QUESTION A.

1.Rabbit Company's investment of $100 generates after-tax cash flows of $40 in Year 1, $80 in Year 2, and $120 in Year 3. The required rate of return is 20%. Calculate the NPV.

2.Jaguar.Co's investment of $20,000 will create a perpetual after-tax cash flow of $2,000. The required rate of return is 8 percent. Calculate the investment's Profitability Index (PI).

3.An investment of Koi Company has an outlay of 100 and after-tax cash flows of 40 annually for four years. A project enhancement increases the outlay by 15 and the annual after-tax cash flows by 5. As a result, the vertical intercept of the NPV profile of the enhanced project shifts up and the horizontal intercept shifts left. Is the statement above correct?

4.With regard to the net present value (NPV) profiles of two projects planned by Butterfly Company, the crossover rate is best described as the discount rate at which two projects have the same internal rate of return. Is the statement above correct?

5.Koala Inc is considering the purchase of new equipment. The equipment costs $349,000, and an additional $103,000 is needed to install it. The equipment will be depreciated straight-line to zero over a 5-year life. The equipment will generate additional annual revenues of $269,000 and it will have annual cash operating expenses of $82,000. The equipment will be sold for $80,000 after 5 years. An inventory investment of $74,000 is required during the life of the investment. Koala Inc is in the 40 percent tax bracket, and its cost of capital is 10 percent. Calculate the NPV.

6.Given the following cash flows for a capital project in Elephant Corporation.

Year0123 45

Cash Flow-50,000 15,00015,00020,000 10,0005,000

Calculate the NPV and IRR. The required rate of return is 8%.

7.Panda Corporation is considering an investment of 750 million won with expected after-tax cash inflows of 175 million won per year for seven years. The required rate of return is 10 percent. Calculate the project's NPV and IRR.

8.Lion.Co is reviewing a profitable investment project that has a conventional cash flow pattern. If the cash flows for the project, initial outlay, and future after-tax cash flows all double. What would be Lion.Co's prediction for its IRR?

9.Consider the two projects of Otter.Co below. The cash flows as well as the NPV and IRR for the two projects are given. For both projects, the required rate of return is 10 %.

Cash Flows

Year01234NPVIRR

Project 1-1003636363614.1216.37%

Project 2-10000017519.5315.02%

Calculate the discount rate in the same NPV for both projects.

10.With regard to net present value (NPV) profiles, the point at which a profile crosses the horizontal axis is best described as a Crocodile. Co project's internal rate of return when the project's NPV is equal to zero. Is the statement above correct?

11.When assembling the cash flows to calculate an NPV or IRR, the Buffalo Inc project's after-tax interest expenses should be subtracted from the cash flows for both, NPV and IRR. Is the statement above correct?

QUESTION B.

1.Cutlass Company's projected profit for the coming year is as follows:

TotalPer Unit

Sales$200,000$20

Less: Variable Expenses120,00012

Contribution Margin$80,000$8

Less: Fixed Expenses64,000

Operating Income$16,000

Required:

a. Compute the break-even point in units.

b.How many units must be sold to earn a profit of $30,000?

c. Compute the contribution margin ratio. Using the ratio, compute the additional profit that Cutlass would earn if sales were $25,000 more than expected.

d.Suppose Cutlass would like to earn operating income equal to 20 percent of sales revenue. How many units must be sold for this goal to be realized? Prepare an income statement to prove your answer.