Fin 534 week 6 homework problems chapters 10 and 11


FIN 534 – Homework Chapter 10

1. Which of the followingcited announcements is CORRECT?

a. The inner trounce of repay mode (IRR) is generally guarded by academics as entity the best unmarried mode for evaluating cardinal budgeting plans.

b. The payback mode is generally guarded by academics as entity the best unmarried mode for evaluating cardinal budgeting plans.

c. The discounted payback mode is generally guarded by academics as entity the best unmarried mode for evaluating cardinal budgeting plans.

d. The net exhibit appreciate mode (NPV) is generally guarded by academics as entity the best

unmarried mode for evaluating cardinal budgeting plans.

e. The mitigated inner trounce of repay mode (MIRR) is generally guarded by academics as entity the best unmarried mode for evaluating cardinal budgeting plans.

 

2. Projects A and B bear selfselfsimilar expected lives and selfselfsimilar modeadmonish specie outflows (costs).  However, most of one plan’s specie streams conclude in the future years, period most of the other plan’s specie streams happen in the posterior years.  The two NPV lines are loving underneath: Which of the followingcited announcements is CORRECT?

a. Balance of Plan A’s specie streams happen in the posterior years.

b. Balance of Plan B’s specie streams happen in the posterior years.

c. We must bear notification on the consume of cardinal in direct to determine which plan has the larger future specie streams.

d. The NPV line graph is illogical following a time the announcement made in the drift.

e. The crossbalance trounce, i.e., the trounce at which Projects A and B bear the selfselfsimilar NPV, is elder than either plan’s IRR.

 

3. Suppose a sturdy relies detestedly on the payback mode when making cardinal budgeting conclusions, and it sets a 4-year payback unobservant of economic stipulations.  Other things held invariable, which of the followingcited announcements is most mitigated to be gentleman?

a. It accomplish recognize too sundry short-term plans and exclude too sundry long-term plans (as judged by the NPV).

b. It accomplish recognize too sundry long-term plans and exclude too sundry short-term plans (as judged by the NPV).

c. The sturdy accomplish recognize too sundry plans in all economic states owing a 4-year payback is too low.

d. The sturdy accomplish recognize too few plans in all economic states owing a 4-year payback is too tall.

e. If the 4-year payback outcomes in recognizeing impartial the correct set of plans inferior mediocre

economic stipulations, then this payback accomplish outcome in too few long-term plans when the

economy is feeble.

 

4. You are on the staff of Camden Inc.  The CFO venerates plan recognizeance should be naturalized on the NPV, but Steve Camden, the moderator, insists that no plan should be recognizeed flattentual its IRR exceeds the plan’s induce-adjusted WACC.  Now you must fashion a instruction on a plan that has a consume of $15,000 and two specie streams:  $110,000 at the end of Year 1 and -$100,000 at the end of Year 2.  The moderator and the CFO twain accord that the mismisappropriate WACC for this plan is 10%.  At 10%, the NPV is $2,355.37, but you invent two IRRs, one at 6.33% and one at 527%, and a MIRR of 11.32%.  Which of the followingcited announcements best describes your optimal instruction, i.e., the resolution and instruction that is best for the association and lowest mitigated to get you in distress following a time either the CFO or the moderator?

a. You should praise that the plan be excludeed owing its NPV is privative and its IRR is near than the WACC.

b. You should praise that the plan be excludeed owing, although its NPV is express, it has an IRR that is near than the WACC.

c. You should praise that the plan be recognizeed owing (1) its NPV is express and (2) although it has two IRRs, in this condition it would be improve to standpoint on the MIRR, which exceeds the WACC.  You should interpret this to the moderator and narrebuke him that the sturdy’s appreciate accomplish extension if the plan is recognizeed.

d. You should praise that the plan be excludeed.  Although its NPV is express it has two IRRs, one of which is near than the WACC, which indicates that the sturdy’s appreciate accomplish dismiss if the plan is recognizeed.

e. You should praise that the plan be excludeed owing, although its NPV is express, its MIRR is near than the WACC, and that indicates that the sturdy’s appreciate accomplish dismiss if it is recognizeed.

 

5. A sturdy is because Projects S and L, whose specie streams are shown underneath.  These plans are mutually detested, equal intrepid, and not repeatable.  The CEO wants to use the IRR test, period the CFO kindnesss the NPV mode.  You were compensated to warn the sturdy on the best proceeding.  If the evil-doing conclusion test is used, how abundantly virtual appreciate would the sturdy surrender?

WACC:  6.00%

Year 0 1 2 3 4

CFS -$1,025 $380 $380 $380 $380

CFL -$2,150 $765 $765 $765 $765

a. $188.68

b. $198.61

c. $209.07

d. $219.52

e. $230.49

 

 

FIN 534 – Homework Chapter 11

1. Which of the followingcited announcements is CORRECT?

a. An externality is a post where a plan would bear an impertinent goods on some other bisect of the sturdy’s balanceall operations.  If the plan would bear a advantageous goods on other operations, then this is not an externality.

b. An issue of an externality is a post where a bank opens a new employment, and that new employment causes deposits in the bank’s other employments to dismiss.

c. The NPV mode automatically communicates becomingly following a time externalities, flatten if the externalities are not specifically signed, but the IRR mode does not.  This is another infer to kindness the NPV.

d. Twain the NPV and IRR modes communicate becomingly following a time externalities, flatten if the externalities are not specifically signed.  However, the payback mode does not.

e. Identifying an externality can never manage to an extension in the conducive NPV.

 

2. Taussig Technologies is because two virtual plans, X and Y.  In assessing the plans’ induces, the association estimated the beta of each plan versus twain the association’s other proceeds and the hoard communicate, and it too conducted powerful scenario and airs analyses.  This elimination done the followingcited account:

Project X Plan Y

Expected NPV $350,000 $350,000

Standard derangement (σNPV) $100,000 $150,000

Project beta (vs. communicate) 1.4 0.8

Correlation of the plan specie streams following a time specie streams from generally solid plans.  Specie streams are not correlated following a time the specie streams from solid plans.  Specie streams are tallly correlated following a time the specie streams from solid plans.

Which of the followingcited announcements is CORRECT?

a. Plan X has balance stand-alone induce than Plan Y.

b. Plan X has balance corpotrounce (or following a timein-firm) induce than Plan Y.

c. Plan X has balance communicate induce than Plan Y.

d. Plan X has the selfselfsimilar flatten of corpotrounce induce as Plan Y.

e. Plan X has near communicate induce than Plan Y.

 

3. Which of the followingcited announcements is CORRECT?

a. If an asset is sold for near than its tome appreciate at the end of a plan’s society, it accomplish genetrounce a damage for the sturdy, future its marginal specie stream accomplish be privative.

b. Simply incremental specie streams are applicable in plan resolution, the becoming incremental specie streams are the reputed accounting pay, and thus reputed accounting inconclude should be used as the cause for investor and managerial conclusions.

c. It is unrealistic to venerebuke that any extensions in net agoing cardinal required at the set-out of an disquisition plan can be recovered at the plan’s quantity.  Agoing cardinal relish list is approximately frequently used up in operations.  Thus, specie streams associated following a time agoing cardinal should be comprised simply at the set-out of a plan’s society.

d. If equipment is expected to be sold for balance than its tome appreciate at the end of a plan’s society, this accomplish outcome in a benefit-service.  In this condition, opposing taxes on the benefit-service, the end-of-plan specie stream accomplish be elder than if the asset had been sold at tome appreciate, other things held invariable.

e. Changes in net agoing cardinal advert to changes in general proceeds and general liabilities, not to changes in long-term proceeds and liabilities.  Therefore, changes in net agoing cardinal should not be considered in a cardinal budgeting resolution.

4. Temple Corp. is because a new plan whose account are shown underneath.  The equipment that would be used has a 3-year tax society, would be depreciated by the straight-line mode balance its 3-year society, and would bear a naught salvage appreciate.  No new agoing cardinal would be required.  Revenues and other unconditional consumes are expected to be invariable balance the plan’s 3-year society. 

What is the plan’s NPV?

Risk-adjusted WACC 10.0%

Net boarding consume (depreciable cause) $65,000

Straight-line backbiting trounce 33.3333%

Sales revenues, each year $65,500

Operating consumes (beside backbiting), each year $25,000

Tax trounce 35.0%

a. $15,740

b. $16,569

c. $17,441

d. $18,359

e. $19,325

 

 

5.   Florida Car Wash is because a new plan whose account are shown underneath.  The equipment to be used has a 3-year tax society, would be depreciated on a straight-line cause balance the plan’s 3-year society, and would bear a naught salvage appreciate following Year 3.  No new agoing cardinal would be required.  Revenues and other unconditional consumes accomplish be invariable balance the plan’s society, and this is impartial one of the sturdy’s sundry plans, so any damagees on it can be used to offset pay in other units.  If the number of cars washed dismissd by 40% from the expected flatten, by how abundantly would the plan’s NPV dismiss?  (Hint: Note that specie streams are invariable at the Year 1 flatten, whatever that flatten is.)

WACC 10.0%

Net boarding consume (depreciable cause) $60,000

Number of cars washed 2,800

Average expense per car $25.00

Fixed op. consume (excl. deprec.) $10,000

Variable op. consume/unit (i.e., VC per car washed) $5.375

Annual backbiting $20,000

Tax trounce 35.0%

a. $28,939

b. $30,462

c. $32,066

d. $33,753

e. $35,530