AMERICAN UNIVERSITY IN BULGARIA BUS 330: CORPORATE FINANCE I FALL 2012, AUBG

MIDTERM EXAM 2 Name: ___________________________________ ID _________ Ve !"#$ 2 S#%&'"#$ G&"(e

INSTRUCTIONS: 1. You have 75 minutes to complete the exam. 2. The exam is o!th a total o" 1## points. $. You ma% use a calculato! an& sc!atch pape! sheets. You must han& in the sheets ith %ou! exam 'put %ou! name on it(. ). *llocate %ou! time isel%. Use the num+e! o" points assi,ne& to each p!o+lem as %ou! ,ui&e. 5. In o!&e! to ,et "ull c!e&it on the p!o+lems- %ou must sho *.. %ou! o!/0 1. You can ,et pa!tial c!e&its i" %ou sho %ou! calculations o! p!ovi&e a!,uments to suppo!t %ou! ans e!. 7. No c!e&its ill +e a!&e& i" %ou "ail to state %ou! assumptions o! conclusions explicitl%.

Pa ' A: M&%'")%e *+#"*e ,&e!'"#$! -2 )#"$'! ea*+, 12 )#"$'! "$ '#'a%.: 1. 2hich o" the "ollo in, statements is CORR3CT4 a. 2hen calculatin, the cost o" &e+t- a compan% nee&s to a&5ust "o! taxes+ecause inte!est pa%ments a!e &e&ucti+le +% the pa%in, co!po!ation. +. 2hen calculatin, the cost o" p!e"e!!e& stoc/- companies must a&5ust "o! taxes+ecause &ivi&en&s pai& on p!e"e!!e& stoc/ a!e &e&ucti+le +% the pa%in, co!po!ation. c. 6ecause o" tax e""ects- an inc!ease in the !is/7"!ee !ate ill have a ,!eate! e""ect on the a"te!7tax cost o" &e+t than on the cost o" common stoc/ as measu!e& +% the C*89. &. I" a compan%:s +eta inc!eases- this ill inc!ease the cost o" e;uit% use& to calculate the 2*CC- +ut onl% i" the compan% &oes not have enou,h !etaine& ea!nin,s to ta/e ca!e o" its e;uit% "inancin, an& hence must issue ne stoc/. e. <i,he! "lotation costs !e&uce sha!ehol&e!s= expecte& !etu!ns an& e;uit% costan& that lea&s to a !e&uction in a compan%:s 2*CC. A$!/e : A 2. 2hich o" the "ollo in, is NOT a capital component hen calculatin, the ave!a,e cost o" capital '2*CC( "o! use in capital +u&,etin,4 a. .on,7te!m &e+t. +. Notes pa%a+le. c. Retaine& ea!nin,s. &. Common stoc/. e. 8!e"e!!e& stoc/. A$!/e : B ei,hte&

$. 2hich o" the "ollo in, is NOT a !elevant cash "lo an& thus shoul& not +e !e"lecte& in the anal%sis o" a capital +u&,etin, p!o5ect4 a. Chan,es in net o!/in, capital. +. Shippin, an& installation costs. c. Canni+ali>ation e""ect. &. Oppo!tunit% costs. e. Cost that as incu!!e& an& expense& in the past an& cannot +e !ecove!e& i" the "i!m &eci&es not to ,o "o! a!& ith the p!o5ect. A$!/e : E ). 2hich one o" the "ollo in, oul& NOT !esult in inc!emental cash "lo s an& thus shoul& NOT +e inclu&e& in the capital +u&,etin, anal%sis "o! a ne p!o&uct4 a. * "i!m has a pa!cel o" lan& that can +e use& "o! a ne plant site o! +e sol&!ente&- o! use& "o! a,!icultu!al pu!poses. +. * ne p!o&uct ill ,ene!ate ne sales- +ut some o" those ne sales ill +e "!om custome!s ho s itch "!om one o" the "i!m:s cu!!ent p!o&ucts. c. * "i!m must o+tain ne e;uipment "o! the p!o5ect- an& ?1 million is !e;ui!e& "o! shippin, an& installin, the ne machine!%.

&. * "i!m has spent ?2 million on R@A associate& ith a ne p!o&uct. These costs have +een expense& "o! tax pu!poses- an& the% cannot +e !ecove!e& !e,a!&less o" hethe! the ne p!o5ect is accepte& o! !e5ecte&. e. * "i!m can p!o&uce a ne p!o&uct- an& the existence o" that p!o&uct ill stimulate sales o" some o" the "i!m:s othe! p!o&ucts A$!/e : D 5. 2hich o" the "ollo in, shoul& NOT in"luence a "i!m:s &ivi&en& polic% &ecision4 a. The "i!m:s a+ilit% to accele!ate o! &ela% investment p!o5ects. +. * st!on, p!e"e!ence +% most sha!ehol&e!s "o! cu!!ent cash income ve!sus capital ,ains. c. Const!aints impose& +% the "i!m:s +on& in&entu!e 'cont!act(. &. The "act that much o" the "i!m:s e;uipment has +een lease& !athe! than +ou,ht an& o ne&. e. The "act that Con,!ess is consi&e!in, chan,es in the tax la !e,a!&in, the taxation o" &ivi&en&s ve!sus capital ,ains. A$!/e : D 1. 2hich o" the "ollo in, statements is CORR3CT4 a. I" a "i!m !epu!chases some o" its stoc/ in the open ma!/et- then sha!ehol&e!s ho sell thei! stoc/ "o! mo!e than the% pai& "o! it ill +e su+5ect to capital ,ains taxes. +. *n open7ma!/et &ivi&en& !einvestment plan ill +e most att!active to companies that nee& ne e;uit% an& oul& othe! ise have to issue a&&itional sha!es o" common stoc/ th!ou,h investment +an/e!s. c. Stoc/ !epu!chases ten& to !e&uce "inancial leve!a,e. &. I" a compan% &ecla!es a 27"o!71 stoc/ split- its stoc/ p!ice shoul& !ou,hl% &ou+le. e. One a&vanta,e o" a&optin, the !esi&ual &ivi&en& polic% is that this ma/es it easie! "o! co!po!ations to meet the !e;ui!ements o" 9o&i,liani an& 9ille!:s &ivi&en& clientele theo!%. A$!/e : A

P #0%em 1 -1 )#"$'!. * compan%:s 1B coupon !ate- semiannual pa%ment- ?1-### pa! value +on& that matu!es in $# %ea!s- sells at a p!ice ?515.11. The compan%:s "e&e!al7plus7state tax !ate is $5B. 2hat is the "i!m:s a"te!7tax component cost o" &e+t "o! pu!poses o" calculatin, the 2*CC4 '<int: 6ase %ou! ans e! on the nominal rate.( S#%&'"#$: 3nte! these values: N C 1#- 8D C 7515.11- 89T C $# an& ED C 1###- to ,et I C 1B C pe!io&ic !ate. The nominal !ate is 1BF'2( C 12B- an& The a"te!7tax component cost o" &e+t is 1223-0451. 6 74824 P #0%em 2 -8 )#"$'!. No!the!n 8aci"ic Inc. has a six month +ac/lo, o" o!&e!s "o! its patente& sola! heatin, s%stem. To meet this &eman& mana,ement plans to expan& p!o&uction capacit% +% )#B ith a ?1# million investment in plant an& machine!%. The "i!m ants to maintain a )#B &e+t7to7total assets !atio in its capital st!uctu!e. It also ants to maintain its past &ivi&en& polic% o" &ist!i+utin, )5B o" last %ea!:s net income. In 2#1# net income as ?5 million. a. -1 )#"$'!. <o much exte!nal e;uit% must No!the!n 8aci"ic see/ at the +e,innin, o" 2#11 in o!&e! to expan& capacit% as &esi!e&4 +. -3 )#"$'!. Aesc!i+e the "ou! "acto!s that the optimal &ist!i+ution !atio is a "unction o". S#%&'"#$: a4 Re'a"$e( ea $"$9! 6 Ne' "$*#me3-1 : Pa;#&' a'"#. 6 5-###-###F'1 7 #.)5( C ?2-75#-###. 3xte!nal e;uit% nee&e& is: Total e;uit% !e;ui!e& C 'Ne investment('1 7 Ae+t !atio( C ?1#-###-###'1 7 #.)#( C ?1-###-###. Ne exte!nal e;uit% nee&e& C ?1-###-### 7 ?2-75#-### C ?$-25#-### 04 T+e <#& <a*'# ! '+a' '+e #)'"ma% ("!' "0&'"#$ a'"# "! a <&$*'"#$ #< a e: Investo!s: p!e"e!ences "o! &ivi&en&s ve!sus capital ,ains The "i!m:s investo! oppo!tunities Its ta!,et capital st!uctu!e The availa+ilit% an& cost o" exte!nal capital

P #0%em 3 -10 )#"$'!. *6C Copin, Co!po!ation has G million sha!es o" common stoc/ outstan&in, an& 12#-###- H.5 pe!cent semiannual +on&s outstan&in,- ith pa! value o" ?1### each. The common stoc/ cu!!entl% sells "o! ?$) pe! sha!e an& has a +eta o" 1.2#- an& the +on&s have 15 %ea!s to matu!it% an& sell "o! G$ pe!cent o" pa!. The ma!/et !is/ p!emium is 1# pe!cent- T7+ills a!e %iel&in, 5 pe!cent annual !etu!n- an& *6C Copin,:s tax !ate is )# pe!cent. a. -1 )#"$'!. 2hat is the "i!m:s ma!/et value4 2hat a!e ma!/et value ei,hts o" the "i!m:s capital st!uctu!e4 +. -1 )#"$'!. I" *6C 9inin, is evaluatin, a ne investment p!o5ect that has the same !is/ as the "i!m:s t%pical p!o5ect- hat !ate shoul& the "i!m use to &iscount the p!o5ect:s cash "lo s4 'Note: use 2*CC "o!mula +ase& on ma!/et value ei,hts.( S#%&'"#$: a( 2e ill +e,in +% "in&in, the ma!/et value o" each t%pe o" "inancin,. 2e "in&: 9DA C 12#-### I '?1-###('#.G$( C ?111-1##-### 9D3 C G-###-### I '?$)( C ?$#1-###-### *n& the total ma!/et value o" the "i!m is: D C ?111-1##-### J $#1-###-### C ?)17-1##-### So- the ma!/et value ei,hts o" the compan%:s "inancin, is: AKD C ?111-1##-###K?)17-1##-### C .2172 3KD C ?$#1-###-###K?)17-1##-### C .7$2H +( Eo! p!o5ects e;uall% as !is/% as the "i!m itsel"- the 2*CC shoul& +e use& as the &iscount !ate. Ei!st e can "in& the cost o" e;uit% usin, the S9. e;uation. The cost o" e;uit% is: RE 6 401 = 1420-410. 6 41700 # 174002 The cost o" &e+t is the YT9 o" the outstan&in, +on&s- so: 8# C ?G$# C ?)2.5'8DIE*RB-$#( J ?1-###'8DIERB-$#( R 6 >458?2 -)e "#("* a'e. YT9 C ).1GB I 2 C G.$7HB *n& the a"te!7tax cost o" &e+t is: RD 6 -1 @ 4>0.-40?38. 6 401528 # 14532 No e can calculate the 2*CC as the app!op!iate &iscount !ate: AACC 6 41700-47328. = 401528-42572. 6 413?51 # 134?512

P #0%em > -20 )#"$'!. Consi&e! the "ollo in, cash "lo s o" t o mutuall% exclusive p!o5ects "o! To/%o Ru++e! Compan%. *ssume the &iscount !ate "o! To/%o Compan% is 1# pe!cent. Yea! # 1 2 $ Eo!/li"t 7?5##-### $##-### 5##-### 1##-### Conve%o! 7?1-###-### 1##-### )##-### 1-###-###

a. -3 )#"$'!. 6ase& on the N8D an& IRR !ules- hich p!o5ect shoul& +e ta/en4 +. -7 )#"$'!. 6ase& on &iscounte& pa%+ac/ pe!io&- hich p!o5ect shoul& +e ta/en4 c. -10 )#"$'!. 6ase& on this anal%sis- is inc!emental IRR anal%sis necessa!%4 I" %es- please- con&uct the anal%sis '<int: su+t!act the cash "lo s o" smalle! p!o5ect "!om the cash "lo s o" the la!,e! p!o5ect to "in& IRR.( S#%&'"#$: a4 Ba!e( #$ '+e NPV &%e, /+"*+ ) #Be*' !+#&%( 0e 'aCe$D The N8D o" each p!o5ect is: N8D'Eo!/li"t( C L?5##-### J ?$##-### K 1.1# J ?5##-### K 1.1#M2 J ?1##-### K 1.1#M$. S#, NPV-F# C%"<'. 6 E251,08148? N8D'Conve%o!( C L?1-###-### J ?1##-### K 1.1# J ?)##-### K 1.1#M2 J ?1-###-### K 1.1#M$. S#, NPV-C#$Fe;# . 6 E527,3>7485 The N8D !ule implies acceptin, Conve%o! p!o5ect +ecause it has the hi,hest N8D. The IRR o" the t o p!o5ects is: # C L?5##-### J ?$##-### K '1 J IRR( J ?5##-### K '1 J IRR(M2 J ?1##-### K '1 J IRR(M$. S#, IRR-F# C%"<'. 6 >04??2 # C L?1-###-### J ?1##-### K '1 J IRR( J ?)##-### K '1 J IRR(M2 J ?1-###-### K '1 J IRR(M$. S#, IRR-C#$Fe;# . 6 3?47?2 The IRR c!ite!ion implies acceptin, the Eo!/li"t p!o5ect +ecause it has the hi,hest IRR. Remem+e! the IRR &oes not necessa!il% !an/ p!o5ects co!!ectl%. 04 Ba!e( #$ ("!*#&$'e( )a;0a*C )e "#(, /+"*+ ) #Be*' !+#&%( 0e 'aCe$D The pa%+ac/ pe!io& is the time that it ta/es "o! the cumulative un&iscounte& cash in"lo s to e;ual the initial investment.

Eo!/li"t p!o5ect: Cumulative cash "lo s Yea! 1 C ?$##-###K1.1# C ?272-727.27 Cumulative cash "lo s Yea! 2 C ?272-727.27J 5##-###K1.1#M2 C ?1H5-G5#.)1 8a%+ac/ pe!io& C 1 J '?5##-###7272-727.27(K?5##-###K1.1#M2 PBP 6 1 = 227,272473G>13,22341> 6 1,110 Conve%o! p!o5ect: Cumulative cash "lo s Yea! 1 C ?1##-###K1-1# C ?5)5-)5).55 Cumulative cash "lo s Yea! 2 C ?5)5-)5).55 J )##-###K1.1#M2 C ?H71-#$$.#1 8a%+ac/ pe!io& C 2 J '1-###-### L H71-#$$.#1(K'1-###-###K1.1#M$( C PBP 6 2 = -123,?554?>.G711,31>480 6 24151 Since the Eo!/li"t p!o5ect has a sho!te! pa%+ac/ pe!io& than the Conve%o! p!o5ectthe compan% shoul& choose the Eo!/li"t. *4 Ba!e( #$ '+"! a$a%;!"!, "! "$* eme$'a% IRR a$a%;!"! $e*e!!a ;D I< ;e!, )%ea!e, *#$(&*' '+e a$a%;!"! a$( <"$( IRR4 Inc!emental IRR anal%sis is necessa!%. The Eo!/li"t p!o5ect has a hi,he! IRR- +ut is !elativel% smalle! in te!ms o" investment an& N8D. In calculatin, the inc!emental cash "lo s- e su+t!act the cash "lo s o" the p!o5ect ith the smalle! initial investment "!om the cash "lo s o" the p!o5ect ith the la!,e initial investment- so the inc!emental cash "lo s a!e: Conve%o! Eo!/li"t Conve%o! 7 Eo!/li"t Yea! # 7?1-###-### 75##-### 7?5##-### Yea! 1 ?1##-### $##-### ?$##-### Yea! 2 ?)##-### 5##-### 7?1##-### Yea! $ ?1-###-## # 1##-### ?G##-### e "in&

Settin, the p!esent value o" these inc!emental cash "lo s e;ual to >e!othe inc!emental IRR is:

# C L?5##-### J ?$##-### K '1 J IRR( L ?1##-### K '1 J IRR(M2 J ?G##-### K '1 J IRR(M$. So- IRR 6 384?02 N#$:*#$Fe$'"#$a% CF!, !# MIRR 6 2?4>1?2 -*+e*C.

P #0%em 1 -20 )#"$'!. Usin, the in"o!mation "!om the 6alance sheet o" Spo!tp!om- Inc.- an& the a&&itional ma!/et in"o!mation- ans e! the "ou! ;uestions +elo : Ba%a$*e !+ee' a! #< De*em0e 31, 2001 H"$ E000I A!!e'! L"a0"%"'"e! a$( $e' /# '+ Cu!!ent *ssets ?2#-### Cu!!ent .ia+ilities Eixe& *ssets .on,7te!m &e+t '+on&sNet 8lan- 8!ope!t% an& 11#-### ?1### pa!- HB coupon3;uipment &ue 2##G( Noo& ill @ othe! 1#-### Total Eixe& *ssets 17#-### Total lia+ilities 8!e"e!!e& Stoc/- 1#B- pa! ?1## Common stoc/- pa! ?2.5# 8ai&7in su!plus Retaine& ea!nin,s Total shareholders equity Total *ssets: ?1G#-### Total lia+ilities an& net o!th:

?2#-### 5#-### 7#-### 15-### 2#-### 1#-### 75-### 12#-### ?1G#-###

9a!/et in"o!mation: 1( 6on&s: 8o C ?G#2 'at the en& o" 2##1(. Elotation costs a!e estimate& at 1B o" the ma!/et p!ice. 2( 8!e"e!!e& stoc/: 8o C ?H5 'at the en& o" 2##1(. Elotation costs a!e estimate& at )B o" the ma!/et p!ice. $( Common stoc/: Aiv# C ?2.## an& , C 1#B '+ase& on histo!ical ea!nin,s an& &ivi&en&s ,!o th(. Elotation costs oul& +e GB +ase& on 8o C ?2# pe! sha!e 'at the en& o" 2##1(. )( The co!po!ate ma!,inal tax !ate is $5B. F"$(: a. -1 )#"$'!. 2hat a!e the ma!/et value ei,hts o" &i""e!ent sou!ces o" "inancin,4 +. -10 )#"$'!. 2hat is the cost o" each sou!ce o" "inancin,4 c. -1 )#"$'!. 2hat is the ei,hte& ave!a,e cost o" capital "o! Spo!tp!om4 S#%&'"#$: a. De'e m"$"$9 '+e ma Ce' /e"9+'! Capital Sou!ce Ae+t 8!e"e!!e& 3;uit% Common Retaine& 9a!/et valueF ?)5-1##-### 12-75#-### 9a!/et value 2ei,ht- B 2#.7# 5.H5

Total e;uit% Total

11#-###-### ?217-H5#-###

7$.)5 1##.##

<e!e: 9a!/et value o" &e+t C Num+e! o" +on&s outstan&in, '5#-###( cu!!ent p!ice pe! +on& '?G#2( 9a!/et value o" p!e"e!!e& stoc/ C Num+e! o" sha!es o" p!e"e!!e& stoc/ '15#-###( cu!!ent ma!/et p!ice pe! sha!e '?H5( 9a!/et value o" common stoc/ C Num+e! o" sha!es o" common stoc/ 'H-###-###( cu!!ent ma!/et p!ice pe! sha!e '?2#( +. De'e m"$"$9 '+e *#m)#$e$' *#!' #< *a)"'a% 1( Calculatin, the component cost o" &e+t Net 8 C cu!!ent ma!/et p!ice '1 L "lotation cost( C ?G#2 '1L#.#1( C ?HG2.GH H 1 1 ?G#2'1 #.#1( = ?H# + ?1### i t =1 '1 + YT9 ( '1 + YT9 ( H Solve "o! YT9 C 1#B 'Use the "inancial calculato!(
/ & = YT9 '1 T ( = #.1# '1 #.$5( = #.#15 , # 54102

2( Calculatin, the component cost o" p!e"e!!e& stoc/

/p = AID ?1# = = #.1225 , # 124212 8# '1 E( ?H5 '1 #.#)(

Aiv C 1#B O ?1## 8a! C ?1# $( Calculatin, the component cost o" !etaine& ea!nin,s
/ !e = AID# '1 + , ( ?2.##'1 + #.1#( +, = + #.1# = #.21 , # 212 8# ?2#

)( Calculatin, the component cost o" common stoc/

/ cs = AID# '1 + , ( ?2.##'1 + #.1#( +, = + #.1# = #.22#G , # 2240?2 8# '1 E( ?2#'1 #.#G(

*4 De'e m"$"$9 '+e *#!' #< *a)"'a% 2*CC C #.2#7#'1.5#B( J #.#5H5'12.25B( J #.7$)5'22.#GB( 6 1842872

N#'e: /e (# $#' &!e *#!' #< e'a"$e( ea $"$9! '# <"$( AACC a! '+e; +aFe $# ma Ce' /e"9+' '# 0e (e'e m"$e(4

1#

P #0%em 5 -21 )#"$'!. The 9a&ison 9anu"actu!in, cu!!entl% uses an in5ection7mol&in, machine that as pu!chase& 2 %ea!s a,o. This machine is +ein, &ep!eciate& on a st!ai,ht7line +asis- an& it has 1 %ea!s o" !emainin, li"e. Its cu!!ent +oo/ value is ?2-1##- an& it can +e sol& "o! 2-5## at this time. Thus- the annual &ep!eciation expense is ?2-1##K1 C ?$5# pe! %ea!. I" the ol& machine is not !eplace&- it can +e sol& "o! ?5## at the en& o" its use"ul li"e. 9a&ison is o""e!e& a !eplacement machine that has a cost o" ?7-5##- an estimate& use"ul li"e o" 1 %ea!s- an& an estimate& salva,e value o" ?H##. This machine "alls into the 9*CRS 57 %ea! class- so the applica+le &ep!eciation !ates a!e 2#B- $2B- 1G.2#B- 11.52B- 11.52Ban& 5.71B. The !eplacement machine oul& pe!mit an output expansion- so sales oul& !ise +% ?1-### pe! %ea!P even so- the ne machine:s much ,!eate! e""icienc% oul& !e&uce ope!atin, expenses +% ?1-5## pe! %ea!. The ne machine oul& !e;ui!e that invento!ies +e inc!ease& +% ?2-###- +ut accounts pa%a+le oul& simultaneousl% inc!ease +% ?5##. 9a&ison:s ma!,inal "e&e!al7plus7state tax !ate is )#B- an& its 2*CC is 15B. Shoul& the compan% !eplace the ol& machine ith the ne one4 S#%&'"#$: a. -1 )#"$'!. Aete!mine the net cash "lo at %ea! Q#R. Ei!st &ete!mine the net cash "lo at t C #: 8u!chase p!ice Sale o" ol& machine Tax on sale o" ol& machine Chan,e in net o!/in, capital Total investment '?7-5##( 2-5## '11#( '1-5##( '?1-11#(

Note: 1. The ma!/et value o" the ol& machine is ?2-5## L ?2-1## C ?)## a+ove the +oo/ value. Thus- the!e is a ?)## !ecaptu!e o" &ep!eciation- an& 9a&ison oul& have to pa% #.)#'?)##( C ?11# in taxes. 2. The chan,e in net o!/in, capital is a ?2-### inc!ease in cu!!ent assets minus a ?5## inc!ease in cu!!ent lia+ilities- hich totals to ?1-5##. +. -8 )#"$'!. Aete!mine a"te!7tax inc!emental cash "lo s. Ein& the annual &ep!eciation expenses an& the tax shiel& the% c!eate- that isTF'Aep!eciation(. Sales inc!ease Cost &ec!ease Inc!ease in p!e7tax !evenues *"te!7tax !evenue inc!ease: ?2-5##F'1 L T( C ?2-5##F'#.1#( C ?1-5##. Aep!ecia+le +asis C ?H-###. Aep!eciation expense in each %ea! e;uals &ep!ecia+le +asis times the 9*CRS pe!centa,e allo ances o" 2#B- $2B- 1G.2#B- 11.52B?1-### 1-5## ?2-5##

11

11.52B- an& 5.71B in Yea!s 17 1- !espectivel%. Aep!eciation tax savin,s C TF'Aep!eciation( C #.)F'Aep!eciation(. Roun&e& num+e!s Aep!eciation: Yea! Ne Ol& $5# Chan,e Aep!eciation tax savin,s $$ 1 1 ?1-5## ?)$2 $5# ?1-15# ? )1# 2 ?2-)## $5# ?2-#5# ? $2# $ ?1-))# $5# ?1-#G# ? )$1 ) ?H1) $5# ?51) ?2#1 5 ?H1) $5# ?51)?H2 ?2#1 ?

c. -10 )#"$'!. Aete!mine annual net cash "lo s. Ein& the te!minal value o" the p!o5ect '<int: inclu&e N2C !ecove!% an& oppo!tunit% cost o" ol& machine in %ea! 1( Yea! 1 7 net o!/in, capital investment o" ?1-5##- an& it "!om the sale o" the !eplacement machine. oul& also !eceive ?H##

#.)#F'?H##( C ?$2# a!e the taxes on the ne machine sale. ?5##F'#.)( C ?2## oul& +e &ue +ecause the ol& machine &ep!eciate& in Yea! 1. ?5## L ?2## C ?$## is the oppo!tunit% cost o" the ol& machine. Einall%- place all the cash "lo s on a time line:

oul& +e "ull%

Roun&e& num+e!s

12

15B # S Net investment '1-11#( *"te!7tax !evenue inc!ease 1-5## Aep!eciation tax savin,s 2o!/in, capital !ecove!% 1-5## Salva,e value o" ne machine H## Tax on salva,e value o" ne machine '$2#( Oppo!tunit% cost o" ol& machine '$##( 8!o5ect net cash "lo s '1-11#( $-21$ S

1 S

2 S

$ S

) S

5 S

1-5## )1#

1-5## H2#

1-5## )$1

1-5## 2#1

1-5## 2#1 $$

1-G1#

2-$2#

1-G$1

1-7#1

1-7#1

&. -2 )#"$'!. Aete!mine net p!esent value an& inte!nal !ate o" !ate. Shoul& it !eplace the ol& machine4 The net p!esent value o" this inc!emental cash "lo st!eam- hen &iscounte& at 15B, is E1,28>4214 The inte!nal !ate o" !ate is 2145782. Thus- the !eplacement shoul& +e ma&e.

1$

B#$&! ,&e!'"#$! -> )#"$'! "$ '#'a%.: 1. -2 )#"$'!. 2hat is the 6ul,a!ian Stoc/ 3xchan,e in&ex4 T+e 0e!' a$!/e "! A4 a. SOEIT +. Ao Uones c. Ni//ei &. A*T 2. -2 )#"$'!. 2hat is the meanin, o" the ac!on%m Q.I6OR4 T+e 0e!' a$!/e "! A4 a. .on&on Inte!76an/ O""e! Rate +. .on&on Inte!76an/ Outsou!ce Rate c. .on&on Inte!76an/ Ove!ni,ht Ris/ &. .on&on Inte!national 6u!eau o" Resea!ch

1)