Corporate and International Finance (N1563)

Seminar 3 (questions)

Chapter 8: Net Present Value and Other Investment Criteria

SHORT ANSWER

1) What are some of the (dis)advantages of using the IRR method?

2) Briefly discuss capital rationing. Explain the terms soft rationing & hard rationing.

MULTIPLE CHOICE | PROBLEMS

3) What is the NPV of a project that costs $100,000 and returns $50,000 annually for 3 years if the opportunity cost of capital is 14%?

A) $16,081.60

B) $13,397.57

C) $33,748.58

D) $14,473.44

4) Because of its age, your car costs $4,000 annually in maintenance expense. You could replace it with a newer vehicle costing $8,000. Both vehicles would be expected to last 4 more years, at which point they will be valueless. If your opportunity cost is 8%, by how much must maintenance expense decrease on the newer vehicle to justify its purchase?

A) $1,469.08

B) $1,625.40

C) $1,584.63

D) $1,409.54

5) A polisher costs $10,000 and will cost $20,000 a year to operate and maintain. If the discount rate is 10% and the polisher will last for 5 years, what is the equivalent annual cost of the tool?

A) $17,163.04

B) $22,187.84

C) $22,637.98

D) $19,411.15

6) You can continue to use your less efficient machine at a cost of $8,000 annually. Alternatively, you can purchase a more efficient machine for $12,000 plus $5,000 annual maintenance. If the new machine lasts 5 years and the cost of capital is 15%, you should:

A) buy the new machine and save $600 in equivalent annual costs.

B) buy the new machine and save $388 in equivalent annual costs.

C) keep the old machine and save $388 in equivalent annual costs.

D) keep the old machine and save $580 in equivalent annual costs.

Chapter 9: Using Discounted Cash-flow Analysis to Make Investment Decisions

7) What is the annual depreciation tax shield for a profitable firm in the 30% marginal tax bracket with $100,000 of annual depreciation expense?

8) What is the operating cash flow for a firm with $500,000 profit before tax, $100,000 depreciation expense, and a 35% marginal tax rate?

9) A firm plans to purchase a $50,000 asset that will be depreciated straight-line over a 5-year life to a zero salvage value. What is the present value of the resulting depreciation tax shield if the tax rate is 35% and the discount rate is 10%?

10) What is the NPV of a 6-year project that costs $100,000, has annual revenues of $50,000 and cash expenses of $15,000? Assume the investment can be depreciated for tax purposes straight-line over 6 years, the corporate tax rate is 35%, and the discount rate is 14%.

2