MAC3702 ASSESSEMENT 2
SEMESTER 2 OF 2024
EXPECTED QUESTIONS
AND ANSWERS
1. Question: A company is considering a project requiring an initial
investment of $250,000. The project will generate cash inflows of $70,000
per year for 6 years. If the discount rate is 10%, calculate the Net Present
Value (NPV) and advise on whether to proceed with the project.
● Answer: The NPV can be calculated using the formula:
NPV=∑(70,000(1+0.10)t)−250,000NPV = {70,000}{(1+0.10) -
250,000NPV=∑((1+0.10)t70,000)−250,000 The NPV is approximately
$47,720, meaning the project should be accepted since the NPV is positive.
2. Question: A firm has a capital structure consisting of 50% debt at 5%
interest and 50% equity with a cost of 10%. The tax rate is 30%. Calculate
the Weighted Average Cost of Capital (WACC).
● Answer: WACC=(0.50×5%×(1−0.30))+(0.50×10%)=1.75%
+5.00%=6.75%WACC = (0.50 \times 5\% \times (1 - 0.30)) + (0.50 \times
10\%) = 1.75\% + 5.00\% = 6.75\%WACC=(0.50×5%×(1−0.30))
+(0.50×10%)=1.75%+5.00%=6.75% The WACC is 6.75%.
3. Question: A company sells a product at $100 per unit, with variable costs
of $60 per unit and fixed costs of $200,000. How many units must the
company sell to break even?
, ● Answer: Break−even units=Fixed costsSelling price per unit−Variable costs
per unit=200,000100−60=5,000 unitsBreak-even\ units = \frac{Fixed\ costs}
{Selling\ price\ per\ unit - Variable\ costs\ per\ unit} = \frac{200,000}{100 -
60} = 5,000\ unitsBreak−even units=Selling price per unit−Variable costs
per unitFixed costs=100−60200,000=5,000 units The company must sell
5,000 units to break even.
4. Question: A firm has current assets of $400,000, current liabilities of
$150,000, and inventory valued at $100,000. Calculate the firm's quick ratio.
● Answer: Quick ratio=Current assets−InventoryCurrent
liabilities=400,000−100,000150,000=2.0Quick\ ratio = \frac{Current\ assets
- Inventory}{Current\ liabilities} = \frac{400,000 - 100,000}{150,000} =
2.0Quick ratio=Current liabilitiesCurrent assets−Inventory
=150,000400,000−100,000=2.0 The quick ratio is 2.0, indicating strong
liquidity.
5. Question: A company has total assets of $800,000, total debt of $300,000,
and total equity of $500,000. Calculate the debt-to-equity ratio and interpret
it.
● Answer: Debt−to−equity ratio=Total debtTotal
equity=300,000500,000=0.6Debt-to-equity\ ratio = \frac{Total\ debt}{Total\
equity} = \frac{300,000}{500,000} = 0.6Debt−to−equity ratio=Total
equityTotal debt=500,000300,000=0.6 A debt-to-equity ratio of 0.6 indicates
that for every $1 of equity, the company has $0.60 in debt, showing
moderate lever
6. Question: A project requires an initial investment of $400,000 and will
generate annual cash inflows of $120,000 for 5 years. If the required rate of
return is 12%, calculate the payback period and advise if the project is
acceptable based on this criterion.
● Answer: Payback period=Initial InvestmentAnnual Cash
Inflows=400,000120,000≈3.33 yearsPayback\ period = \frac{Initial\
Investment}{Annual\ Cash\ Inflows} = \frac{400,000}{120,000} \approx
3.33\ yearsPayback period=Annual Cash InflowsInitial Investment
=120,000400,000≈3.33 years The payback period is 3.33 years. If the firm’s
acceptable payback period is less than this, the project may be rejected,
otherwise, it can be considered.
SEMESTER 2 OF 2024
EXPECTED QUESTIONS
AND ANSWERS
1. Question: A company is considering a project requiring an initial
investment of $250,000. The project will generate cash inflows of $70,000
per year for 6 years. If the discount rate is 10%, calculate the Net Present
Value (NPV) and advise on whether to proceed with the project.
● Answer: The NPV can be calculated using the formula:
NPV=∑(70,000(1+0.10)t)−250,000NPV = {70,000}{(1+0.10) -
250,000NPV=∑((1+0.10)t70,000)−250,000 The NPV is approximately
$47,720, meaning the project should be accepted since the NPV is positive.
2. Question: A firm has a capital structure consisting of 50% debt at 5%
interest and 50% equity with a cost of 10%. The tax rate is 30%. Calculate
the Weighted Average Cost of Capital (WACC).
● Answer: WACC=(0.50×5%×(1−0.30))+(0.50×10%)=1.75%
+5.00%=6.75%WACC = (0.50 \times 5\% \times (1 - 0.30)) + (0.50 \times
10\%) = 1.75\% + 5.00\% = 6.75\%WACC=(0.50×5%×(1−0.30))
+(0.50×10%)=1.75%+5.00%=6.75% The WACC is 6.75%.
3. Question: A company sells a product at $100 per unit, with variable costs
of $60 per unit and fixed costs of $200,000. How many units must the
company sell to break even?
, ● Answer: Break−even units=Fixed costsSelling price per unit−Variable costs
per unit=200,000100−60=5,000 unitsBreak-even\ units = \frac{Fixed\ costs}
{Selling\ price\ per\ unit - Variable\ costs\ per\ unit} = \frac{200,000}{100 -
60} = 5,000\ unitsBreak−even units=Selling price per unit−Variable costs
per unitFixed costs=100−60200,000=5,000 units The company must sell
5,000 units to break even.
4. Question: A firm has current assets of $400,000, current liabilities of
$150,000, and inventory valued at $100,000. Calculate the firm's quick ratio.
● Answer: Quick ratio=Current assets−InventoryCurrent
liabilities=400,000−100,000150,000=2.0Quick\ ratio = \frac{Current\ assets
- Inventory}{Current\ liabilities} = \frac{400,000 - 100,000}{150,000} =
2.0Quick ratio=Current liabilitiesCurrent assets−Inventory
=150,000400,000−100,000=2.0 The quick ratio is 2.0, indicating strong
liquidity.
5. Question: A company has total assets of $800,000, total debt of $300,000,
and total equity of $500,000. Calculate the debt-to-equity ratio and interpret
it.
● Answer: Debt−to−equity ratio=Total debtTotal
equity=300,000500,000=0.6Debt-to-equity\ ratio = \frac{Total\ debt}{Total\
equity} = \frac{300,000}{500,000} = 0.6Debt−to−equity ratio=Total
equityTotal debt=500,000300,000=0.6 A debt-to-equity ratio of 0.6 indicates
that for every $1 of equity, the company has $0.60 in debt, showing
moderate lever
6. Question: A project requires an initial investment of $400,000 and will
generate annual cash inflows of $120,000 for 5 years. If the required rate of
return is 12%, calculate the payback period and advise if the project is
acceptable based on this criterion.
● Answer: Payback period=Initial InvestmentAnnual Cash
Inflows=400,000120,000≈3.33 yearsPayback\ period = \frac{Initial\
Investment}{Annual\ Cash\ Inflows} = \frac{400,000}{120,000} \approx
3.33\ yearsPayback period=Annual Cash InflowsInitial Investment
=120,000400,000≈3.33 years The payback period is 3.33 years. If the firm’s
acceptable payback period is less than this, the project may be rejected,
otherwise, it can be considered.
