Exam III Review Sheet for Exam III (Chapters 9, 10, 11, and portions of 18, 20, and

notes from Ch. 21) Subject to Change Refer to this every week Do NOT get behind in your studies Do not assume that this covers everything on the exam

1. Define capital budgeting, and explain its importance. 2. Explain the different types of projects, and understand how they influence the capital budgeting process (when may certain tools be used, and when may they not be used?) 3. Understand the advantages and disadvantages of each of the capital budgeting decision tools. 4. Understand the decision rule for each of the capital budgeting tools 5. What are the problems with IRR? 6. Relationship between NPV, IRR, and PI (good projects have NPV >=0, IRR >= RRR, and PI >= 1). 7. Define IRR: (beyond simply discount rate that makes NPV = 0) 8. NPV profile is downward sloping for conventional projects, and bubble-shaped for nonconventional projects. For non-conventional projects, multiple IRRs may exist, so the NPV profile will cross the x-axis more than once. 9. Calculate the present value and IRR of irregular cash flows. 10. Calculate payback, NPV, IRR, and PI of a project. 11. Know everything conceptual about the four capital budgeting tools covered (and listed just above). 12. Know how to apply and make a decision with all of the capital budgeting decision tools. 13. Know the four project classifications (independent, mutually exclusive, conventional, and non-conventional) and how that affects what capital budgeting tool may be used. 14. Know all the cash flow issues that we have covered - definition of incremental cash flows; rework all examples from the Chapter 10 Course Notes 15. How can a net working capital investment lower the NPV of a project if the investment is recovered at the end of the project? 16. Know about the various types of what-if analyses. 17. Know how to calculate break-even, DOL, DFL, DCL, and what they tell us. 18. Calculation and definition of operating cycle, cash cycle, etc. 19. Know how to calculate the APR and effective rates for trade credit. What does that rate tell us? What would induce one to take a discount, and how would that affect the cost associated with trade credit? 20. Exchange rates ($1.50 = one British pound is a direct quote for the U.S. based investor like a price tag in a store, its the dollar price of something. If something costs 20 pounds then it will cost 20 pounds X $1.5/1pound = $30. One dollar = .6667pounds is a direct quote for the U.K. investor since they are seeing a pound price tag on one U.S. dollar. If something costs 20 pounds then 20 pounds x $1/.6667pounds is still $30. The exam will consist of approximately 50 multiple choice and/or true/false questions.

You are considering an investment with the following cash flows. If the required rate of return for this investment is 15.5 percent, should you accept the investment based solely on the internal rate of return rule? Why or why not?

You cannot apply the IRR rule in this case.

Denver Interiors, Inc., has sales of $930,000 and cost of goods sold of $690,000. The firm had a beginning inventory of $36,000 and an ending inventory of $45,000. What is the length of the inventory period? 15.00 days 19.50 days 21.42 days 20.14 days 13.93 days Inventory turnover = $690,000/[($36,000 + $45,000)/2] = 17.037037 Inventory period = 365/17.037037 = 21.42 days The Bear Rug has sales of $811,000. The cost of goods sold is equal to 63 percent of sales. The beginning accounts receivable balance is $41,000 and the ending accounts receivable balance is $38,000. How long on average does it take the firm to collect its receivables? 17.26 days 17.78 days 18.58 days 20.44 days 29.77 days Receivables turnover = $811,000/[($41,000 + $38,000)/2] = 20.53165 Receivables period = 365/20.53165 = 17.78 Days The Mountain Top Shoppe has sales of $512,000, average accounts receivable of $31,400 and average accounts payable of $24,800. The cost of goods sold is equivalent to 71 percent of sales. How long does it take The Mountain Top Shoppe to pay its suppliers? 21.76 days 22.38 days 24.90 days 25.89 days 26.67 days Payables turnover = ($512,000 0.71)/$24,800 = 14.6581 Payables period = 365/14.6581 = 24.90 days West Chester Automation has an inventory turnover of 16 and an accounts payable turnover of 11. The accounts receivable period is 36 days. What is the length of the cash cycle?

5.67 days 25.63 days 41.00 days 52.00 days 58.81 days Cash cycle = (365/16) + 36 - (365/11) = 25.63 days The Wire House purchases its inventory one quarter prior to the quarter of sale. The purchase price is 55 percent of the sales price. The accounts payable period is 45 days. The accounts payable balance at the beginning of quarter one is $32,500. What is the amount of the expected disbursements for quarter two given the following expected quarterly sales? Quarter 1: $35,000 Quarter 2: $39,000 Quarter 3: $50,600 Quarter 4: $60,600 $28,300 $21,400 $35,700 $24,640 $22,900 Q2 disbursements = [(45/90) (0.55) $39,000] + [(45/90) (0.55) $50,600] = $24,640

What effective annual interest rate does the firm earn when a customer does not take the discount? 40.06%, 24.90% 45.06% 40.86% 38.46% The interest rate for the term of the discount is: Interest rate = 0.030/0.97 Interest rate = 0.0309 or 3.09% And the interest is for: 46 13 = 33 days

So, using the EAR equation, the effective annual interest rate is: EAR = (1 + Periodic rate)m 1 EAR = (1.0309)365/33 1 EAR = 0.4006 or 40.06% Required: (a)If the discount is changed to 5 percent, what will be the effective annual interest rate? 76.36% (b)If the credit period is increased to 64 days, what will be the effective annual interest rate? 24.36% (c)If the discount period is increased to 19 days, what will be the effective annual interest rate? 50.95% The price of one Euro expressed in U.S. dollars is referred to as a(n): ADR rate. cross inflation rate. depository rate. exchange rate. foreign interest rate. How many euros can you get for $2,800 if one euro is worth 1.0577 2,973 2,611 2,745 2,848 2,647 $2,800 (1/$1.0577) = 2,647 The camera you want to buy costs $362 in the U.S. If absolute purchasing power parity exists, the identical camera will cost ___ in Canadian dollars if the exchange rate is C$1 = $.7069

450.64 286.77

368.71 512.10 522.34 $362 (C$1/$.7069) = C$512.10