MBA618.

51FA2016
Final Exam Part II (Available points=50pts)

*You are not allowed to do this exam with other people.

*You are not allowed to discuss any problems in this exam wi
*Show all of your work for any possible partial credit.
*All necessary calculations should be done on this excel fil
can figure out the whole process as to how your answers were
numbers as a result does not earn any point.
* Be sure to answer exactly what is asked in the problems.
* Due by 11:59 p.m. ET, October 21 (Friday)

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Save your work file in the following format of the file name:
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Note that including any special symbol in the file name may
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You have to pack all you

0pts)

h other people.
ems in this exam with other people.
partial credit.
one on this excel file to show how to get your outputs.
w your answers were obtained. Therefore, simply showing
nt.
in the problems.

riday)

rmat of the file name: Final_Exam_Last Name_First Name.xls

bmit_Final_Part II located under the tab of Final Exam.
t be accepted.

in the file name may cause a trouble in uploading or downloading

bols, such as $, #, *, &, etc.

ou have to pack all your answers into this excel file. If you need a

1. The management of Jasper Equipment Company is planning to purchase a new milling machine that will cost $16
depreciated but can be sold for $15,000. The new machine will be depreciated on a straight-line basis over its 10-ye
$10,000. If this milling machine will save Jasper $20,000 a year in production expenses, what are the annual net cas
Assume a marginal tax rate of 40 percent. Show all of your calculations with appropriate explanatio
showing allof your calculation work.

ANS:
Dep

(160000-10000)/10

15000
Net Cashf (20000-15000)(1-0.40)+15000
18000

2. Fool Proof Software is considering a new project whose data are shown below. The equipment that would be use
for such property are 33%, 45%, 15%, and 7% for Years 1 through 4. Revenues and other operating costs are expec
life. What is the Year 1 cash flow?

Show all of your calculations with appropriate explanation. You won't earn any point with

Equipment cost (depreciable basis)

Incremental Sales revenues, each year
Incremental Operating costs (excl. depreciation)
Tax rate

$65,000
$60,000
$25,000
35.0%

29992

3. A corporation has decided to replace an existing asset with a newer model. Two years ago, the existing asset orig
MACRS using a five-year recovery period. The existing asset can be sold for $40,000. The new asset will cost $80,
five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial inv
discussed in class, the cash flow at time 0 in the case of a replacement project should consider cash flow from sales
See page 9, M06L01 Lecture Notes).

Show all of your calculations with appropriate explanation. You won't earn any point with

five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial inv
discussed in class, the cash flow at time 0 in the case of a replacement project should consider cash flow from sales
See page 9, M06L01 Lecture Notes).

Show all of your calculations with appropriate explanation. You won't earn any point with

cost of new machine

depreciation
Dep expense
dep cost at year
sales prices
gain
tax rate
tax
net sale
Cost of new machine

30000
20%
30%
6000
9600
214400
25000
10600
40%
4240
20760
75000

ling machine that will cost $160,000 installed. The old milling machine has been fully
raight-line basis over its 10-year economic life to an estimated salvage value of
es, what are the annual net cash flows associated with the purchase of this machine?
appropriate explanation. You won't earn any point without

e equipment that would be used has a 3-year tax life, and the allowed depreciation rates
other operating costs are expected to be constant over the project's 10-year expected

on't earn any point without showing allof your calculation work.

ars ago, the existing asset originally cost $70,000 and was being depreciated under
0. The new asset will cost $80,000 and will also be depreciated under MACRS using a
nd capital gains, the initial investment (i.e., Cash flow at time 0) is ________. (As
consider cash flow from sales of old machine and tax impact on capital gain or loss.

on't earn any point without showing allof your calculation work.

nd capital gains, the initial investment (i.e., Cash flow at time 0) is ________. (As
consider cash flow from sales of old machine and tax impact on capital gain or loss.

on't earn any point without showing allof your calculation work.

MACRS Rates

(Review M01L02 Lecture Notes for MACRS)

Zair Electronics can make either of two investments at time 0. Assuming a required rate of return of 14%, determine for ea
index, and (d) the internal rate of return. Assume under MACRS the asset falls in the five-year property class and that the
savings excluding depreciation and taxes (i.e., EBITDA) are shown below:
Assume that there is no difference in the level of net working capital for both of projects and no salvage value at the end o
template provided below.
Make sure to show all of your work!

Change EBIT (Excluding Depreciation)

Project A
Project B

1
$8,000
$5,000

Depreciation Rates
MACRS

20%

Change in Depreciation
Project A
Project B

1600
1000

Cash Flows
Project A
Project B

NPV of Project A
NPV of Project B

-$28,000
-$20,000

20400
20400

2500
2000

of 14%, determine for each project (a) the payback period, (b) the net present value, (c) the profitability
operty class and that the corporate marginal tax rate is 34%. The initial investments required and yearly

alvage value at the end of useful life. You have to calculate net cash flows that fill the blanks in the

2
$8,000
$5,000

3
$8,000
$6,000

4
$8,000
$6,000

5
$8,000
$7,000

6
$8,000
$7,000

7
$8,000
$7,000

32%

19%

12%

12%

5%

2560
1600

1520
1140

960
720

960
840

400
350

-30800
20400

22440
20400

-33880
20400

24684
20400

-37268
20400

27152.4
20400

Assume that you have been hired as a consultant by ABC Co., a major producer of chemicals and plastics, includin
and fertilizers, to estimate the firm's weighted average cost of capital. The balance sheet and some other informatio

Assets
Current assets
Net plant, property, and equipment
Total assets

38,000,000
101,000,000
139,000,000

Liabilities and Equity

Accounts payable
Accruals
Current liabilities
Long-term debt (40,000 bonds, $1,000 par value)
Total liabilities
Common stock (10,000,000 shares)
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity

10,000,000
9,000,000
19,000,000
40,000,000
59,000,000
30,000,000
50,000,000
80,000,000
139,000,000

The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with
selling for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Trea
required return on the stock market (i.e., Rm)is 11.50%. The firm's tax rate is 40%.
1) What is the best estimate of the after-tax cost of debt (%)? i.e, (1-t)*kd?

2) Based on the CAPM, what is the firm's cost of equity (%) ? i.e., ke?

3) Calculate the weights of market value of debt and market value of equity for use in calculating the WACC based in market

4) Calculate ABC's WACC (%) based on your answers to 1), 2), and 3)

Show all of your calculations with appropriate explanation. You won't earn any point wit
calculation work.

Maintenance Cost @20% chance to be $50,000

Maintenance Cost @50% chance to be $30,000
Maintenance Cost @30% chance to be $10,000
NPV

Cash Flow

Probaility

$10,560
$5,600
$8,500

0.2
0.5
0.3

Net Present Value

Present value of inflows
Present value of outflows

$230,025.4580
$240,000,000.00
$240,230,025.46

chemicals and plastics, including plastic grocery bags, styrofoam cups,

heet and some other information are provided below.

alue, 20-year, 7.25% bonds with semiannual payments are

and the yield on a 20-year Treasury bond is 5.50%. The

ulating the WACC based in market values? i.e., Wd (%) and We (%)

won't earn any point without showing allof your

$2,112
$2,800
$2,550
$7,462

1. Baker Company is considering an investment in a new metal lathe. If the new lathe is purchased, revenues wil
and depreciated on a straightline basis over 10 years to a zero estimated salvage value. Baker's marginal tax rate is 40%. Determine the annua
by the lathe.
Reduction in work-in-progress inventory
Operating Income Before Taxes

$25,000
($25,000)

$30,000
($30,000)

Taxes on Operating Income

Operating income after taxes

($8,750)
($16,250)

($10,500)
($19,500)

Add Back Depreciation

After-tax operating cash flow

$0

$0

($16,250)

($19,500)

###

###

Termninal year after-tax non operating cash floes

After-Tax
$15,000
Discounted value at 10%

Year
Investment outlays
Fixed Capital
Setup costs

0
($200,000)
###

Annual Depreciation

Cost of Machine
Setup Costs

37000

Year 0
Year 1
($200,000)
###

Sales Revenue
Reduction in direct labor costs
Reduction in hops used in manufacturing process
Total Revenue Benefits
Depreciation

$1,000,000
$80,000
$10,000
$1,090,000
($37,000)

NPV

215040

purchased, revenues will increase by $5,000 per year and cash operating costs will decline by $10,000 per year. The depreciatio

0%. Determine the annual net cash flows generated

$36,000
($36,000)

$43,200
($43,200)

$51,840
($51,840)

($12,600)
($23,400)

($15,120)
($28,080)

($18,144)
($33,696)

$0

$0

$0

($23,400)

($28,080)

($33,696)

###

###

###

Year 2

$1,050,000
$84,000
$10,000
$1,144,000
($37,000)

Year 3

$1,102,500
$88,200
$10,000
$1,200,700
($37,000)

Year 4

$1,157,625
$92,610
$10,000
$1,260,235
($37,000)

Year 5

###
$97,241
$10,000
###
($37,000)

r year. The depreciation expense of the lathe will be $60,000