Econ final exam.

NAME: ___________________________

MID-TERM EXAM

Due via e-mail 8 December 2014 at 10P

I will available for questions by telephone until 4P on 5 December 2014. Due via e-mail 8 December 2014 at 10P.

1. Draw a cash flow diagram using the data below.

Year Cash flow

0 -$10,000

1 $2,000

2 $3,000

3 $4,000

4 $5,000

5 -$1,000

NAME: ___________________________

2. Determine the value of EUAW from the cash flow diagram shown below. i = 10%.

A. $139 B. $185 C. $98 D. $251

NAME: ___________________________

3. Compute the rate of return for a project that has an initial cost of $40,000 and would provide positive cash flows of $6,000 the first year, $7,000 the second year, $8,000 the third year, $9,000 the fourth year, $10,000 the fifth year, and $11,000 the sixth year.

A.6.30% B. 7.46% C. 7.04 D. 6.70%

NAME: ___________________________

4. The cash flows for three different alternatives are given in table below. MARR =10%.

Alt. A Alt. B Alt. C

Initial cost $5,000 9,000 7,500

Annual benefits $1,457 2,518 2,133

RoR 14% 13% 12.4%

Life in years 5

ΔRoR for the first increment (Alt. C-Alt. A) is ___________________.

A. 10.12% B. 9.38% C. 11.85% D. 11.00%

The best alternative for a MARR of 10% using the incremental rate of return analysis is ____________.

A. Alt. C B. Alt. A C. Alt. B D. Do-nothing

NAME: ___________________________

5. Ross Systems in considering four projects A, B, C and D that have risks associated with the producing benefits. Based on the information given in the table below, which project is more desirable for the company?

A. Project A B. Project B C. Project C D. Project D

Project A Project B Project C Project D

EUAW Prob. EUAW Prob. EUAW Prob. EUAW Prob.

$2,000 0.2 $3,000 0.1 -$5,000 0.2 $4,000 0.4

$1,500 0.5 -$2,500 0.4 $6,500 0.5 $2,500 0.3

$3,000 0.3 $3,500 0.5 $1,000 0.3 -$2,000 0.3

NAME: ___________________________

6. An automated inspection system purchased at a cost of $120,000 by Kal Tech Engineering Systems was depreciated using the MACRS method. The system was sold after 4 years for $50,000. Determine the capital recovery on this equipment.

A. $50,000 B. $0 C $ 37,488. D. $12,512

NAME: ___________________________

7. A piece of equipment bought for $50,000 at MKBK Systems is being depreciated using SOYD method using a life of 5 years and a salvage value of $5,000. At the end of four years, the management decided to sell the equipment for a modest price of $20,000. The company is in the 34% tax bracket. Compute the tax consequence in the sale of this equipment.

A. $6,125 B. $7,200 C. $4,080 D. $5,780

NAME: ___________________________

8. The cost data like the equivalent uniform annual cost of capital recovery (EUAC of CR), EUAC of Maintenance and EUAC of Operating Cost for equipment being considered at a local company are given in the table below. What is the economic life?

A. 4 years B. 2 year C. 3 years D. 5years

Year EUAC of CR EUAC of Maintenance EUAC of Operating Cost

1 $9,000 $400 $800

2 6,000 800 1,600

3 4,000 1,200 2,400

4 2,500 1,600 2,600

5 1,500 2,000 3,500

NAME: ___________________________

9. Beth bought some residential development property for 200,000 five years ago. She sold the property this year for $1,200,000 and spent $250,000 for infrastructure development in year 5, the year in which the property was sold. If the inflation rate for the past 5 years has been steady at 5% annually, compute the after-tax real rate of return on this investment. Assume a capital gain tax of 15%.

A. 33.17% B. 28.13% C. 26.83% D. 31.84%

NAME: ___________________________

10. Sophia Inc., a luxury handbag maker in Georgia, has raised the needed capital as shown in the table below. The combined state and federal tax rate is 39.5%. What is the after-tax cost of the capital for the company?

Sources of Capital %Capitalization Interest rate/Dividend

Secured Loans 20% 7%

Unsecured Loans 15% 12%

Bonds 25% 9%

Common Stock 40% 4%

A. 3.97% B. 6.23% C. 5.76% D. 4.90%