Question 1:

Harkins Co. needs to update its equipment to meet regulatory standards. This mandatory update will require a $2,400,000 initial investment in fixed assets. These assets will be depreciated straight-line to zero and will have no value after its useful life. The benefit of the mandated upgrade is that it should generate $1,200,000 in additional sales with costs of$300,000 per year during the 3-year period. Harkins Co. has a tax rate of 20%, and a required rate of return of 8%.

What is the NPV of this project?

A) (184,670)

B) 481,787

C) 152,628

D) (132,155)

Question 2: What is the EAC of this project?

A) (52,810)

B) (51,280)

C) (51,082)

Question 3:

If Harkins Co. had to choose either the project given in Questions 1 and 2, or a second project with an equivalent annual cost of $55,000, which project should they undertake?

A)The first project because of the greater EAC

B)The first project because of the lower EAC

C) The second project because of the greater EAC

D) The second project because of the lower EAC

Question 4:

The management team of Bonkers Biochem is considering whether they should move forward with an investment in a potential treatment for Alzheimer's. There are two phases in the investment, the testing phase and the production phase.

The testing phase will cost $1 billion and last for one year.

The production phase will have the following characteristics:

-A $1.5billion initial investment

-10 years of production and sales

-Annual sales of $12billion every year, with $3billion in variable costs

-Annual $1 billion of fixed costs

-Annual $0.8billion of depreciation-25% tax rate-12% cost of capital

Bonkers Biochem will only move forward with the production phase if the testing phase proves successful. The likelihood of success is 6%.

What is the yearly cash flow of the production phase (years 2-11), assuming a successful testing phase (in year 1)?

A) $5.6 billion

B) $6.2 billion

C) $7.8 billion

D) $8.4 billion

Question 5:

What is the payoff of a successful test? I.e. what is the NPV of just the production phase?

A) $33.53 billion

B) $28.14 billion

C) $26.06 billion

D) $19.48 billion

Question 6: What is the NPV at Year 0? Should Bonkers Biochem move forward with testing?

A) $0.16 billion; Yes

B) -$0.42billion; No

C) -$0.24billion; No

D) $0.30billion; Yes

Question 7:

Calculate the break-even cash flow for a project with an initial investment of $560,000 that will generate cash flows for 8 years. Assume a 7.5% cost of capital.

A) $89,593

B) $92,709

C) $95,607

D) $86,805