questions are in the document attached. they are math related questions

Capital Budgeting Midterm Problems Portion Chapters 1-8 Name__________________________ Please do your own work and do not share your work with others. Please type a numerical solution in the space provided for each problem -- thanks. 1. How much will need today to have $186,000 at the end of 16 years you can earn 1.8% in a saving account _________ 2. How much do you need to invest at the end of each year to have $895,000 at the end of 18 years if you can earn 8.6% annually? ____________ 3. You plan to work for the next 39 years and earn 6.5% on your investments during your working years. In retirement, you expect to need $82,000 per year during each of your 25 years of retirement and (during this time) you expect to earn 6.4% on investments. How much do you need to invest at the end of each year (while working) to allow this to happen? _______________ 4. Assume that you have accumulated $75,000 in student loan debt. You pick a 12-year horizon to pay of the loan. If the loan has a 7.56% annual rate, what will your monthly payments be? _________________ 5. A different bond pays 5.2% annual interest once per year, has 9 years to maturity, and a $1,000 par or maturity value. Given the risk level of this bond the market demands a 7.9% interest rate. What is the value of this bond today?_______________ 6. A bond can be purchased for $956 today. This bond pays $67 in interest each year in annual year end payments. The bond has a par or maturity value of $1,000 and has 9 years to maturity. What is the expected yield to maturity for this bond? (Two decimal places please - for example 8.25%)_______________ 7. Bill Inc. common stock is expected to pay a $2.32 dividend at the end of the year and is in a risk class that requires an 8.5% required return. If this dividend is expected to grow forever at a 3.2% rate, what is the estimated value of Bill Inc.'s common stock? _______________ 8. Joe Inc.'s preferred stock is expected to pay a $2.52 dividend annually and is expected to do this forever. Joe Inc. is in a high risk business that requires an 8.2% return. What is the estimated value of Joe Inc.'s preferred stock?_______________ 9. You are put in charge of replacing the fleet of sales and executive automobiles for your company. Three types of cars have been identified. The first type would cost less upfront, have higher maintenance cost, and lower salvage values after shorter lives. The second type would cost a little more upfront, have slightly lower maintenance cost, and slightly higher salvage values after slightly longer operating lives. The third type would cost more upfront, have lower maintenance cost, and higher salvage values after longer operating lives. The cash flow estimates for each type is given below: Type one: Purchase price per car $16,000; Annual operating expense per car $4,000; Disposition value per car $4,000; Estimated useful life of the car 4 years Type two: Purchase price per car $32,000; Annual operating expense per car $3,600; Disposition value per car $5,500; Estimated useful life of the car 6 years Type three: Purchase price $48,000; Annual operating expense $2,800; Disposition value $8,000; Estimated useful life of the asset 8 years All cars can be replaced at the end of their asset lives. Using a 5.8 percent discount rate and the equivalent annuity method, which car is the better investment? Please show the NPV, and Equivalent annuity for each type of car. NPV Equivalent Annuity Car Type One ____________________ _____________ Car Type Two ____________________ _____________ Car Type Three ____________________ _____________ Which type of car should be chosen?______________________ An asset costs $247,000 and will generate cash benefits of $80,000 at the end of each year for six years for Hartford Corporation. Salvage values are $160,000, $145,000, $85,000, and $45,000 at the end of years 3, 4, 5, and 6 respectively. The required return is 5.75 percent. Please compute the net present value, and the equivalent annuity and record these below: Keep for 6 years ________________ ____________________ Keep for 5 years ________________ ____________________ Keep for 4 years ________________ ____________________ Keep for 3 years ________________ ____________________ When is the optimal time to abandon the investment?_____________________ 10. 11. You place a commercial building into service on July 1st, 2015 costing $3,220,000. What is the depreciation expense allowed by the IRS for this building for tax years 2015? _____________And 2016?______________ 12. Joe's Technology must choose between two repeatable methods of producing a new product. The initial costs and year-end cash benefits are as follows: Year 0 1 2 3 4 5 Method M -$1,500,000 600,000 750,000 550,000 200,000 Method N -$2,500,000 1,200,000 950,000 700,000 400,000 300,000 Assume all cash flows occur at year-end and the company's required return is 6.75 percent. Please compute the net present value ______________ and the equivalent annuity ________________ for Method M Please compute the net present value ______________ and the equivalent annuity ________________ for Method N Which production method should be used? _______________ 13. You place the following equipment into service in the following years with the following tax lives: Year placed Tax life Cost Into service Computer Car Shelves 2011 2012 2013 3 year 5 year 7 year $19,000 $25,000 $39,000 What is the total depreciation expense allowed by the IRS for all three pieces of equipment for tax years 2012?__________________ What is the total depreciation expense allowed by the IRS for all three pieces of equipment for tax years 2013?__________________ What is the total depreciation expense allowed by the IRS for all three pieces of equipment for tax years 2014?__________________ You are opening your own business and estimate the following expenses and revenues: Year 1 Year 2 Year 3 Revenues $900,000 $1,500,000 $1,700,000 Cost of goods sold $550,000 $800,000 $900,000 14. Accounts payable as a percentage of cost of goods sold........11% Inventory as a percentage of cost of goods sold..................13% Cash balance as a percentage of revenues.........................8% Accounts receivables as a percentage of revenues...............15% Accrued expenses as a percentage of revenues...................9% All balances are needed in the year prior to the generation of the revenue and expense. Please calculate the incremental investment in working capital needed for years 0,1,2,3. (you do not need to calculate the cash flow from operations - you do not have enough information to do this - only the incremental investment in working capital - all working capital accounts are liquidated at book value at the end of year 3) Year 0_______________ Year 1_______________ Year 2__________________ and Year 3______________ 15. You are opening your own business and estimate the following expenses and revenues: Revenues year 1 $212,000 growing at 9% thereafter Cost of goods sold year 1 $121,000 growing at 12% thereafter Operating expense year 1 $47,000 growing at 6% thereafter Taxes all in years 20% per year Depreciation $15,000 in year 1, $21,000 in year 2, $17,000 in year 3 No working capital is needed -- please predict the after-tax cash flows from operations for the first three years of operations below: Year 1_______________ Year 2__________________ and Year 3______________ Please use the following information to answer the remaining problems: Able Corporation has Project A with the following cash flows and a 7.6% cost of money: Numbers in parentheses are outflows. Both Year 0 and Year 3 cash flows are outflows. Year Cash flow 0 1 2 3 4 5 6 $(351,000) $ 95,000 $180,000 $(280,000) $ 280,000 $260,000 $180,000 16. Please calculate the net present value ______________ 17. Please calculate the profitability indexes (two decimals please)_________________ 18. Please calculate the modified profitability index using the terminal value approach in the textbook (two decimals please)_______________________ 19. Please calculate the internal rate of return (two decimals please)_____________________________ 20. Please calculate the modified internal rate of return (two decimals please and per the book)________________________ 21. Please calculate the payback period (two decimals please)________________________ 22. Please calculate the present value payback period (two decimals please)______________________