Download Finance - Quiz 3 Problems - Spring 2008 | FIN 4360 and more Quizzes Finance in PDF only on Docsity! Finance 4360; Quiz 3; Spring 2008; 9:00 Class Name _________________________________ Note: For any question with numbers, all of the points are earned by setting up solutions. There are no points for any calculations. As a result, you will likely earn a higher grade on this quiz if you simply set up problems but never touch your calculator. “Setting up solutions” may involve writing a single number. 1. Which of the capital budgeting rules discussed in Chapter 6 fails because it ignores the time value of money? 2. Assume that a new factory will cost $5,000,000 to build (the cost will occur today) and will generate $1,800,000 at the end of each of the next five years. The factory will be depreciated to zero at a rate of $1,000,000 per year over its life. Using a cost of capital of 6%, calculate the factory’s EVA for the third year of the factory’s life? 3. Blastoff Shoes is considering building a new retail store in Waco on land that it already owns. Should the cost of the land where the store will be located be included as part of the incremental earnings of the proposed new store (“yes” or “no” is all that is needed to answer this question)? 4. Games Galore is considering building a new assembly plant in Central Texas. Games Galore has already calculated the plant’s unlevered net income and is now attempting to calculate its free cash flow. Using the following estimates, calculate the impact of working capital on the plant’s free cash flow for the 3rd year of operation if Game Galore’s marginal tax rate is 35%. Year 0 1 2 3 4 5 Cash 5 6 8 9 10 11 Accounts receivable 0 30 32 35 37 40 Inventory 100 120 130 135 140 140 Accounts payable 50 70 75 80 82 85 Net Working Capital 55 86 95 99 105 106 5. Water ‘R Us Inc. has just spent $100,000 to purchase equipment that falls into the ten-year MACRS property class. If Water R’ Us’ marginal tax rate is 35%, calculate the impact of deprecation on the firm’s unlevered net income during the third year of the equipment’s life (the first year is the year the equipment is put into service). Note: write a “+” to indicate a positive impact and a “–“ to indicate a negative impact.
