1. Questions 1 to 6:

Celestila Moonn is looking at the capital budgeting analysis for her firm. Her firm, SchoolStreet, is considering at upgrading the firms production capacity in an effort to improve the companys competitive position. Moonn estimates the discount rate for this Capital budgeting is 10%.

Moonn is being assisted by Amy Sun, an UMB MBA intern at SchoolStreet. Sun estimates that the new HP-450N2 copy machine will costs $370,000 and an additional $130,000 is needed for shipping and install it. The HP-450N2 will be depreciated straight-line to zero over a five-year life. The HP-450N2 will generate additional annual revenues of $285,000, and it will have annual cash operating expenses of $103,000. The HP-450N2 will be sold for $95,000 after five years. A current asset investment of $93,000 is required during the life of the investment. The corporate tax rate is 40%

Factor -1: Moonn noticed that interest expenses was not included in Suns after-tax operating cash flow analysis and was wondering whether in her NPV or IRR calculation, the projects after-tax interest expenses should have been subtracted from the operating cash flows.

Factor -2: Moonn was not sure whether Suns estimated depreciable lives of 5-year was correct and the straight-line depreciation method is appropriate for this project and was wondering what would have been the impact on NPV had Sun used 7-year depreciable lives and 5-MARCS depreciation schedule instead of 5-year straight-line method

Based on her estimates on new HP-450N2 copy machine, what was the initial investment?

A.

$593,000

B.

$500,000

C.

$423,000

QUESTION 2

1. The incremental annual after-tax operating cash flow is closest to

A.

$49,200

B.

$149,200

C.

$82,000

QUESTION 3

1. The fifth years after-tax non-operating cash flow is closest to

A.

$57,000

B.

$150,000

C.

$188,000

QUESTION 4

1. What is the project NPV

A.

$79,300

B.

$313,355

C.

$65,724

QUESTION 5

1. With respect to Moons concerns in Factor 1, the projects after-tax interest expenses should have been subtracted from the cash flows analysis

	A.	Neither for the IRR not for NPV calculations
	B.	Only for the IRR calculation
	C.	For both the IRR and NPV calculations

QUESTION 6

1. With regards to Facto 2, had Sun used MACRS depreciation schedule in lieu of straight-line method:

	A.	The IRR would have been higher but not the NPV
	B.	The NPV would have been higher but not the IRR
	C.	Both the NPV and the IRR would have been higher.