EFB210 Finance 1 Sample Question for Final Exam THE FOLLOWING INFORMATION RELATES TO QUESTIONS 1 - 5 Davo Corp Ltd is a large investment company, which has investments in two of the following industries: | Expected Return | Beta | Covariance with the Market | Standard Deviation | Mining | ? | ? | 0.068 | 0.50 | Transport | 0.14 | 1.5 | ? | ? | Building | ? | 2.0 | ? | ? | Alcohol | ? | ? | 0.032 | 0.35 | Market Index | ? | 1 | ? | 0.20 | The ten-year bond rate (risk free rate) is 5%. The proportion of the two industries in Davo Corps investment portfolio is as follows: Mining 60% and Alcohol 40%. QUESTION 1 What is the beta of Mining? QUESTION 2 What is the expected return on …show more content…
The present equipment cost a total of $6,000 three years ago and it is being depreciated at a rate of 22.5% reducing balance. The investment proposal under consideration is for new equipment costing $25,000 and it would be depreciated on the equivalent prime cost rate as the old equipment. In the NPV analysis, what incremental/marginal depreciation figure would be included in year ones' taxable income ? QUESTION 12 The present value of an outlay in perpetuity for a particular project can be calculated as follows: PV of Outlay = $45,000 X (1.1)4 (in perpetuity) 0.77156 If the present is Year 0 and rates compound annually, in what year does the first outlay of $45,000 occur? Hint, you’re using the perpetuity approach to valuation. THE FOLLOWING INFORMATION RELATES TO QUESTIONS 13 TO 14 Sunrise Industries Ltd. is considering the purchase of an additional printing press for $25,000. It is expected that additional cash revenue each year will be $24,000 before any taxation. Cash costs are expected to be $13,000, however $1,800 of these will be non deductable for taxation purposes. The useful life of the press is expected to be five years with a salvage value of $1,200. The Commissioner of Taxation has specified the rate for depreciation on such a press to be 22.5% diminishing value method. The
Free cash flows of the project for next five years can be calculated by adding depreciation values and subtracting changes in working capital from net income. In 2010, there will be a cash outflow of $2.2 million as capital expenditure. In 2011, there will be an additional one time cash outflow of $300,000 as an advertising expense. Using net free cash flow values for next five years and discount rate for discounting, NPV for the project comes out to be $2907, 100. The rate of return at which net present value becomes zero i.e.
For the depreciation part, we adopted the straight-line method. Here since the depreciation of year 1984 was $1270, we just assumed all the depreciation amount to be equal to $1270 till the year 1989. With all of these previous assumptions, we obtain the complete pro forma financial statement and the cash flow table for the Collinsville Plant.
1. The first step to evaluating the cash flows is to conduct the depreciation tax flow analysis. Depreciation is not a cash flow, but the depreciation expense lows the taxes payable for the company. As a result, the tax effect of deprecation needs to be calculated as a cash flow. There are two depreciable items on the company's balance sheet the building and the equipment. The equipment is known to have a seven year depreciable life, which will be assumed to be straight line. The building is also assumed to be subject to straight line depreciation, this time of forty years. The tax saving reflects the depreciation expense multiplied by the tax rate, which in this case is assumed to be 28%. The following table illustrates the tax effect in future dollars of the depreciation expense:
depreciation tax savings in each year of the project’s economic life, and 3) the project’s
Given that the total profit over 8 years is $1.2375B (or $155M per year for 8 years), we will now compute the Present Value of this amount using the following formula:
The equipment is expected to cost $240,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 96,000 units of the equipment’s product each year. The expected annual income related to this equipment follows.
Therefore the annual interest rate is 8% and the effective annual rate compounded quarterly is 8.24%
Compute the incremental cash flows of the investment for each year. (Do not round intermediatecalculations. A negative answer should be indicated by a minus sign.)
Salta Company installs a manufacturing machine in its factory at the beginning of the year at a cost of $87,000. The machine’s useful life is estimated to be 5 years, or 400,000 units of product, with a $7,000 salvage value. During its second year, the machine produces 84,500 units of product. Determine the machines’ second year depreciation under the units of production method:
7. The company uses the straight line method of depreciation for all its assets. The buildings have an estimated useful life of 20 years with zero
Life insurance is meant to provide funds to replace a breadwinner's to protect and support dependents. Chad and Haley are dependents, not income providers. Therefore, the purchase of life insurance is unnecessary and not recommended. The Dumonts should use the money they would spend on policies for the children to increase their own coverage.
Jurassic Company owns machinery that cost $1,145,700 and has accumulated depreciation of $458,280. The expected future net cash flows from the use of the asset are expected to be $636,500. The fair value of the equipment is $509,200.
The following observation will describe the decisions made by a financial analyst who is working for the capital budget department at Caledonia Products. The organization has asked Team B to evaluate the potential risk involved in an upcoming transaction and identify several options in how to proceed. Because this is the team’s first assignments dealing with risk analyzes the team has been ask to further explain the details. The organization analysis will focus on free cash flows, projection of cash flows, projects initial outlay, cash flow diagram, net present value, internal rate of return, and if the
Founders’ termination term is very important for Laracey because it increases the possibility that the unvested equity of the founders could be accelerated when the incoming CEO terminates them. It directly protects the benefits of the founders.