FIN 301: Exam 2 - Practice Exam

A project has a required return of 12.6 percent, an initial cash outflow of $42,100, and cash inflows of $16,500 in Year 1, $11,700 in Year 2, and $10,400 in Year 4. What is the net present value? Multiple Choice −$11,748.69 −$10,933.52 −$11,208.62 −$10,457.09 −$12,006.13

−$11,748.69 CFO: -42,100 CF1: 16,500 F1: 1 CF2: 11,700 F1: 1 CF3: 0 F1: 1 CF4: 10,400 F1: 1 I/Y = 12.6 NPV = -11,748.692

Integrity Materials is considering expanding on some land that it currently owns. The initial cost of the land was $364,500 and it is currently valued at $357,900. The company has some unused equipment that it currently owns valued at $29,000 that could be used for this project if $8,200 is spent for equipment modifications. Other equipment costing $157,900 will also be required. What is the amount of the initial cash flow for this expansion project? Multiple Choice −$530,600 −$158,720 −$553,000 −$585,600 −$559,600

−$553,000 -357,900 - 29,000 - 8,200 - 157,900 = -553,000

Which one of the following is an example of a sunk cost? Multiple Choice $2,000 in lost sales because an item was out of stock $2,000 paid last year to rent equipment $2,000 project that must be forfeited if another project is accepted $2,000 reduction in Product A revenue if a firm commences selling Product B $2,000 increase in comic book sales if a store ceases selling puzzles

$2,000 paid last year to rent equipment

Jonathan invested $6,220 in an account that pays 11 percent simple interest. How much money will he have at the end of 40 years? Multiple Choice $33,588 $408,671 $106,905 $159,654 $404,305

$33,588 6,220 x 0.11 = 684.2 684.2 x 40 = 27,368 27,369 + 6,220 = 33,588

Your credit card company charges you 1.15 percent interest per month. What is the APR? Multiple Choice 18.92% 13.80% 15.95% 17.25% 14.71%

13.80% 1.15 x 12 = 13.80

A perpetuity is defined as: Multiple Choice a limited number of equal payments paid in even time increments. payments of equal amounts that are paid irregularly but indefinitely. varying amounts that are paid at even intervals forever. unending equal payments paid at equal time intervals. unending equal payments paid at either equal or unequal time intervals.

unending equal payments paid at equal time intervals.

Claire's coin collection contains fifty 1948 silver dollars. Her grandparents purchased them at their face value in 1948. These coins have appreciated by 7.6 percent annually. How much is the collection expected to be worth in 2025? Multiple Choice $13,611.18 $18,987.56 $14,122.01 $11,218.27 $14,077.16

$14,077.16 2025 - 1948 = 77 = N 50 = PV 7.6 = I/Y CPT --> FV = 14,077.155

What is the future value in 60 years of $7,440 invested today at 9 percent interest, compounded annually? $1,309,673 $1,314,038 $38,256 $91,006 $14,469,253

$1,309,673 60 = N -7,440 = PV 9 = I/Y CPT --> FV = 1,309,672.8

Meek's is considering a five-year project that will require $738,000 for new fixed assets that will be depreciated straight-line to a zero book value over five years. No bonus depreciation will be taken. At the end of the project, the fixed assets can be sold for 18 percent of their original cost. The project is expected to generate annual sales of $679,000 with costs of $321,000. The tax rate is 22 percent and the required rate of return is 15.2 percent. What is the amount of the aftertax salvage value? Multiple Choice $105,165.60 $103,615.20 $104,409.20 $132,840.00 $118,406.90

$103,615.20 ATS = salvage value - tax(salvage value - BV) salvage value = 738,000 x 0.18 = 132,840 ATS = 132,840 - 0.22(132,840 - 0) = 103,615.20

Assume your mother invested a lump sum 28 years ago at 4.05 percent interest, compounded annually. Today, she gave you the proceeds of that investment, totaling $48,613.24. How much did your mother originally invest? Multiple Choice $14,929.00 $16,500.00 $15,994.70 $14,929.29 $16,500.93

$15,994.70 28 = N 4.05 = I/Y 48,613.24 = FV CPT --> PV = -15,994.70

A relative will support your education by paying you $500 a month for 50 months. If you can earn 7 percent on your money, what is this gift worth to you today? Multiple Choice $21,629.93 $18,411.06 $21,338.40 $20,333.33 $19,450.25

$21,629.93 500 = PMT 50 = N 7/12 = 0.5833 = I/Y CPT --> PV = -21,629.932

A project will produce cash inflows of $5,400 per year for 3 years with a final cash inflow of $2,400 in Year 4. The project's initial cost is $13,400. What is the net present value if the required rate of return is 14.2 percent? Multiple Choice −$311.02 $505.92 −$165.11 $218.98 $668.02

$505.92 CFO: -13,400 CF1: 5,400 F1: 3 CF2: 2,400 F1: 1 I/Y = 14.2 NPV = 505.924

A project has an initial cost of $6,900. The cash inflows are $850, $2,400, $3,100, and $4,100 over the next four years, respectively. What is the payback period? Multiple Choice 3.73 years 2.51 years 3.13 years 3.51 years 3.94 years

3.13 years -6,900 + 850 = -6,050 -6,050 + 2,400 = -3,650 -3,650 + 3,100 = -550 550/4,100 = 0.1341 0.1341 + 3 full subtractions calculations = 3.13

Assume the total cost of a college education will be $245,000 when your child enters college in 15 years. You presently have $108,000 to invest for this purpose. What annually compounded rate of interest must you earn to cover the cost of your child's college education? Multiple Choice 5.79% 5.50% 5.61% 6.25% 6.81%

5.61% 245,000 = FV 15 = N -108,000 = PV CPT --> I/Y = 5.612

What is the EAR if a bank charges you an APR of 7.65 percent compounded quarterly? Multiple Choice 7.91% 8.38% 8.02% 7.87% 8.11%

7.87% 0.0765 / 4 =0.0191 +1 = 1.0191 ^4 = 1.0787 -1 = 0.0787 = 7.87%

Sixty years ago, your grandmother invested $4,500. Today, that investment is worth $430,065.11. What is the average annually compounded rate of return she earned on this investment? Multiple Choice 6.67% 11.71% 7.90% 10.40% 12.02%

7.90% 60 = N -4,500 = PV 430,065.11 = FV CPT --> I/Y = 7.896

Fifteen years ago, you invested $5,000. Today, it is worth $18,250. What annually compounded rate of interest did you earn? Multiple Choice 8.27% 9.01% 99.96% 109.01% 9.65%

9.01% 15 = N -5,000 = PV 18,250 = FV CPT --> I/Y = 9.015

Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be? Multiple Choice Accept both projects because both NPVs are positive Accept Project A because it has the shortest payback period Accept Project B and reject Project A based on the NPVs Accept Project A and reject Project B based on their AARs Accept Project A because it has the lower required return

Accept Project B and reject Project A based on the NPVs Project B NPV: 82,909 Project A NPV: 81,406 B > A

On your tenth birthday, you received $300 which you invested at 4.5 percent interest, compounded annually. Your investment is now worth $756. How old are you today? Multiple Choice Age 20 Age 31 Age 30 Age 23 Age 21

Age 31 -300 = PV 4.5 = I/Y 756 = FV CPT --> N = 20.99 "On your 10th bday" --> 21 + 10 = 31

Assume you are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now? Future value Present value Principal amount Discounted value Invested principal

Future value

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs? Multiple Choice Sunk Total Variable Incremental Fixed

Incremental

Eunchae invested $2,000 six years ago at 4.5 percent interest. She spends all of her interest earnings immediately so she only receives interest on her initial $2,000 investment. Which type of interest is she earning? Multiple Choice Free interest Complex interest Simple interest Interest on interest Compound interest

Simple interest

Cullen invested $5,000 five years ago and earns 6 percent annual interest. By leaving his interest earnings in her account, he increases the amount of interest he earns each year. His investment is best described as benefitting from: simplifying. compounding. aggregating. accumulating. discounting.

compounding

Net present value: Multiple Choice is the best method of analyzing mutually exclusive projects. is less useful than the internal rate of return when comparing different-sized projects. is the easiest method of evaluation for nonfinancial managers. cannot be applied when comparing mutually exclusive projects. is very similar in its methodology to the average accounting return.

is the best method of analyzing mutually exclusive projects.

If a firm accepts Project X it will not be feasible to also accept Project Z because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be: Multiple Choice independent. interdependent. mutually exclusive. economically scaled. operationally distinct.

mutually exclusive.

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles? Multiple Choice Underlying value principle Stand-alone principle Equivalent cost principle Salvage principle Fundamental principle

Stand-alone principle

Which one of the following types of costs was incurred in the past and cannot be recouped? Multiple Choice Incremental Side Sunk Opportunity Erosion

Sunk

Your parents have made you two offers. The first offer includes annual gifts of $4,000, $4,500, and $5,200 at the end of each of the next three years, respectively. The other offer is the payment of one lump sum amount today. You are trying to decide which offer to accept given the fact that your discount rate is 9.7 percent. What is the minimum amount that you will accept today if you are to select the lump sum offer? Multiple Choice $12,489 $18,086 $11,325 $17,687 $10,378

$11,325 CFO: 0 CF1: 4,000 F1: 1 CF2: 4,500 F2: 1 CF3: 5,200 F3: 1 I/Y = 9.7 NPV = 11,324.66

Aidan can afford $240 a month for five years for a car loan. If the interest rate is 8.5 percent, what is the most he can afford to borrow? Multiple Choice $11,750.00 $12,348.03 $11,697.88 $10,266.67 $10,400.00

$11,697.88 -240 = PMT 5 x 12 = 60 = N 8.5/12 = 0.7083 = I/Y CPT --> PV = 11,697,883

A project will produce operating cash inflows of $61,000 per year for 10 years in a row. The initial fixed asset investment in the project will be $94,000. The net aftertax salvage value is estimated at $7,000 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 14.5 percent? Multiple Choice −$404,263 $219,878 $313,878 −$76,443 −$313,878

$219,878 CFO: -94,000 CF1: 61,000 F1: 9 CF2: 68,000 F1: 1 [61,000 + 7,000] I/Y = 14.5 NPV = 219,877.71

Newson Minerals is considering a project that will require the purchase of $479,000 of equipment. The equipment will be depreciated straight-line to a zero book value over the five-year life of the project after which it will be worthless. The required return is 12 percent and the tax rate is 25 percent. What is the value of the depreciation tax shield in Year 4 of the project assuming no bonus depreciation is taken? Multiple Choice $28,740 $32,200 $78,600 $119,750 $23,950

$23,950 479,000 / 5 = 95,800 95,800 x 0.25 = 23,950

Pham & Davis currently sells 9,820 motor homes per year at $45,500 each, and 3,680 luxury motor coaches per year at $89,700 each. The company wants to introduce a new portable camper to fill out its product line. It hopes to sell 4,000 of these campers per year at $14,750 each. An independent consultant has determined that if the new campers are introduced, sales of its existing motor homes will most likely increase by 250 units per year while the sales of its motor coaches will probably decline by 368 units per year. What is the amount that should be used as the annual sales figure when evaluating the portable camper project? Multiple Choice $59,000,000 $103,384,600 $64,141,800 $37,365,400 $103,325,600

$37,365,400 Current 9,820 x 45,500 = 446,810,000 3,680 x 89,700 = 330,096,000 Total = 776,906,000 New 4,000 x 14,750 = 59,000,000 10,070 x 45,500 = 458,185,000 [9,820 + 250 = 10,070] 3,312 x 89,700 = 297,086,400 [3,680 - 368 = 3,312] Total = 814,271,400 New - Current = 814,271,400 - 776,906,000 = 37,365,400

A project will require $512,000 for fixed assets and $47,000 for net working capital. The fixed assets will be depreciated straight-line to a zero book value over the six-year life of the project. No bonus depreciation will be taken. At the end of the project, the fixed assets will be worthless. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $965,000 and costs of $508,000. The tax rate is 21 percent and the required rate of return is 14.7 percent. What is the amount of the annual operating cash flow? Multiple Choice $283,633.33 $447,826.67 $378,950.00 $245,300.00 $198,300.00

$378,950.00 OCF = NI + depr Depr = 512,0000 / 6 = 85,333.33 NI = sales - costs - depr = 965,000 - 508,000 - 85,333.33 = 371,666.67 --> x 0.79 = 293,616.67 OCF = NI + depr = 293,616.67 + 85,333.33 = 378,949.99

What is the future value of $8,500 invested at the end of each year for 40 years, at 10.8 percent interest compounded annually? Multiple Choice $3,278,406.16 $4,681,062.12 $2,711,414.14 $3,989,476.67 $4,021,223.33

$4,681,062.12 -8,500 = PMT 40 = N 10.8 = I/Y CPT --> FV = 4,681,062.115

Twenty years from now, you hope to have $175,000 to buy a parcel of land. How much must you deposit as a lump sum today to achieve this goal at an interest rate of 6.6 percent, compounded annually? Multiple Choice $54,208.16 $48,740.95 $57,911.08 $40,019.82 $51,446.60

$48,740.95 20 = N 175,000 = FV 6.6 = I/Y CPT --> PV = -48,740.946

Assume an investment has cash flows of −$105,000, $140,000, $200,000, and $485,000 for Years 0 to 3, respectively. What is the NPV if the required return is 13.5 percent? Should the project be accepted or rejected? Multiple Choice $505,307; accept $505,307; reject $533,466; reject $533,466; accept $501,656; reject

$505,307; accept CFO: -105,000 CF1: 140,000 F1: 1 CF2: 200,000 F1: 1 CF3: 485,000 F1: 1 I/Y = 13.5 NPV = 505,307.03 Positive = accept

A project has an initial cost of $7,900 and cash inflows of $2,100, $3,140, $3,800, and $4,500 per year over the next four years, respectively. What is the payback period? Multiple Choice 2.70 years 3.28 years 3.36 years 3.70 years 2.28 years

2.70 years 7,900 - 2,100 = 5,800 5,800 - 3,140 = 2,660 [2,660 < 3,800] --> 2,660 / 3,800 = 0.7 0.7 + 2 full subtraction calculations = 2.7

You just paid $480,000 for an annuity that will pay you and your heirs $15,000 a year forever. What rate of return are you earning on this policy? Multiple Choice 3.650% 3.100% 2.875% 3.125% 4.255%

3.125% 15,000 / 480,000 = 0.0313

Salazar's Salads is considering two projects. Project X consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project Z would instead use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods? Multiple Choice Profitability index Internal rate of return Payback Net present value Accounting rate of return

Net present value

Bui Bakery has a required payback period of two years for all of its projects. Currently, the firm is analyzing two independent projects. Project X has an expected payback period of 1.4 years and a net present value of $6,100. Project Z has an expected payback period of 2.6 years with a net present value of $18,600. Which project(s) should be accepted based on the payback decision rule? Multiple Choice Project X only Project Z only Both X and Z Neither X nor Z Either, but not both projects

Project X only Req payback: 2 yrs X: 1.4, within 2 years Z: 2.6, greater than 2 years

The interest rate that is most commonly quoted by a lender is referred to as the: Multiple Choice annual percentage rate. compound rate. effective annual rate. simple rate. common rate.

annual percentage rate.

Alina's Cafe is expanding and expects the expansion to cause an increase in operating cash flows of $42,000 per year for seven years. This expansion requires $78,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires an investment of $6,000 in net working capital at the start of the project, which will be recovered at the end of the project. What is the net present value of this expansion project at a required rate of return of 14 percent? Multiple Choice $98,507 −$261,711 $182,507 −$98,507 −$64,817

$98,507 CFO: -84,000 [78,000 + 6,000] CF1: 42,000 F1: 6 CF2: 48,000 F1: 1 [42,000 + 6000] I/Y = 14 NPV = 98,506.62

The Whey Station is considering a project with an initial cost of $146,500 and cash inflows for Years 1 to 3 of $56,700, $68,500, and $71,200, respectively. What is the IRR? Multiple Choice 14.37% 15.56% 16.17% 12.88% 13.23%

15.56% CFO: -146,500 CF1: 56,700 F1: 1 CF2: 68,500 F1: 1 CF3: 71,200 F1: 1 IRR = 15.559

A project has cash flows of -$343,200, $56,700, $138,500, and $245,100 for Years 0 to 3, respectively. The required rate of return is 10.5 percent. Based on the internal rate of return of _____ percent for this project, you should _____ the project. Multiple Choice 11.03; accept 8.03; reject 9.87; reject 10.47; reject 10.93; accept

10.93; accept CFO: -343,200 CF1: 56,700 F1: 1 CF2: 138,500 F1: 1 CF3: 245,100 F1: 1 I/Y = 10.5 IRR = 10.932 10.93 > 10.5, accept

Theresa adds $1,500 to her savings account on the first day of each year. Marcus adds $1,500 to his savings account on the last day of each year. They both earn 6.5 percent annual interest. What is the difference in their savings account balances at the end of 35 years? Multiple Choice $12,093.38 $12,113.33 $12,127.04 $12,211.12 $12,219.46

$12,093.38 -1,500 = PMT 6.5 = I/Y 35 = N CPT --> FV Theresa (BGN): FV = 198,145.42 Marcus (END): FV = 186,052.04 T - M = 198,145.42 - 186,052.04 = 12,093.38

Which one of the following statements related to the internal rate of return (IRR) is correct? Multiple Choice The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects. A project with an IRR equal to the required return would reduce the value of a firm if accepted. The IRR is equal to the required return when the net present value is equal to zero. Financing type projects should be accepted if the IRR exceeds the required return. The average accounting return is a better method of analysis than the IRR from a financial point of view.

The IRR is equal to the required return when the net present value is equal to zero.

Which one of the following statements concerning interest rates is correct? Multiple Choice Savers would prefer annual compounding over monthly compounding given the same annual percentage rate. The effective annual rate decreases as the number of compounding periods per year increases. The effective annual rate equals the annual percentage rate when interest is compounded annually. Borrowers would prefer monthly compounding over annual compounding given the same annual percentage rate. For any positive rate of interest, the annual percentage rate will always exceed the effective annual rate.

The effective annual rate equals the annual percentage rate when interest is compounded annually.

Which one of the following statements related to loan interest rates is correct? Multiple Choice The annual percentage rate considers the compounding of interest. When comparing loans you should compare the effective annual rates. Lenders are most apt to quote the effective annual rate. Regardless of the compounding period, the effective annual rate will always be higher than the annual percentage rate. The more frequent the compounding period, the lower the effective annual rate given a fixed annual percentage rate.

When comparing loans you should compare the effective annual rates.

Nirav just opened a savings account paying 2 percent interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Given this information, Nirav: Multiple Choice will earn the same amount of interest each year for four years. will earn simple interest on his savings every year for four years. could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest. has an account currently valued at $5,000. could earn more interest on this account if the interest earnings were withdrawn annually.

could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest.

The internal rate of return is defined as the: Multiple Choice maximum rate of return a firm expects to earn on a project. rate of return a project will generate if the project is financed solely with internal funds. discount rate that equates the net cash inflows of a project to zero. discount rate which causes the net present value of a project to equal zero. discount rate that causes the profitability index for a project to equal zero.

discount rate which causes the net present value of a project to equal zero.