FIN 3403 QUIZ QUESTIONS WITH
CORRECT ANSWERS
Crossroad Corporation is trying to decide whether to invest to automate a production
line. If the project is accepted, labor costs will decrease by $165,000 per year. However,
other cash operating expenses will increase by $86,000 per year. The equipment will
cost $260,000 and is depreciable over 10 years using simplified straight line to a zero
salvage value. Crossroad will invest $10,000 in net working capital at installation. The
firm has a marginal tax rate of 34%. Calculate the firm's annual cash flows associated
with the new project. - Answer- Equipment Cost Deprecation
260,000/10=26,000
165,000 (labor cost decreased)
(86,000) cash expense
(26,000) dep
=53,000
(18,020)=
34,980+
26,000=60,980
Eastern Corporation has $21,000,000 in equipment that has a 15 year class life. The
equipment is 8 years old. Eastern is selling the equipment for $10,000,000. Eastern
uses simplified straight line depreciation (zero salvage value) and has a marginal tax
rate of 34%. What is the terminal cash flow? Assume no working capital. - Answer-
21,000,000/15*7=
9,800,000
BV-SV
10,000,000-9,800,00=200,000
(68,000) tax
10,000,000-68000=9,932,000
A new transmission in your truck will cost $9,500.00. Luckily, it should reduce
maintenance expense by $3,150.00 each year for the next 10 years. What is the NPV of
the transmission? Use a discount rate of 10.60%. - Answer- Cfj0= -9500
cfj1-10= 3150.00
I=10.60%
Shift NPV=9366
, By automating its shop floor, your company expects to save $54,000.00 annually. If the
automation costs $450,000.00, what is the payback period of the automation? - Answer-
450,000/54,000= 8.33
A new transmission in your truck will cost $7,500.00. Luckily, it should recude
maintenance expense by $3,525.00 each year for the next 10 years. What is the
profitability index of the transmission? Use a discount rate of 12.30%. - Answer- Find
NPV
Add back IO
Then divide by IO
2.62
By purchasing training software for $7,500.00, you can eliminate other training costs of
$3,300.00 each year for the next 10 years. What is the IRR of the software? - Answer-
cfj 0= -7500
cfj 1-10=3300.00
shift IRR
Given the following cash flows for two mutually exclusive projects, and a required rate of
return of 12%, which of the following statements is true? - Answer- Project A should be
accepted because it has the highest EAA.
EAA: just input them as cash flows, solve for NPV, take that NPV and use it as PV and
then solve for PMT using how many years each project is and the given 11%. that will
give you the EAA. do this for both. Higher EAA equals more earnings per year.
X-Ray Inc. recently paid its annual dividend ($3.00), and reported an ROE of 15%, of
which 50% is paid as dividends. Based on your analysis, you estimate that the stock
has a required rate of 15.50%. What is the intrinsic value of this stock? - Answer-
D1/kcs-g
g=.15*50
3.00x1.075=3.225
(3.225/15.50)-.075
40.31
Driver Products recently paid its annual dividend ($2.00), and reported an ROE of 15%,
of which 50% is paid as dividends. The stock has a beta of 1.44. The current risk-free
rate is 2.50% and the market return (RM) is 11.00%. Assuming that CAPM holds, what
is the intrinsic value of this stock? - Answer- D1/kcs-g
g=.15*.50=.075
CORRECT ANSWERS
Crossroad Corporation is trying to decide whether to invest to automate a production
line. If the project is accepted, labor costs will decrease by $165,000 per year. However,
other cash operating expenses will increase by $86,000 per year. The equipment will
cost $260,000 and is depreciable over 10 years using simplified straight line to a zero
salvage value. Crossroad will invest $10,000 in net working capital at installation. The
firm has a marginal tax rate of 34%. Calculate the firm's annual cash flows associated
with the new project. - Answer- Equipment Cost Deprecation
260,000/10=26,000
165,000 (labor cost decreased)
(86,000) cash expense
(26,000) dep
=53,000
(18,020)=
34,980+
26,000=60,980
Eastern Corporation has $21,000,000 in equipment that has a 15 year class life. The
equipment is 8 years old. Eastern is selling the equipment for $10,000,000. Eastern
uses simplified straight line depreciation (zero salvage value) and has a marginal tax
rate of 34%. What is the terminal cash flow? Assume no working capital. - Answer-
21,000,000/15*7=
9,800,000
BV-SV
10,000,000-9,800,00=200,000
(68,000) tax
10,000,000-68000=9,932,000
A new transmission in your truck will cost $9,500.00. Luckily, it should reduce
maintenance expense by $3,150.00 each year for the next 10 years. What is the NPV of
the transmission? Use a discount rate of 10.60%. - Answer- Cfj0= -9500
cfj1-10= 3150.00
I=10.60%
Shift NPV=9366
, By automating its shop floor, your company expects to save $54,000.00 annually. If the
automation costs $450,000.00, what is the payback period of the automation? - Answer-
450,000/54,000= 8.33
A new transmission in your truck will cost $7,500.00. Luckily, it should recude
maintenance expense by $3,525.00 each year for the next 10 years. What is the
profitability index of the transmission? Use a discount rate of 12.30%. - Answer- Find
NPV
Add back IO
Then divide by IO
2.62
By purchasing training software for $7,500.00, you can eliminate other training costs of
$3,300.00 each year for the next 10 years. What is the IRR of the software? - Answer-
cfj 0= -7500
cfj 1-10=3300.00
shift IRR
Given the following cash flows for two mutually exclusive projects, and a required rate of
return of 12%, which of the following statements is true? - Answer- Project A should be
accepted because it has the highest EAA.
EAA: just input them as cash flows, solve for NPV, take that NPV and use it as PV and
then solve for PMT using how many years each project is and the given 11%. that will
give you the EAA. do this for both. Higher EAA equals more earnings per year.
X-Ray Inc. recently paid its annual dividend ($3.00), and reported an ROE of 15%, of
which 50% is paid as dividends. Based on your analysis, you estimate that the stock
has a required rate of 15.50%. What is the intrinsic value of this stock? - Answer-
D1/kcs-g
g=.15*50
3.00x1.075=3.225
(3.225/15.50)-.075
40.31
Driver Products recently paid its annual dividend ($2.00), and reported an ROE of 15%,
of which 50% is paid as dividends. The stock has a beta of 1.44. The current risk-free
rate is 2.50% and the market return (RM) is 11.00%. Assuming that CAPM holds, what
is the intrinsic value of this stock? - Answer- D1/kcs-g
g=.15*.50=.075
