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QUESTION 1
You have a $1 million capital budget and must make the decision about which investments your firm should undertake for the
coming year. There are three projects available and the cash flows of each project appear below. Assume a cost of capital of
12% Which project do you select using the the profitability index, and what is its PI? (Show your work. Two decimal places
required. Highlight or bold your answer.)
Project 1
Project 2
Project 3
Cash flow
Year 0
-$400,000
-$500,000
-$1,000,000
Year 1
175,000
300,000
500,000
Year 2
275,000
350,000
700,000
Year 3
275,000
350,000
700,000
QUESTION 2
Swerling Company is considering a project with the following cash flows What is the payback period of the proposed Swerling
Company project? (Show your work. Label years. Two decimal places required. Highlight or bold your answer.) What
is the net present value of the proposed Swerling Company project if the discount rate is 6%? (Show your work. Label $.
Two decimal places required. Highlight or bold your answer.) What is the profitability index of the proposed Swerling
Company project if the discount rate is 6%? (Show your work. Two decimal places required. Highlight or bold your
answer.) What is the IRR of the proposed Swerling Company project? (Show your work. Label %. Two decimal places
required. Highlight or bold your answer.) What is the discounted payback period of the proposed Swerling Company project
if the discount rate is 6%? (Show your work. Label years. Two decimal places required. Highlight or bold your answer.)
Year
Cash Flow
($20,000)
1
$ 3,000
2
$ 4,000
3
$ 5,000
4
$ 6,000
5
$ 7,000
QUESTION 3
Thompson Manufacturing is considering two investment proposals. The first involves a quality improvement project, and the
second is about an advertising campaign. The cash flows associated with each project appear below:
Quality Improvement
Advertising Campaign
Initial cash outflow
$100,000
$100,000
Cash Inflows
Year 1
10,000
80,000
Year 2
30,000
45,000
Year 3
125,000
10,000
Suppose the hurdle rate of the firm is 10% Calculate the cash flows of the "incremental project" by subtracting the cash flows of
the second project from the cash flows of the first project. What is the IRR of the incremental project? (Show your
work. Label %. One decimal place required. Highlight or bold your answer.)
QUESTION 4
A firm that manufactures DVD players for automakers currently has excess capacity. The firm expects that it will exhaust its
excess capacity in three years. At that time it will have to invest $2 million to build new capacity. Suppose that the firm can
accept additional work as a subcontractor for another company By doing so, the firm will receive a net cash inflow of $120,000
immediately and in each of the next two years. However, the firm will have to begin expansion two years earlier than originally
planned to bring new capacity on line. Assume a discount rate of 10% What is the NPV if the firm accepts the subcontractor
job? (Show your work. Label $. No decimal places required. Highlight or bold your answer.)
QUESTION 7
Future Semiconductors is evaluating a new etching tool. The equipment costs $1,000,000 and will generate after-tax cash
inflows of $400,000 per year for six years Assume the firm has a 15% cost of capital What's the NPV of the investment?
(Show your work. Label $. No decimal places required. Highlight or bold your answer.)
QUESTION 11
A machine costs $3 million and has zero salvage value. Assume a discount rate of 10% and a 40% tax rate. The machine is
depreciated straight-line over 3 years for tax purpose What is the present value of depreciation tax savings associated with this
machine? (Show your work. Label $. No decimal places required. Highlight or bold your answer.)
QUESTION 12
Johnson Chemicals is considering an investment project The project requires an initial $3 million outlay for equipment and
machinery resulting in finance charges in years 1-4 of $20,000. $15,000. $10,000, and $5,000, respectively. Sales are projected
to be $1.5 million per year for the next four years. The equipment will be fully depreciated straight-line by the end of year 4.
Cost of goods sold and operating expense (not including depreciation) are predicted to be 30% of sales. The equipment can be
sold for $400,000 at the end of year 4. Johnson Chemicals also needs to add net working capital of $100,000 immediately. The
net working capital will be recovered in full at the end of the fourth year. Assume the tax rate is 40% and the cost of capital is
10% What is the operating cash flow for years 1-4? (Show your work. Label $. No decimal places required. Highlight or
bold your answer.)

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