QUESTION 1

It is April 30, 2015. Caleb Jamal has worked for several years at SchoolStreet, Inc. Yesterday, the CEO informed Caleb that he would be retiring, effective immediately, and the Board of Directors has appointed Caleb the new CEO. After a brief celebration, Caleb arrives work today ready to accept his responsibilities. Caleb is immediately confronted with a number of investment and Corporate finance decisions.

Questions 1 to 6

Calebs first priority is to understand the companys capital budgeting analysis. He is looking at upgrading the firms production capacity in an effort to improve the companys competitive position. Caleb estimates that SchoolStreets cost of capital is 10%.

Caleb is being assisted by Celestila Moonn, an UMB MBA intern at SchoolStreet. Moonn estimates that travel and hotel costs expended as a result of their research and the trade shows they attended amounted to $8,000. Caleb considers the money well spent because he now had two great projects for improving SchoolStreets competitiveness in the industry.

First of all, Caleb is considering replacing a HP462 copy machine. This machine was purchased for $50,000 3-year ago and is being depreciated over 5 years to a zero salvage value using straight-line depreciation. The firm has 2 years of depreciation remaining on the old machine.

If Caleb decides to make the replacement, the HP462 copy machine can be sold today for $10,000. The new HP -777 copy machine will cost the firm $100,000. According to Moonns projections, the new HP -777 machine will increase revenue by $40,000 per year for 3 years but will also increase costs by $5,000 per year. The new HP -777 machine will be depreciated over a modified accelerated cost recovery system (MACRS) 3-year class life. At the end of year 3, the HP -777 machine will be sold for $20,000. The firms tax rate is 35 percent.

Caleb is also considering an investment in a new HP XM900 digital copy machine. Moonn estimates that the new HP XM900 digital copy machine will cost $50,000, and that shipping and installation costs will be $7,500. The addition of the digital machine will require a $2,000 investment in spare parts inventory at the inception of the project, but these parts can be resold for $2,000 at the projects end. Compared with the manual process that SchoolStreet used to use for putting on faxing, emailing and copying, Moonnestimates that the new HP XM900 digital machine will reduce costs by $25,000 per year for 4 years. The HP XM900 digital machine will be depreciated over a MACRS 5-year class life. At the end of year 4, the equipment will be sold for $8,000.

Before making the final calculations, Caleb and Moonn discuss net present value analysis for the projects they are considering. Moonntells Caleb, When calculating the net present value of the two new projects, we also need to account for the costs expended as a result of researching the project options. Caleb makes a note on his legal pad and says to Moonn, There is no need to make any adjustments for inflation in our net present value calculations because inflation is included as part of the expected returns used to calculate our weighted average cost of capital. After their conversation, Moonn and Caleb prepare their report to present toSchoolStreets Board of Directors meeting for approval.

Depreciation schedules under MACRS are shown in the exhibit below:

Ownership Year	Class of Investment
	3-Year	5-Year	7-Year	10-Year
1	33%	20%	14%	10%
2	45%	32%	25%	18%
3	15%	19%	17%	14%
4	7%	12%	13%	12%
5		11%	9%	9%
6		6%	9%	7%
7			9%	7%
8			4%	7%
9				7%
10				6%
11				3%
	100%	100%	100%	100%

The initial investment outlay for purchasing the HP777 copy machine is closest to:

A.

-$90,000

B.

-$86,500

C.

-$123,000

1 points

QUESTION 2

The year 1 operating cash flow and year 3 total cash flow from the HP777 copy machine are closest to:

	A.	The year 1 operating cash flow and year 3 total cash flow are $30,800 and $43,450, respectively.
	B.	The year 1 operating cash flow and year 3 total cash flow are $22,750 and $28,500, respectively.
	C.	The year 1 operating cash flow and year 3 total cash flow are $34,300 and $48,000, respectively.

1 points

QUESTION 3

The initial cash out flow and the year 2 operating cash flows from the HP XM900 digital copy machine are closest to:

	A.	The initial cash out flow and the year 2 operating cash flows ($59,500) and $33,4000, respectively.
	B.	The initial cash out flow and the year 2 operating cash flows ($59,500) and $22,690, respectively.
	C.	The initial cash out flow and the year 2 operating cash flows ($57,500) and $34,650, respectively.

1 points

QUESTION 4

With respect to the dialogue between Caleb and Nyla pertaining to NPV analysis:

	A.	Neither was correct
	B.	Only Caleb was correct.
	C.	Only Moonn was correct

1 points

QUESTION 5

After finishing the projects evaluation, Moon made the following statement. However, Caleb was not sure whether he agrees with the statements.

Concept 1: When rationing capital, it is better to choose the portfolio of investments that maximizes the company NPV than the portfolio that maximizes the company IRR

Concept 2: Project betas should be used for establishing the required rate of return whenever the projects beta is different from the companys beta.

Concept 3: "I analyzed my project using scenarios for the base case, best case, and worst case. I computed break-evens and degrees of operating leverage. I did sensitivity analysis and simulation analysis. I computed NPV, IRR, payback and Profitability Index. In the end, I have over a hundred different estimates and am more confused than ever. I would have been better off just sticking with my first estimate and going by my gut reaction."

Caleb tels Moonn that -the purpose of evaluating an NPV estimate or other decision criteria is to determine the reasonableness of it. If done appropriately, the added analysis will reinforce either the degree of comfort or the degree of discomfort about a project. At the end of the day, this type of analysis reveals both the weaknesses and the strengths of a project. In addition, it helps isolate potential trouble areas and sharpens the focus on which variables are most vital for forecasting. The very nature of the process still leaves a great deal of uncertainty even after all of the analysis is complete. However, eventually, the analyst should be better informed and more comfortable in making a decision, not less so.

Are the statements identified as Concept 1 and Concept 2 correct?

	A.	No for Concepts 1 and 2.
	B.	No for Concept 1, but yes for Concept 2.
	C.	Yes for Concept 1, and 2.

1 points

QUESTION 6

With respect to Concept 3, are Moon nd Caleb correct?

	A.	Moonn's statement is correct
	B.	Caleb's statement is corect
	C.	Neither Moonn nor Caleb is correct