Please show all work, especially in the application problems. You are encouraged to use Excel to calculate the final answer. If your computed answer is NOT one of the options presented, please show your work so I can give you credit. Sometimes Bill Gates may round differently than my answer key.
There are 3 sections. Each section is identified with the tab below. Make sure you complete each section.
Section 1:
1. Discounted cash flow valuation is the process of discounting an investment's:
A. Assets.
B. Future profits.
C. Liabilities.
D. Costs.
E. Future cash flows
2. The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:
A. produce a positive annual cash flow.
B. produce a positive cash flow from assets.
C. offset its fixed expenses.
D. offset its total expenses.
E. recoup its initial cost.
3. Benny's is considering adding a new product to its lineup. This product is expected to generate sales for four years after which time the product will be discontinued. What is the project's net present value if the firm wants to earn a 14 percent rate of return?
|
Year
|
Cash Flow
|
|
0
|
($62,000)
|
|
1
|
16,500
|
|
2
|
23,800
|
|
3
|
27,100
|
|
4
|
23,300
|
A. $2,336.29
B. $2,511.49
C. $2,874.21
D. $3,013.05
E. $3,268.47
4. The Tool Box needs to purchase a new machine costing $1.46 million. Management is estimating the machine will generate cash inflows of $223,000 the first year and $600,000 for the following three years. If management requires a minimum 12 percent rate of return, should the firm purchase this particular machine? Why or why not?
A. Yes; because the IRR is 10.75 percent
B. Yes; because the IRR is 12.74 percent
C. No; because the IRR is 10.75 percent
D. No; because the IRR is 12.74 percent
E. The answer cannot be determined as there are multiple IRRs.
5. A pro forma financial statement is a financial statement that:
A. expresses all values as a percentage of either total assets or total sales.
B. compares actual results to the budgeted amounts.
C. compares the performance of a firm to its industry.
D. projects future years' operations.
E. values all assets based on their current market values.
6. A 9-year project is expected to generate annual revenues of $114,500, variable costs of $73,600, and fixed costs of $14,000. The annual depreciation is $3,500 and the tax rate is 34 percent. What is the annual operating cash flow?
A. $14,301
B. $14,788
C. $15,052
D. $17,506
E. $18,944
7. Burke's Corner currently sells blue jeans and T-shirts. Management is considering adding fleece tops to its inventory to provide a cooler weather option. The tops would sell for $49 each with expected sales of 3,600 tops annually. By adding the fleece tops, management feels the firm will sell an additional 220 pairs of jeans at $59 a pair and 350 fewer T-shirts at $18 each. The variable cost per unit is $36 on the jeans, $9 on the T-shirts, and $21 on the fleece tops. With the new item, the depreciation expense is $27,000 a year and the fixed costs are $62,000 annually. The tax rate is 34 percent. What is the project's operating cash flow?
A. $27,789
B. $34,708
C. $36,049
D. $38,419
E. $40,201
8. Which one of the following commences on the day inventory is purchased and ends on the day the payment for that inventory is collected? Assume all sales and purchases are on credit.
A. Inventory period
B. Accounts receivable period
C. Accounts payable period
D. Operating cycle
E. Cash cycle
9. Consider the following financial statement information from Fargo Farm Fresh:
|
Item
|
Beginning
|
Ending
|
|
Inventory
|
$ 10,407
|
$ 10,822
|
|
Accounts Receivable
|
$ 6,840
|
$ 7,301
|
|
Accounts Payable
|
$ 7,221
|
$ 6,948
|
|
Net Sales
|
$ 146,400
|
|
|
Cost of Goods Sold
|
$ 82,500
|
|
Assume all sales are on credit. How long is the cash cycle?
A. 28.21 days
B. 33.25 days
C. 51.03 days
D. 51.58 days
E. 53.57 days
10. Bob Gibson's has sales for the year of $311,400, cost of goods sold equal to 78 percent of sales, and an average inventory of $42,800. The profit margin is 6 percent and the tax rate is 35 percent. How many days on average does it take the firm to sell an inventory item?
A. 5.68 days
B. 11.46 days
C. 64.32 days
D. 71.74 days
E. 82.03 days
Section 2:
1. Compute Payback Period
2. Compute the Profitability Index
3. Compute Project NPV
4. Compute Project IRR
5. Recommendation (ACCEPT or REJECT): Why or Why Not?
Section 3:
1. What month yields the highest net cash flow?
2. What month yields the lowest net cash flow?
3. Are there any months where the cumulative cash flow goes below zero? If so, what does this mean? Is there a solution or a set of options to correct this problem?
Attachment:- Excel_Worksheet.xlsx