FIN630, Exam I Winter 2014 Exam is available on blackboard from Sat., 2/15/14, 9:00 am Thurs., 2/20/14, 11:59pm.

. Instructions: Prepare all your answers in an excel file format, so that I can view the various formulas you have used to prepare your responses. Each question below should be prepared in a different tab within the file, and labeled accordingly. Place your name on the top of each page within the file, as well as ensure a proper print range for each problem (both portrait and landscape orientation are acceptable). The completed file should be uploaded onto blackboard no later than the due date of Thursday, 2/20/2014, by 11:59 pm.

1. A firm is considering investing in a project with the following cash flows noted below. The project requires an initial investment of $100,000, and the company has a required rate of return of 14%. Compute the payback period, discounted payback, and the net present value. Should this project be accepted? 1 10,000 2 20,000 3 25,000 4 27,000 5 32,000 6 45,000 7 48,000 8 50,000 10 points

2. Smith Corporation is in the toy business, and they want to introduce some new products. Their after-tax cash flows are listed below, along with the initial investment for each toy line. The firms cost of capital is 12% and its target accounting rate of return is 20%. Assume straight-line depreciation and an asset life of five years. The corporate tax rate is 35%. Each of the toy lines is independent of each other. Assume net income is equal to after-tax cash flow less depreciation. a). Calculate the accounting rate of return on the toy lines. Which toy lines are acceptable according to this criterion? b). Calculate the payback period for all the toy lines. All toy lines with a payback period of fewer than 4 years are acceptable. Which is acceptable using this criterion? c). Calculate all the toy lines NPVs. Which are acceptable according to this criterion? d). Calculate all the toy lines IRRs. Which are acceptable according to this criterion? e. Which toy line (s) should be chosen? Toy Line X Y Z Investment 5,000 7,500 4,000 Yr 1 800 1,250 600 Yr 2 1,000 3,000 1,200 Yr 3 350 2,500 1,200 Yr 4 1,250 5,000 2,400 Yr 5 3,000 5,000 3,000 20 points

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3. Gilford, Inc. is trying to decide whether or not to replace an existing engineering tracking system, with a newer, more up to date system. Gilfords Financial Manager has come up with the forecasted net before tax savings if the company invests into this new tracking system. These are given below in (000s). It has a 10% cost of capital, a 35% tax rate and uses straight-line depreciation. The new tracking system will cost $1.4 million, but the company is eligible for a 15% ITC in the first and second year. The ITC reduces Gilfords taxes for those years. There is no ITC eligible on the old system. The old tracking system can be sold to another company for $250K. Both systems have a depreciable life of five years and are being depreciated to a zero salvage value. The old tracking system originally cost $1 million and is 3 years old at this time. a). What is the net investment required in the new tracking system? b). What are the incremental operating cash flows associated with the new system? c). If the new tracking systems salvage value at the end of five years is projected to be $90K, should Gilford purchase it?

Year ($)

1 250

2 250

3 200

4 200

5 200
20 points

4). HP is trying to decide whether or not to invest in a new computer line of accessory products. These accessories will compliment HPs current computer line. The analysis has b een performed and the forecasts of the demand and the costs related to these accessory products is below. The project is expected to last for ten years. Sales revenue for the first year will be $200K, and grow at a rate of 10% per year until the final two years of the project, at which time the revenue will decline 15% per year until the termination of the project. The cost of the product will be 65% of sales. SG&A expenses are projected to start at 15% of sales, and then decline to 10% of sales in all years after year 3, (start year 4). Advertising costs are expected at 40% of sales in years 1-3, and then decline to $10K per year in years 4-6, and then zero, thereafter. The cost of the initial investment is expected to be $250K, along with $10K of installation costs associated with the project and will be depreciated over the life of the project, using the straight line method of depreciation. The initial investment has no salvage value. There is no investment tax credit associated with the project. The companys tax rate is 35%. The companys current cost of capital is 10%, and the project is expected to be the same as the companys.
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a). Calculate the net income and operating cash flows associated with this project. b). What is the NPV of the project? c). What is the IRR of the project? d). Is the project acceptable? Which method did you base your answer on ? e). Assume a 3% rate of inflation for all variable items in the P&L. Calculate the net income, operating cash flows, NPV, and IRR of the project? Is the project acceptable with inflation ? 20 points

5). Hemond Company wants to replace some of its machinery with more up-to-date, state of the art machinery. The price of the new machinery is $1.3 million. If the machinery is purchased, then the sales revenue will increase from $1.8 mil to $2.2 mil annually for the next 5 years. The before tax and before depreciation profit margin on the sales, old and new, is 30%.. If the company does invest in this new piece of equipment, working capital is estimated to be 20% of sales, and overhead costs will be cut by $20K per year for the next five years. The working capital will also be recaptured at the end of the five years. The old piece of equipment was purchased for $900K, 3 years ago, and is being depreciated on a straight-line basis over a five year life. This equipment can be expected to be sold today at $200K. The new equipment will also be depreciated over a five year life. Hemond Companys tax rate is 35%, and the cost of capital is 14%. Hemond Company will also receive an investment tax credit equal to 10% of the purchase price of the new equipment. a). What is the net investment required in this new equipment? (assume both pieces of equipment are being depreciated to a zero salvage value). b). What are the operating cash flows for each of the next five years? c). Taking your analysis into account, based on the information, should Hemond Company replace its current equipment? 20 points

6). Big G Copper Mining Company is operating a Copper mine. The present market price of copper is $4.00 per pound. It currently costs Big G $2.50 per pound to mine the copper. The average amount per year that Big G is able to mine has been 100,000 pounds. Big G is not certain how long the mine will last, but estimates that the mine should last for ten years. The required rate of return on copper mine is 15%. (Note: this involves an annuity calculation). a). What is the value of the copper mine? b). What is the value of the mine if the cost to produce increases by 30% per year, every year. and no change in the price of copper? The required rate of return for the copper mine also increases to 18%. 10 points
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