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Final Exam Review Part 1
Final Exam Review Part 1
Question 1
A major software company, Megasoft, is considering adding one more product to its
product line. The programming and marketing departments have come up with the
following information for two potential products the company can develop.
Product A:
This product will take 2 years to develop. The project starts in Year 0 with costs of
$100,000 in Year 0 and $ 50,000 in Year 1. Benefits in years 2, 3 and 4 are expected to
be $100,000 per year.
Product B:
This product will only take a year (Yr 0) to develop, at a cost of $120,000. Benefits in
years 1-4 is expected to be $60,000 per year.
Assuming the company uses a 5 – year planning horizon, which product should Megasoft
initiate a project to develop?
Question 2
What is the net present value of a project with the following cash flows and a required
return of 12%:
Question 3
What is the net present value of a project that has an initial cash outflow of $12,670 and
the following cash inflows? The required return is 11%
Year Inflows
0 $ 4,375
1 $0
2 $ 8,750
3 $ 4,100
A project will produce cash inflows of $1,750 a year for four years. The project initially
costs $10,600 to get started. In year five, the project will be closed and as a result should
produce a cash inflow of $8,500. What is the net present value of this project if the
discount rate is 14%?
Question 5
You are considering the following tow mutually exclusive projects. The required rate of
return is 11% for project A and 10 percent for project B. Which project should you accept
and why?
Question 6
You are considering two mutually exclusive projects with the following cash flows. Will
your choice between the two projects differ if the required rate of return is 8% rather than
11%? If so, what should you do?
Question 7
A project will produce an operating cash flow of $7,300 a year for three years. The initial
cash investments in the project will $ 11,600. The net after-tax salvage value is estimated
at $3,500 and will be receiving during the last year of the project’s life. What is the
present value of the project if the required rate of return is 11%?
Question 8
A project is expected to create an operating cash flow of $22,500 a year for three years.
The initial cost of the fixed assets is $ 50,000. These assets will be worthless at the end of
the project. An additional $3,000 of net working capital will be required throughout the
life of the project. What is the project’s net present value if the required rate of return is
10%?
Woatich Windmill Company is considering a project that calls for an initial cash outlay
of $50,000. The expected net cash inflows from the project are $7,791 for each of 10
years. What is the IRR of the project?
Question 10
Kool Inc. purchased a machine that will be used to produce nylon belt pouches:
Question 11
You have four projects from which to choose one. Project “Apple” is being done over a
six year period and has a net present value (NPV) of $70,000. Project “Berry” is being
done over a three year period and has an NPV of $30,000. Project “Android” is being
done over a five year period and has an NPV of $40,000. Project “Goggle” is being done
over a one year period and has an NPV of $60,000. Which project would you choose?
Question 12
The Thurston Animal Clinic is considering the acquisition of an X-ray machine that
could be used to diagnose injuries in large animals. The machine would cost $200,000
and have an expected life of fifteen years with no salvage value. The annual cash
operating costs of the machine are estimated at $18,000. The manager of the clinic
uncertain as to how much the new machine would increase annual cash revenues.
Assuming the clinic’s cost of capital is 16 percent; compute the minimum amount cash
receipts would need to increase to induce the manager to purchase the new machine?
Question 14
Kool DJ Services have budget constraints and have to choose from one of the two
projects identified as below:
Project 1: Renovate the studio, which will have an increase in revenue by $ 120,000
Project 2: Replenish new equipment, which will have an increase in revenue by $
100,000
Given this choice, the owner of the business Mr. Kool, chose to proceed with Project 1