A Answers

1. d CF0 = $825,000 + $425,000 + $35,000 = $1,285,000

2. c Annual depreciation = $120,000  3 = $40,000
EBIT = [11,500  ($19.99 - $7.65)] - $85,996 - $40,000 = $15,914
Tax = $15,914  .35 = $5,569.90
OCF = $15,914 + $40,000 - $5,569.90 = $50,344.10 = $50,344
3. a Book value at the end of year 3 = $685,000  (1.00 - .20 - .32 - .192) = $197,280
4. d Tax on sale = {74,900 – [(3  7)  129,600]}  {.34} = $6,581.43; After-tax cash flow
= $74,900 – $6,581.43 = $68,318.57 = $68,319
5. a Annual depreciation tax shield = ($628,900  30)  .34 = $7,127.53 = $7,128
−$16 ,000 −$16,000 −$16, 000
NPV A =−$ 221 ,000+ + +
6. a (1+. 09)1 (1+.09)2 (1+. 09)3 = -$261,500.71

-
$ 261,500 .71=EAC A×{ .09 }
1−[ 1/(1+.09)3 ]
; EAC = -$103,307.10 = -$103,307
−$ 21 , 000 −$ 21, 000
NPV B=−$190, 000+ +
(1+. 09 )1 (1+. 09)2 = -$226,941.33

-
$ 226, 941. 33=EAC ×{. 09 }
1−[ 1/(1+.09)2 ]
; EAC = -$129,009.09 = -$129,009
Machine A lowers the annual cost of the equipment by about $25,702, which is
(-$103,307) minus (-$129,009).

7. a Initial net working capital = -$12,000 + $7,000 - $4,000 = -$9,000

8. b
9. a
10. b

B
Answers

1. d Re = [($1.20  1.03)  $26.40] + .03 = .0768 = 7.68 percent

2. c Re = .042 + (1.24  .08) = .1412 = 14.12 percent
3. d Rp = (.09  $100)  $64 = .1406 = 14.06 percent
4. d Enter 6 980 50 1000
N I/Y PV PMT FV
Solve for 5.40
5. c WACC = [(1.0  1.6)  .12] + [(.6  1.6)  .08  (1  .34)] = .075 + .0198 = .0948 =
9.48 percent
6. c .12 = .04 + (.80  mrp); mrp = .10; RProject = .04 + (1.23  .10) = .1630 = 16.30 percent
7. d
8. c
9. b
10. c
C
Answers

1. b
2. c
3. c
4. b Total cash received = 10,000  $26  (1  .07) = $241,800
5. b Number of rights issued = 1  1.1m = 1.1m; Number of shares needed = $5m  $40 =
125,000; Rights needed for each new share = 1.1m  125,000 = 8.8 rights
6. c Number of rights issued = 1  500,000 = 500,000; Number of shares needed = $2m 
$25 = 80,000; Rights needed for each new share = 500,000  80,000 = 6.25; Cost per
share = [(6.25  $30) + $25]  (1 + 6.25) = $29.31; Value of a right = $30  $29.31 =
$.69
7. c New ownership position = (.06  100,000)  (100,000 + 20,000) = .05 = 5 percent
8. d
9. d
10. b