (150-61)/(44-22) = 4.05

A firm purchased raw materials on April 1st on credit, paid for the materials on April 15th, finished producing and sold the finished product on May 15th, and received payment on May 30th. How many days was the cash cycle? 30 55 45 50

Answer: 45 The firm paid for the materials on April 15th and received cash payment on May 30th. This implies the cash cycle is a month and a half, or 45 days.

A firm purchased raw materials on April 1st on credit, paid for the materials on April 15th, finished producing and sold the finished product for cash on May 15th. How many days was the operating cycle? 43 45 40 47

Answer: 45 The firm received the raw materials on April 1 and received cash payment on May 15. This implies the operating cycle was one and a half months, or 45 days.

What is the initial outlay given the following information? Equipment price 375,000 Installation 10,000 Power survey 30,000 Shipping 8,000 Working capital 100,000 Project marketing report 15,000 503,000 493,000 488,000 538,000

Answer: 493,000

A company has a degree of operating leverage of 2.1 and a degree financial leverage of 2.5. What is the company's degree of combined leverage? (Round to the nearest hundredth: .00)

Answer: 5.25 DCL: 2.1*2.5 = 5.25

What is the IRR if the discount rate is 20%? 20% 55% 45% 35%

Answer: 55%

What is the IRR if the discount rate is 20%? 45% 20% 55% 35%

Answer: 55%

A firm purchased raw materials on April 1st on credit, paid for the materials on April 15th, finished producing and sold the finished product on May 15th, and received payment on May 30th. How many days was the operating cycle? 60 120 90 30

Answer: 60 The firm received the raw materials on April 1 and received cash payment on May 30. This implies the operating cycle was 2 months, or 60 days.

Equipment is sold for $30,000 at the end of a project. The working capital return is $50,000. The tax rate is 40%. What is the terminal cash flow? 18,000 80,000 50,000 68,000

Answer: 68,000 30,000 - (30,000 * .4) + 50,000 = 68,000

What is the net equipment cost given the following when a new piece of equipment replaces an old one? Old equipment sells for 125,000 Book value of old equipment 22,000 Tax rate 40% New equipment cost 800,000 Site survey 18,000 Installation cost 20,000 736,200 695,000 820,000 717,000

Answer: 736,200 125,000 - 22000 = 103,000 * .4 = 41,200 125,000 - 41,200 = 83,800 deducted from new equipment 800,000 + 20,000 - 83,800 = 736,200

A project has sales of $300,000, general expenses of $195,000, and depreciation expense of $25,000. The tax rate is 35%. What is the differential cash flow? 80,000 105,000 77,000 52,000

Answer: 77,000 (300 - 195 - 25) * (1 - .35) + 25 = 77

A project has net income of $750,000 including depreciation expense of $42,000. What is the differential cash flow? 42,000 792,000 708,000 750,000

Answer: 792,000 750 + 42 = 792

A piece of equipment was sold at the end of the project. The project received $85,000 for the equipment that carried a book value of $75,000. The tax rate is 35%. What is the salvage value? 26,250 81,500 85,000 10,000

Answer: 81,500 85,000 - ((85,000-75,000)*.35) = 81,500

Equipment is scrapped at the end of the project and has a book value of $20,000. The tax rate is 35%. The projected started with $75,000 of working capital. What is the terminal cash flow? 55,000 82,000 -20,000 75,000

Answer: 82,000 (20,000 * .35) + 75,000 = 82,000

Company A has an EBIT of $700,000 and interest expense of $30,000. Company B has EBIT of $1,500,000 and interest expense of $30,000. Which company has a higher degree of financial leverage? Company B Company A Insufficient data to make a determination Companies A and B have the same leverage

Answer: Company A 700,000/670,000 = 1.04 Co B: 1,500,000/1,470,000 = 1.02

Company A offers trade credit of 2% 10 / net 30, and Company B offers trade credit at net 30. What can be said about the credit policies of each company? Company A can attract more customers. Company B has a looser credit policy. Company B can attract more customers. Company A keeps more of its accounts receivable.

Answer: Company A can attract more customers.

Company A wishes to keep 20% of its assets as cash. Company B keeps its cash balance at 5% of assets. Which of the following statements applies? Company B has a more conservative cash policy. Company A uses better working capital management. Company B invests in more working current assets. Company A is less liquid than Company B.

Answer: Company B invests in more working current assets.

Company A's inventory is larger than Company B's. Both companies are competitors and are about the same size. What does this difference mean from a working capital management standpoint? Company A has tighter credit. Company B has lower inventory float. Company A has more cash in hand. Company B might have higher inventory turnover.

Answer: Company B might have higher inventory turnover.

What is the financial leverage of Company A? How will that leverage affect profits compared to Company B if sales decrease? For Company A, EBIT is $500,000, interest expense is $50,000, sales are $4,500,000, and variable costs are $3,000,000. Degree of financial leverage: 1.11 Interest costs rise as sales decrease. Degree of financial leverage: 1.11 Profits decrease with higher leverage. Degree of financial leverage: 3.00 Profits increase as sales decrease. Degree of financial leverage: 3.33 Profits increase as interest expense increases.

Answer: Degree of financial leverage: 1.11 Profits decrease with higher leverage. Profits decrease more as leverage increases. 500/(500 - 50) = 1.11

A discount policy 2/10 net 30 means that a discount of 2% is applied to the 10% of the total bill that is due in 30 days.

Answer: False There are benefits and disadvantages to purchasing on credit. A firm should evaluate its situation and do appropriate working capital management.

When a company uses more leverage as evidenced by a higher degree of either financial or operating leverage, what effect does it have on changes in profitability? Higher leverage leads to lower risk. When leverage goes up liquidity goes down. Lower leverage results in higher income to shareholders. Higher leverage leads to higher profitability for a given sales level.

Answer: Higher leverage leads to higher profitability for a given sales level.

What are the NPV and IRR for an investment of $550,000 with annual differential cash flows as follows: Yr 1: $75,000, Yr 2: $90,000, Yr 3: $125,000, Yr 4: $100,000, Yr 5: $80,000, and a terminal cash flow of $180,000, if the company uses a discount rate of 7%? NPV: 152,792 IRR: 5.329% NPV: -37594 IRR: 4.837% NPV: 148,099 IRR: 4.837% NPV: -75,533 IRR: 3.880%

Answer: NPV: -37594 IRR: 4.837% NPV = - 37,593.89 IRR = 4.8369 Remember, the TCF is added to Yr 5 so the Yr 5 calc entry is 260,000.

Suppose a firm was provided an option to purchase $100 of raw materials according to a 2/15 net 45 discount policy. What is the 30-day interest rate in percent in annual terms on this effective loan? (round to the nearest hundredth: .00).

Answer: None of these choices. Collection float can be specifically defined as the time it takes for a firm to be able to use the payments from customers.

What is the operating leverage of Company Y? How will that affect profits compared with Company Z, which has an operating leverage of 5.25? Company Y has an EBIT of $3,000,000, sales of $25,000,000, and variable expenses of $18,000,000. Operating leverage of .43 As sales increase, Company Y's profits will rise faster than Company Z's. Operating leverage of 2.33 As sales increase, Company Y's profits will rise slower than Company Z's. Operating leverage of 2.33 As sales increase, the profits of both companies will stay the same. Operating leverage of .43 As sales increase, Company Y's profits will rise slower than Company Z's.

Answer: Operating leverage of 2.33 As sales increase, Company Y's profits will rise slower than Company Z's. As sales increase, Company Y's profits will rise slower than Company Z's. (25-18) / 3 = 2.33

What is the tax implication of selling the old machine? Tax liabilities of $16,000 Tax shield of $16,000 Tax shield of $12,000 Tax liabilities of $12,000

Answer: Tax liabilities of $12,000 Price of Old 40,000 BV of Old (10,000) Gain/Loss 30,000 Tax (12,000)

ABC Corp is considering a project requiring the purchase of new equipment. The firm spent $20,000 on a market assessment four months ago as well as $14,000 for a feasibility study a year ago. In order to start the new project, the firm has to replace an old machine with a remaining book value of $25,000 (note: this is the original salvage value of the old machine; as such, it is fully depreciated). While still functional, the machine has no market value and will be scrapped if the new equipment is acquired. The new machine will cost the firm $220,000. In order to put the machine in working condition, ABC will spend $6,000 in installation and $4,000 in shipping. If the new machine is purchased net working capital will be increased by $10,000. The new machine will be depreciated via the straight-line depreciation method to a salvage value of $0. However, at the end of the new machine's five-year life, it can be sold for $30,000. The corporate tax rate is 40%. If accepted, the new machine will increase annual revenues by $150,000 and will increase annual operating cost by $45,000. The company has a marginal tax rate of 40% and a cost of capital of 14%. The project will last 5 years. What is the tax implication from the sale of the new machine at Year 5 (the end of its useful life)? Tax shields of $2,000 Tax liabilities of $12,000 Tax liabilities of $2,000 Tax shields of $12,000

Answer: Tax liabilities of $12,000 The machine is fully depreciated to a book value of $0. Hence, all of the sale proceeds are taxable. Tax liability = (Realizable salvage value - Book value) X Tax Rate = (30,000 - 0) X 0.40 = $12,000.

What is the tax implication on the sale of the new machine at Year 5? Tax liabilities of $33,000 Tax liabilities of $17,000 Tax shield of $17,000 Tax shield of $33,000

Answer: Tax liabilities of $17,000 (Realized salvage value - Book value) X Tax Rate = (50,000 - 0) X 0.34 = $17,000. Since it is capital gain, the firm will have tax expense.

TippingToys is considering the purchase of a new toy-making machine that will increase revenues by $50,000 a year and annual costs by $10,000. The new machine will replace an outdated machine with a current book value of $10,000 but if scrapped now can only be sold for $6,000. The new machine will cost $100,000 with shipping and installation fees of $10,000. The machine will be depreciated via 5-year MACRS schedule (20.0%, 32.0%, 19.2%, 11.5%, 11.5%, 5.8%). The firm estimates that the new machine can be sold at the end of its five-year life for $20,000. The new machine will necessitate an investment of $30,000 in working capital that will be fully recovered at the end of the project. Tipping Toys has a 10% cost of capital and a corporate tax rate of 40%. What is the tax implication of selling the old machine? Tax liabilities of $1,600 There is no tax effect Tax shield of $4,000 Tax shield of $1,600

Answer: Tax shield of $1,600 Sale of Old 6,000 BV of Old (10,000) Gain (Loss) (4,000) Tax shield 1,600 Note: since the sale of the old equipment results in a $4000 taxable loss, a tax shield of $1600 is created ($4k loss x .4 tax rate). Hence, the net cash impact of selling the old equipment = $6000 sales price + $1600 tax shield = $7600.

If a WACC of 15.00% is used to compute the NPV, what does the IRR computed in question 110, above, tell about the project? The project is acceptable. The NPV is too large. No decision can be made based on the data. The project is unacceptable.

Answer: The project is acceptable.

If a firm is considering a new project which will generate the following cash flows: IO = -145, YR1 = 100, YR2 = 100, YR3 = 100, YR4 = 100, YR5 = -275, what is the IRR of the project? Assume that the discount rate of the project is 12.76% 8.78% 26.65% 12.76% There are multiple IRR

Answer: There are multiple IRR Since there are multiple sign changes in cash flows, there are multiple IRRs which are 8.78% and 26.65%. IRR cannot be used in this circumstance.

If the book value of the old machine was $40,000 (instead of $10,000), then the initial outlay will: decrease by $12,000 increase by $30,000 decrease by $30,000 increase by $12,000

Answer: decrease by $12,000 If the BV of the old machine was also $40,000, then there will be no tax liability on the sale of the old asset. Therefore you will save $12,000 in taxes. Hence, the initial outlay would be $12,000 lower. Cost of New Machine (340,000) Installation/Shipping (60,000) Depreciable Assets (400,000) Working Capital (28,000) Price of Old 40,000 BV of Old (40,000) Gain/Loss - Tax - Net Sales of Old 40,000 Total Cash Flow (388,000)