FIN 3030, Final Exam, F37,a a) project A; because it has the higher required rat

Question

FIN 3030, Final Exam, F37,a a) project A; because it has the higher required rate of return b) proiect A: because its NPV is about $4,900 more than the NPV of project b c) project 8, because it has the largest total cash inflow d) project 8; because it has the largest cash inflow in year one e) project B, because it has the lower required return 15) Jefferson & Sons is evaluating a project that will increase annual sales by $145,000 and annual cash costs by $94,000. The project will initially require $110,000 in fixed asset straight-line to a zero book value over the 4-year life of the project. The applicable tax rate percent. What is the annual operating cash flow (OCF) for this project? s that will be depreciated a) $11,220 b) $29,920 c) $43,480 d) $46,480 16) What is the NPV of the project in question above if the OCF from the project comes out to $45,000 per year and the appropriate discount rate is 15%? a) $2,558 b) $14,134 c) $18,474 d) $124,134 17) What is the IRR of the project in the questions above? a) -28.2% b) 3.5% c) 21.2% d) 23.1%

Explanation / Answer

15 calculation of the operating cash flow of this project depreciation cost of the asset / number of years 110000/4 27500 operating income 1 sales 145000 2 cash cost 94000 3 depreciation 27500 4 profit before tax ( 1 - 2 - 3 ) 23500 5 tax at 32 % ( 23500 * 32 % ) 7520 6 profit after tax ( 4 - 5 ) 15980 7 operating cash flow 43480 answer c 43480 16 calculation of the net present value years 1 2 3 4 1 operating cash flow 45000 45000 45000 45000 2 discount rate at 15 % 0.8696 0.7561 0.6575 0.5718 3 present value cash flows ( 1 * 2 ) 39130 34026 29588 25729 4 total present value 128474 5 initial outlay 110000 6 net present value ( 4 - 5 ) 18474 answer c 18474 17 calculation of the internal rate of the return for question 15 1 years 0 1 2 3 4 2 -110000 43480 43480 43480 43480 internal rate of return using excel .=irr( cash flows from year 0 to 4 ) 21.22% answer c 21.20% for question 16 1 years 0 1 2 3 4 2 -110000 45000 45000 45000 45000 internal rate of return using excel .=irr( cash flows from year 0 to 4 ) 23.09% answer c 23.10%

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