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# FIN/571 Wk 3 – Apply: Wk 3 Quiz

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FIN/571 Wk 3 – Apply: Wk 3 Quiz

# FIN/571 Wk 3 – Apply: Wk 3 Quiz

## FIN/571 Wk 3 – Apply: Wk 3 Quiz

You can buy property today for \$2.2 million and sell it in 5 years for \$3.2 million. (You earn no rental income on the property.)

a. If the interest rate is 10%, what is the present value of the sales price? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)

b. Is the property investment attractive to you?

c-1. What is the present value of the future cash flows, if you also could earn \$120,000 per year rent on the property? The rent is paid at the end of each year. (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)

c-2. Is the property investment attractive to you now?

Compute the future value of a \$95 cash flow for the following combinations of rates and times. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

a. r = 7%; t = 10 years

b. r = 7%; t = 20 years

c. r = 3%; t = 10 years

d. r = 3%; t = 20 years

A factory costs \$460,000. You forecast that it will produce cash inflows of \$150,000 in year 1, \$210,000 in year 2, and \$360,000 in year 3. The discount rate is 12%.

Old Time Savings Bank pays 5% interest on its savings accounts. If you deposit \$1,700 in the bank and leave it there: (Do not round intermediate calculations. Round your answers to 2 decimal places.)

a. How much interest will you earn in the first year?

b. How much interest will you earn in the second year?

c. How much interest will you earn in the 10th year?

a. What is the value of the factory? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. Is the factory a good investment?

multiple choice

Your landscaping company can lease a truck for \$7,100 a year (paid at year-end) for 7 years. It can instead buy the truck for \$38,000. The truck will be valueless after 7 years. The interest rate your company can earn on its funds is 8%.

a. What is the present value of the cost of leasing? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. Is it cheaper to buy or lease?

c. What is the present value of the cost of leasing if the lease payments are an annuity due, so the first payment comes immediately? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

d. Is it now cheaper to buy or lease?

The following are the cash flows of two independent projects:

 Year Project A Project B 0 \$ (260 ) \$ (260 ) 1 140 160 2 140 160 3 140 160 4 140

a. If the opportunity cost of capital is 11%, calculate the NPV for both projects. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. Which of these projects is worth pursuing?

multiple choice

The following are the cash flows of two projects:

 Year Project A Project B 0 \$ (300 ) \$ (300 ) 1 180 200 2 180 200 3 180 200 4 180

a. Calculate the NPV for both projects if the discount rate is 12%. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. Suppose that you can choose only one of these projects. Which would you choose?

multiple choice

If you insulate your office for \$21,000, you will save \$2,100 a year in heating expenses. These savings will last forever.

a. What is the NPV of the investment when the cost of capital is 4%? 10%?

b. What is the IRR of the investment? (Enter your answer as a whole percent.)

c. What is the payback period on this investment?

a. What is the present value of a 3-year annuity of \$280 if the discount rate is 6%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What is the present value of the annuity in (a) if you have to wait an additional year for the first payment? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

Talia’s Tutus bought a new sewing machine for \$80,000 that will be depreciated over 5 years using double-declining-balance depreciation with a switch to straight-line.

Required:

a. Find the depreciation charge each year.

b. If the sewing machine is sold after 3 years for \$34,000, what will be the after-tax proceeds on the sale if the firm’s tax bracket is 35%?

Find the interest rate implied by the following combinations of present and future values: (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Leave no cells blank – be certain to enter “0” wherever required.)

Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for \$7,200 and sell its old washer for \$2,100. The new washer will last for 6 years and save \$1,700 a year in expenses. The opportunity cost of capital is 14%, and the firm’s tax rate is 21%.

a. If the firm uses straight-line depreciation over a 6-year life, what are the cash flows of the project in years 0 to 6? The new washer will have zero salvage value after 6 years, and the old washer is fully depreciated. (Negative amounts should be indicated by a minus sign.)

b. What is project NPV? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

c. What is NPV if the firm investment is entitled to immediate 100% bonus depreciation? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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FIN/571 Wk 3 – Apply: Wk 3 Quiz