FIN701 - #3

- What is a forward contract? Why should a manager care? - What advantages does the MIRR have over the IRR?

- Timco is considering the purchase of a new machine. The machine costs 34,000. It will cost 5500 to modify and install it. We will need to spend 4000 on new parts and lubricants to keep it running smoothly. The machine is 3 year MACRS class. Find the year two depreciation.

- Define each term: counterparty risk, futures option, speculators

- Timco is considering project A. Project A will cost 24000. It should provide after tax cash inflows of 5000 per year for the next 6 years. The cost of funds is 10%. Find the MIRR. Should Timco buy it?

- Briefly describe the expectations theory of futures pricing.

- Why do NPV and IRR sometimes disagree about which mutually exclusive project should be chosen?

- Describe in general the kinds of cash flows that should not be included in capital budgeting analysis.

- What are two possible reasons a project might have a high NPV in a competitive economy?

- We are considering the purchase of a new rotator assembly. It will cost 400000. It should reduce our costs by 150000 per year for 4 years. We can depreciate it at 150000 per year. The tax rate is 35%. Find the effect on our operating cash flows for year 2.