FIN 6212 Financial Management Fall 2014 Problems


Test03(Each Problem worth 5 Points) Please complete any 3 problems (must do problem 3) and complete any oneremaining for Bonus worth 1.5 points. Please show all work.1. A military project is expected to generate earnings before taxes (EBT) of $60,000 per year. Annualdepreciation from the project is $30,000 and the firm’s tax rate is 40 percent. Determine the project’sannual net cash flows.2. IBM is replacing an old assembly line that cost $80,000 five years ago, with a new, more efficientmachine that will cost $225,000. Shipping and installation will cost an additional $20,000. The oldmachine has a book value of $15,000 but will be sold as scrap for $5,000. The new machine will bedepreciated with a 7 year life under MACRS guidelines. With the increased production, inventories willincrease $4,000, accounts receivable will increase $16,000, and accounts payable will increase $14,000. IfIBM has a marginal tax rate of 40 percent, what is the net investment?3. Arnold Fitness Company, Inc., a manufacturer of weights and exercise equipment, is consideringreplacing an old workout equipment with a more sophisticated machines. The following information isgiven as of today.Table One:CostsInstallationMACRSMarket ValuePurchasedFactsExistingMachine150,000.0010,000.005 – Years105,000.002 years agoProposedMachine180,000.0020,000.005 – YearsTable TwoForecasted RevenuesYearExistingProposedMachineMachine1160,000.00170,000.002150,000.00170,000.003140,000.00170,000.004140,000.00170,000.005140,000.00170,000.00Forecasted Expenses (No Depreciation)YearExistingProposedMachineMachine1104,000.00110,500.002104,000.00110,500.0Financial Management (Fin6212)Saturday Fall 20143104,000.004104,000.005104,000.00Name: ______________________________Test 03 Page 2 10/18/20140110,500.00110,500.00110,500.00The firm pays 40 percent taxes on ordinary income and capital gains.A.Given the information in Table 1, compute the initial investment.B.Given the information in Table 2, compute the incremental annual cash flows.C.Given the information from Table 1, assuming 12.5% rate of return, what is ArnoldFitness Company, Inc. NPV on the proposed machine.4. A new drill press is considered a possible new investment for SHELL OIL Corporation if it generates anexpected return of $2,000 per year for the first five years and $2,500 per year for the last five years. Itsexpected purchase price (including installation) is $9,400. What is the drill press project’s expectedinternal rate of return?Suppose that SHELL OIL can borrow the necessary funds in the money and capital markets to make thisinvestment at a cost of 15%. Should it proceed with the project?If SHELL OIL’s investors’ required rate of return is 16%, what is the NPV of the drill pressproject? Based upon your calculation of the NPV should SHELL OIL pursue this project anyfurther?

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