07 Jul EFSB Final
The exam has three problem sets. Your answers, showing all work, are to be uploaded to the individual Problem drop boxes by There are three problem drop boxes – one for each problem. Make sure to put your name at the top of each file you upload. All exam responses are to be your own work.
Problem Set #1: 25 possible points
For each of the following questions show ALL calculations and clearly label the answer.
1. (5 points) Your revenues have grown from $500,000 in 2015 to $975,000 in 2020. What is the average annual growth rate of revenues?
2. (5 points) Your firm has made an investment in a speculative land deal. The property is currently selling for $80,000. The property value is estimated to increase by 20% per year for the foreseeable future. What is the anticipated value of the land in 10 years?
3. (15 points) You have decided to purchase a new warehouse for $400,000 and are evaluating your options for the mortgage. Assume that your down payment will be 20% of the purchase price, mortgage payments will be made monthly, and the first payment will be made one month from today.
a. What is the mortgage amount?
b. If you select the 30-year mortgage, the interest rate will be 5% annually. What is the
monthly payment?
c. The bank is also offering a 15-year mortgage at 4.5% annually. What is the monthly
payment on this mortgage?
d. What is the total of all payments for each mortgage? Which one costs you the least over the
life of the mortgage? (support your answer with numbers.)
Problem #2: 25 possible points
Yards-R-Us is considering the addition of a new line of organic fertilizer. It is expected that each application of fertilizer will sell for $16.50 and the variable operating cost per application will be $11.00. Total fixed operating costs are expected to be $40,000. The company has a 30% tax rate and will have interest expense associated with this line of $12,000. Yards-R-Us expects to sell 10,000 applications in the first year.
- a. Put together the complete income statement for the organic fertilizer line’s first
- year. Is the line expected to be profitable?
- b. Calculate the operating break-even point in both units and dollars.
- c. How many applications would Yards-R-Us need to sell to earn a target EBIT of
- $53,000?
- d. What is the DOL, DFL & DCL for this year?
- e. If sales are expected to increase by 10% next year, show the Proforma Income
- Statement.
Problem #3: 25 possible points
Your firm, Country Furniture, Inc., is thinking about replacing equipment in its production facilities. In considering the replacement, you obtained the following information:
- The expansion will require the company to purchase today (t = 0) $5 million of new equipment. An additional $200,000 in installation charges will be required. The equipment will be depreciated as MACRS 3–year property over the following four years at the following rates:
t = 1 33%
t = 2 45%
t = 3 15%
t = 4 7%
- The expansion will require the company to increase its net operating working capital by $150,000 today (t = 0). This net operating working capital will be recovered at the end of the project’s 5–year economic life.
- The old equipment is fully depreciated (Book Value = $0) and can be sold for $85,000
.
- The new equipment is expected to have a salvage value of $30,000 at the end of its 5-year economic life.
- The company’s operating costs, excluding depreciation, are expected to reflect a decrease of $75,000 per year for each year the new equipment is in operation.
- The new equipment will increase the company’s sales. The projected increases are as follows:
Year 1: $3.0 million
Year 2: 3.5 million
Year 3: 2.5 million
Year 4: 1.5 million
Year 5: 1.0 million
- The required return for the project is 10%. The company’s tax rate is 40%.
a. Forecast the NINV, NCFs and Terminal Value.
b. What are the proposed project’s Net Present Value (NPV) and Internal Rate of Return?
c. If there are no other project proposals in the company and you have the money
available to fund this project, will you fund the project proposal or not? Why?
