1.

Answer - C
Rate 8%
Year 0 1 2 3 4
Cash Flow " (50,000)" " 15,000 "
" 15,000 " " 20,000 " " 10,000 "
NPV (24) " (50,000)" " 13,889 " " 12,860
" " 15,877 " " 7,350 "
IRR 8.0%

2. Answer - C
Rate 8%
Year 0 1 2 3 4
Cash Flow " (50,000)" " 15,000 "
" 15,000 " " 20,000 " " 10,000 "
Cum. CF " (50,000)" " (35,000)" " (20,00
0)" - " 10,000 "
Payback 2 years
NPV " (50,000)" " 13,889 " " 12,860
" " 15,877 " " 7,350 "
Cum. DCF " (50,000)" " (36,111)"
" (23,251)" " (7,374)" (24)
Disc. PB 3.01 years
3. Answer - B
Rate 20%
Year 0 1 2 3
Cash Flow (100) 40 80 120
NPV 58.33 (100) 33 56 69
4. Answer - D
Rate 10%
Year 0 1 2
Cash Flow " (150,000)" " 100,000 "
" 120,000 "
IRR 28.79%
5. Answer - A
Rate 10%
Year 0 1 2 3 4
6 7
Cash Flow (750) 175 175 175
175 175 175
NPV (7) (750) 159 145 131 120
99 90
IRR 10.6%
6. Answer - B
Rate 10%
Year 0 1 2 3 4
6 7
Cash Flow (750) 175 175 175
175 175 175
Cum. CF (750) (575) (400) (225) (50)
 175 350
Payback 4.3
NPV (750) 159 145 131 120
99 90
Cum. DCF (750) (591) (446) (315)
(195) 99 189
Disc. PB 5.9
7. Answer - D
Rate 8%
0 1 Perpetuity
Investment " (20,000.00)"
Cash Flow " 2,000 " " 2,000
"
PV " (25,000)"
PI 1.25
8. Answer - C
Rate 10%
Year 0 1 2 3 4
6 7
Cash Flow (375) 115 115 115
115 115 165
PV (375) 105 95 86 79
65 85
PI 1.37
9. Answer - C
Rate 10%
Year 0 1 2 3 4
6 7
Cash Flow (750) 175 175 175
175 175 175
NPV (7) (750) 159 145 131 120
99 90
IRR 10.6%
Cash Flow " (1,500)" 350 350
350 350 350 350
NPV (13) " (1,500)" 318 289 263
239 198 180
IRR 10.6%
10. Answer - A
Rate 10%
Year 0 1
Cash Flow (750) 751
Cum. CF (750) 1
PB -1.00
NPV (67) (750) 683
IRR 0.13333%
11. Answer - A
Rate (assumed) 10%
- 1 2 3 4
 Scenario 1 Outlay (100)
After-tax CF 40 40 40
40
PV (100) 36 33 30 27
NPV 27
IRR 11%
- 1 2 3 4
Scenario 2 Outlay (115)
After-tax CF 45 45 45
45
PV (115) 41 37 34 31
NPV 28
IRR 10%
12. Answer - B. NPV is the preferred evaluation tool for mutually exclusive
projects.
13. Answer - B. The NPV profile curve of Projects 1 & 2 (where their NPVs ar
e equal) will intersect at a rate between 10% and 15.02%.
14. Answer - A
Rate Year 0 1 2 3
Cash Flow (50) 100 0 (50)
0 NPV 0 (50) 100 0 (50)
32 (47) (50) 3 0 (0)
62 (48) (50) 2 0 (0)
92 (49) (50) 1 0 (0)
15. Answer - D
Rate 10%
Year 0 1 2 3 4
Eqpt cost " (350,000)"
Installation " (110,000)"
Inventory " (73,000)"
Revenues " 265,000 " " 265,00
0 " " 265,000 " " 265,000 "
Cash expenses " 83,000 " " 83,000
" " 83,000 " " 83,000 "
Depreciation " 92,000 " " 92,000
" " 92,000 " " 92,000 "
Op. inc. before taxes " 90,000 "
" 90,000 " " 90,000 " " 90,000 "
"Taxes, 40%" " 36,000 " " 36,000
" " 36,000 " " 36,000 "
Op. Inc. after taxes " 54,000 "
" 54,000 " " 54,000 " " 54,000 "
After-tax OCF " 146,000 " " 146,00
0 " " 146,000 " " 146,000 "
Salvage value
Taxes on SV
After-tax SV
Total after-tax CF " (533,000)" " 146,00
0 " " 146,000 " " 146,000 " " 146,000 "
PV " (533,000)" " 132,727 " " 120,66
1 " " 109,692 " " 99,720 "
NPV " (70,200)"
16. Answer - B
Rate 10%
Year 0 1 2 3 4
6 7 8
Eqpt cost " (100,000)"
Depreciation " 12,500 " " 12,500
" " 12,500 " " 12,500 " " 12,500 " " 12,500 "
" 12,500 "
Total after-tax CF/savings " (100,000)"
" 5,000 " " 5,000 " " 5,000 " " 5,000 " " 5,000
" " 5,000 " " 5,000 "
PV " (100,000)" " 4,545 " " 4,132
" " 3,757 " " 3,415 " " 2,822 " " 2,566 "
" 2,333 "
NPV " (76,430)"
17. Answer - D. Interest expenses are already considered in the cost of mone
y.
18. Answer - C
Tax 30%
Year 0 1 2 3 4
6 7 8 9 10
Eqpt cost " (400,000)"
NWC " (40,000)"
" 40,000 "
Revenues " 240,000 " " 240,00
0 " " 240,000 " " 240,000 " " 240,000 " " 240,000 "
" 240,000 " " 240,000 " " 240,000 "
Cash expenses " 110,000 " " 110,00
0 " " 110,000 " " 110,000 " " 110,000 " " 110,000 "
" 110,000 " " 110,000 " " 110,000 "
Depreciation " 40,000 " " 40,000
" " 40,000 " " 40,000 " " 40,000 " " 40,000 "
" 40,000 " " 40,000 " " 40,000 "
Op. inc. before taxes " 90,000 "
" 90,000 " " 90,000 " " 90,000 " " 90,000 " " 90,000
" " 90,000 " " 90,000 " " 90,000 "
Taxes " 27,000 " " 27,000 "
" 27,000 " " 27,000 " " 27,000 " " 27,000 " " 27,000
" " 27,000 " " 27,000 "
Op. Inc. after taxes " 63,000 "
" 63,000 " " 63,000 " " 63,000 " " 63,000 " " 63,000
" " 63,000 " " 63,000 " " 63,000 "
After-tax OCF " 103,000 " " 103,00
0 " " 103,000 " " 103,000 " " 103,000 " " 103,000 "
" 103,000 " " 103,000 " " 103,000 "
19. Answer - C
Sale of FA 21.00
BV of FA 15.00
Gain 6.00
"Tax, 40%" 2.40
After-tax CF 18.60
WC 8.00
Net CF 26.60
20. Answer - D Please refer to solution in #22
21. Answer - A Please refer to solution in #22
22. Answer - C
Tax 40%
Year 0 1 2 3 4
Eqpt cost " (360,000)"
Installation " (40,000)"
Inventory " (60,000)"
Net outlay " (460,000)"
Cash expenses savings " 140,000 "
" 140,000 " " 140,000 " " 140,000 "
Depreciation " 80,000 " " 80,000
" " 80,000 " " 80,000 "
Net savings " 60,000 " " 60,000
" " 60,000 " " 60,000 "
"Taxes, 40%" " 24,000 " " 24,000
" " 24,000 " " 24,000 "
Op. Inc. after taxes " 36,000 "
" 36,000 " " 36,000 " " 36,000 "
After-tax OCF " 116,000 " " 116,00
0 " " 116,000 " " 116,000 "
Salvage value
Taxes on SV
After-tax SV
Terminal year's after-tax NOCF
23. Answer - C. The real after-tax savings from depreciation and interest ex
pense are reduced. This is because the interest
"rate of the bonds is supposed to compensate for the expected hi
gh inflation, among other risks. When the"
"inflation is lower than expected, therefore, the bond issuer pa
ys a higher interest rate and the bondholder "
"gains in terms of wealth. In the case of depreciation, the tax
shield effect is diminished in value."
24. Answer - A. Scenario analysis is the calculation of NPV for different sc
enarios wherein changes in several of the input
variables are involved.
25. Answer - B. The least common multiple of lives approach and the equivalent a
nnual annuity approach should be used
"when comparing two mutually exclusive projects with unequal liv
es, and not the IRR."
26. Answer - D Please see solution in #27
27. Answer - B
28. Answer - C
Tax 30%
Year 0 1 2
Investment (100)
Depreciation 50 50
EBIT 50 50
"Taxes, 30%" 15 15
Op. Inc. after taxes 35 35
 After-tax OCF 85 85
PV 144 76 68
Change in MV (68) (8)
Economic Income 17.24 9.11
MVA 43.65
29. Answer - A
Rate 10%
Year 0 1 2 3 4
Cashflows " (40,000)" " (12,000)"
" (15,000)" " (20,000)" " (25,000)"
SV " 20,000 " " 17,000
" " 12,000 "
Total CF " (40,000)" " (12,000)"
" 5,000 " " (3,000)" " (13,000)"
PV " (40,000)" " (10,909)" " 4,132
" " (2,254)" " (8,879)"
NPV2 " (46,777)"
NPV3 " (49,031)"
NPV4 " (57,910)"
30. Answer - A. Projects 1 and 5 have the highest total NPV among the combin
ations.
31. Answer - B
Rate 10% 0 1 2 3 4
5 6 7 8 9 10
Outlay -190
CF 40 40 40 40
40 40 40 40 40 40
NPVDH 55.78268423 -190 36.36363636 33.05785
124 30.05259204 27.32053821 24.83685292 22.5789572 20.52632
473 18.66029521 16.96390473 15.42173158
NPVDL -67.10865789
NPVDAve -5.662986829
32. Answer - C
0 1 2 3 4
5 6 7 8 9 10
Outlay -190 -190
CF 40 80 80 80
80 80 80 80 80 80
NPVDH 92.47445937 -190 -136.3636364 66.11570
248 60.10518407 54.64107643 49.67370584 45.1579144 41.05264
946 37.32059042 33.92780947 30.84346315
0 1 2 3 4
5 6 7 8 9 10
Outlay -190 -190
CF 20 40 40 40
40 40 40 40 40 40
NPVDL -135.1264067 -190 -154.5454545 33.05785
124 30.05259204 27.32053821 24.83685292 22.5789572 20.52632
473 18.66029521 16.96390473 15.42173158
0 1 2 3 4
5 6 7 8 9 10
Outlay -190 -190
 CF 30 60 60 60
60 60 60 60 60 60
NPVDAve -21.32597366 -190 -145.4545455 49.58677
686 45.07888805 40.98080732 37.25527938 33.8684358 30.78948
709 27.99044281 25.4458571 23.13259737
33. Answer - A. Risk-adjusted rates should be used to put all capital budget
ing proposals in equal footing.
A project can have an abandonment option and an expansion/growth
option.
34. Answer - D. NPV is the preferred tool when rationing capital. Project be
ta should be used whenever
the project's beta is different from the company's beta.
35. Answer - D
Rate 15% 0 1 2 3
Outlay " (500,000)"
Depreciation " 40,000 " " 40,000
" " 40,000 "
After-tax OI " 20,000 " " 20,000
" " 20,000 "
After-tax CF " 60,000 " " 60,000
" " 60,000 "
SV " 625,839 "
"Taxes, 30%" " 73,752
"
Net SV " 552,087 "
Total CF " (500,000)" " 60,000 "
" 60,000 " " 612,087 "
NPV -0.131503246 " (500,000)" " 52,174 "
" 45,369 " " 402,457 "
IRR 15.00%
36. Answer - A
Rate 18% 0 1 2 3 4
5
Outlay (6.00) (1.00)
(5.00)
After-tax CF 0.50 4.00 4.00
4.00 4.00
Total CF (6.00) (0.50) 4.00 4.00
4.00 (1.00)
NPV 0.509579 (6.00) (0.42) 2.87 2.43
2.06 (0.44)
IRR 21.40%
37. Answer - D
Rate 10% 0 1 2 3
Pinto Outlay (100.00)
After-tax CF 45.00 45.00 45.00
After-tax SV 25.00
(100.00) 45.00 45.00 70.00
NPV 30.691 (100.00) 40.91 37.19
52.59
EAA 12.341
IRR 25.40%
 Rate 10% 0 1 2 3 4
Bolten Outlay (125.00)
After-tax CF 47.00 47.00 47.00
47.00
After-tax SV
20.00
(125.00) 47.00 47.00 47.00
67.00
NPV 37.64 (125.00) 42.73 38.84 35.31
45.76
EAA $11.88
IRR 22.50%
38. Answer - B. Abandonment option should be exercised when the abandonment
value is is above the
"amount of the subsequent cash flows. If the cost of a real opti
on is less than its value, the"
NPV of the investment project will increase.
39. Answer - B
40. Answer - B
41. Answer - A Please see solution in #43
42. Answer - C Please see solution in #43
43. Answer - B Please see solution in #43
Rate 12% 0 1 2 3 4
5 6 7 8 9 10 11 12
Outlay (1.500)
NWC (0.400)
0.400
Depreciation 0.250 0.250 0.250
0.250 0.250 0.250
Revenues 0.100 0.100 0.100
0.100 0.100 0.100 0.100 0.100 0.100 0.100 0.100 0.100
Cash Op. Exp. Savings 0.250 0.250
0.250 0.250 0.250 0.250 0.250 0.250 0.250 0.250 0.250 0.250
OIBT (1.900) 0.100 0.100 0.100
0.100 0.100 0.100 0.350 0.350 0.350 0.350 0.350 0.350
"Tax, 40%" 0.040 0.040 0.040
0.040 0.040 0.040 0.140 0.140 0.140 0.140 0.140 0.140
After-taxes NI (1.900) 0.060 0.060
0.060 0.060 0.060 0.060 0.210 0.210 0.210 0.210 0.210 0.210
After-tax OCF (1.900) 0.310 0.310
0.310 0.310 0.310 0.310 0.210 0.210 0.210 0.210 0.210 0.210
SV
0.500
"Tax, 40%"
0.200
After-tax SV
0.300
NOCF
0.700
After-tax CF (1.900) 0.310 0.310
0.310 0.310 0.310 0.310 0.210 0.210 0.210 0.210 0.210 0.910
NPV (0.01) (1.900) 0.277 0.247 0.221
 0.197 0.176 0.157 0.095 0.085 0.076 0.068 0.060 0.234
44. Answer - C
Rate 12% 0 1 2 3 4
5 6 7 8 9 10 11 12
Outlay (1.500)
NWC (0.400)
0.400
Depreciation 0.125 0.125 0.125
0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125
Revenues 0.100 0.100 0.100
0.100 0.100 0.100 0.100 0.100 0.100 0.100 0.100 0.100
Cash Op. Exp. Savings 0.250 0.250
0.250 0.250 0.250 0.250 0.250 0.250 0.250 0.250 0.250 0.250
OIBT (1.900) 0.225 0.225 0.225
0.225 0.225 0.225 0.350 0.350 0.350 0.350 0.350 0.350
"Tax, 40%" 0.090 0.090 0.090
0.090 0.090 0.090 0.140 0.140 0.140 0.140 0.140 0.140
After-taxes NI (1.900) 0.135 0.135
0.135 0.135 0.135 0.135 0.210 0.210 0.210 0.210 0.210 0.210
After-tax OCF (1.900) 0.260 0.260
0.260 0.260 0.260 0.260 0.335 0.335 0.335 0.335 0.335 0.335
SV
0.500
"Tax, 40%"
0.200
After-tax SV
0.300
NOCF
0.700
After-tax CF (1.900) 0.260 0.260
0.260 0.260 0.260 0.260 0.335 0.335 0.335 0.335 0.335 1.035
NPV 0.05 (1.900) 0.232 0.207 0.185
0.165 0.148 0.132 0.152 0.135 0.121 0.108 0.096 0.266
Straight Line Accelerated
Inc (Dec)
"After-taxes OI, yr1" 0.060 0.135
0.075
NPV (0.008) 0.046
0.055
45. Answer - C
Rate 12% 0 1 2 3 4
5 6 7 8 9 10 11 12
Outlay (1.260)
NWC (0.400)
0.400
Depreciation 0.210 0.210 0.210
0.210 0.210 0.210
Revenues 0.100 0.100 0.100
0.100 0.100 0.100 0.100 0.100 0.100 0.100 0.100 0.100
Cash Op. Exp. Savings 0.250 0.250
0.250 0.250 0.250 0.250 0.250 0.250 0.250 0.250 0.250 0.250
OIBT (1.660) 0.140 0.140 0.140
0.140 0.140 0.140 0.350 0.350 0.350 0.350 0.350 0.350
"Tax, 40%" 0.056 0.056 0.056
0.056 0.056 0.056 0.140 0.140 0.140 0.140 0.140 0.140
 After-taxes NI (1.660) 0.084 0.084
0.084 0.084 0.084 0.084 0.210 0.210 0.210 0.210 0.210 0.210
After-tax OCF (1.660) 0.294 0.294
0.294 0.294 0.294 0.294 0.210 0.210 0.210 0.210 0.210 0.210
SV
0.500
"Tax, 40%"
0.200
After-tax SV
0.300
NOCF
0.700
After-tax CF (1.660) 0.294 0.294
0.294 0.294 0.294 0.294 0.210 0.210 0.210 0.210 0.210 0.910
NPVLo Out 0.166 (1.660) 0.263 0.234
0.209 0.187 0.167 0.149 0.095 0.085 0.076 0.068 0.060 0.234
NPVHi Out (0.008)
Difference 0.174
46. Answer - B
Tax 30%
Year 0 1 2
Investment (100)
Depreciation 50 50
EBIT 50 50
"Taxes, 30%" 15 15
Op. Inc. after taxes 35 35
After-tax OCF 85 85
PV 144 76 68
Change in MV (68) (8)
Economic Income 17.24 9.11
MVA 43.65