Download Quiz 3 with Manual Solutions - Corporate Financial Management | FIN 4360 and more Quizzes Finance in PDF only on Docsity! Finance 4360; Key to Quiz 3; Spring 2008; 2:00 Class 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 may fail because of multiple solutions? Internal Rate of Return 2. Your firm is considering building a new warehouse that will cost $600,000 today to build. The warehouse will last 4 years and will be depreciated at a rate of $100,000 per year to its $200,000 salvage value. The warehouse will generate net cash flows of $125,000 per year at the end of each year of the life of the warehouse. Using a cost of capital of 12%, calculate the warehouse’s EVA two years from today? I = 600,000 – 100,000 EVA3 = 125,000 - .12I – 100,000 3. Blastoff Shoes is considering building a new retail store in Waco on land that it already owns. The land has a historic home on it that will have to be moved before the store can be built. Should the cost of moving the house currently on 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)? Yes 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 4th 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 NWC = 105 – 99 FCF = – NWC 5. Transport Taxi has purchased a new cab for $35,000. The cabs falls into the five-year MACRS property class. Calculate the impact of the taxi’s depreciation on the firm’s free cash flow in its second year of operation (the first year is the year the taxi is put into service) if Transport Taxi’s marginal tax rate is 35%. Note: write a “+” to indicate a positive impact and a “–“ to indicate a negative impact. (-35,000.32)(1-.35) + -35,000.32 (Note: using 7.5b) +35,000.32.35 (Note: using 7.6)
