Midterm Fin 610

1.You are considering a project which has been assigned a discount rate of 8%. If you start the project today, you will incur an initial cost of $480 and will receive cash inflows of $350 a year for three years. If you wait one year to start the project, the initial cost will rise to $520 and the cash flows will increase to $385 a year for three years. What is the value of the option to wait?

$17.08

$18.67

$20.20

$50.20

→ $15.23

Value of option to wait = $437.21 - $421.98 = $15.23

2.At a production level of 5,600 units a project has total costs of $89,000. The variable cost per unit is $11.20. What is the amount of the total fixed costs?

$27,820

$26,280

$24,126

$27,090

$28,626

Total fixed cost = $89,000 - (5,600 × $11.20) = $26,280

3.You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value.

Required rate of return 10% 13%

Required payback period 2.0 years 2.0 years

Based upon the profitability index (PI) and the information provided in the problem, you should:

accept both project A and project B.

accept project A and reject project B.

accept project B and reject project A.

reject both project A and project B.

disregard the PI method in this case.

Because these are mutually exclusive projects, the PI rule should not be applied.

4.Matty's Place is considering the installation of a new computer system that will cut annual operating costs by $11,000. The system will cost $48,000 to purchase and install. This system is expected to have a 5-year life and will be depreciated to zero using straight-line depreciation. What is the amount of the earnings before interest and taxes for this project?

-$9,600

$1,000

$1,400

$11,000

$20,600

Earnings before interest and taxes = $11,000 - ($48,000 ÷ 5) = $1,400

5.Margarite's Enterprises is considering a new project....