question archive A project requires an initial investment in equipment of $90,000 and then requires an initial investment in working capital of $10,000 (at t = 0)

A project requires an initial investment in equipment of $90,000 and then requires an initial investment in working capital of $10,000 (at t = 0)

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A project requires an initial investment in equipment of $90,000 and then requires an initial investment in working capital of $10,000 (at t = 0). You expect the project to produce sales revenue of $120,000 per year for three years. You estimate manufacturing costs at 60 percent of revenues. (Assume all revenues and costs occur at year-end, i.e., t = 1, t = 2, and t = 3). The equipment depreciates using straight-line depreciation over three years. At the end of the project, the firm can sell the equipment for $10,000 and also recover the investment in net working capital. The corporate tax rate is 21 percent and the cost of capital is 15 percent. Cash flows from the project are

 

a) CF0: −90,000;CF1: 12,600; CF2: 12,600; CF3: 29,600.

b) CF0: −100,000; CF1: 44,220; CF2: 44,220; CF3: 62,120.

c) CF0: −100,000; CF1: 42,600; CF2: 42,600; CF3: 42,600.

d) CF0: −100,000; CF1: 42,600; CF2: 42,600; CF3: 49,600.

 

The Solar Calculator Company proposes to invest $5 million in a new calculator-making plant that will depreciate on a straight-line basis. Fixed costs are $2 million per year. A calculator costs $5 per unit to manufacture and sells for $20 per unit. If the plant lasts for three years and the cost of capital is 12 percent, what is the accounting break-even level of annual sales? (Assume no taxes.)

a) 133,334 units

b) 272,117 units

c) 244,444 units

b) 466,666 units

 

Agency costs can be reduced by

a) monitoring managers' efforts only.

b) monitoring managers' efforts and managers' actions.

c) monitoring managers' efforts, monitoring managers' actions, and intervening when managers veer off-course.

d) intervening when managers veer off-course.

 

Percival Hygiene has $10 million invested in long-term corporate bonds. This bond portfolio's expected annual rate of return is 8%, and the annual standard deviation is 14%. Amanda Reckonwith, Percival's financial adviser, recommends that Percival consider investing in an index fund that closely tracks the Standard & Poor's 500 index. The index has an expected return of 16%, and its standard deviation is 22%.

 

a. Suppose Percival puts all his money in a combination of the index fund and Treasury bills. Can he thereby improve his expected rate of return without changing the risk of his portfolio? The Treasury bill yield is 4%.

 

·      Yes

·      No

 

b. Could Percival do even better by investing equal amounts in the corporate bond portfolio and the index fund? The correlation between the bond portfolio and the index fund is +0.1.

 

·      Yes

·      No

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