FIN 311 Sample Third Quiz

FIN 311-01

Spring 2016

D Swanton                                                                                        

 Roosevelt University

Principles of Finance

Sample Third Quiz 

Do all the problems.  Include calculations and/or explanations in your answers wherever appropriate.  More credit will be given for correct reasoning than for correct arithmetic.


1.                  Alpha Co. is investigating two mutually exclusive projects A and B with common cost of capital k = 6%.

here                A:  -$5,000, $1,646, $1,646, $1,646, $1,646     NPV = $704   IRR = 12%

                       B:  -$2,000,   $701,     $701,     $701,     $701.         NPV = $429    IRR = 15%

(a)    Calculate the NPV’s and IRR’s for both.  Is each one by itself acceptable?

(b)    Sketch the NPV profiles on a common set of axes.

(c)    Explain which is preferred at k = 6%.  Which would be preferred at k = 11%?   A at 6%, B at 11%

(d)    Why are these answers in part (c) different?

2.                 Beta Co. is looking at Project C with cost of capital k = 7%.

                    C:  $3,000, -$945, -$945, -$945, -$945.    

IRR = 10% but this is a borrowing project with NPV = -$201

Sketch C’s NPV profile.  Is it acceptable?  Explain in both NPV and IRR terms. 


3.               We are thinking of buying a truck.  It will cost $20,000 and be subject to a 10% investment tax credit.  It falls in the SACRS (30%, 20%, 20%, 15%, 15%) class.  Our tax rate is 30%. 

    (a)    Write the depreciation schedule.           

     (b)    We will sell the truck after four years for $5,000.  What after-tax cash flow will result from the sale?

(c)   The truck will save us $6,000 per year in expenses.  Write all the cash flows for this project from purchase to sale.

4.                Gamma Co. is looking at Project D with k = 7%.

D:  -$3,000, $2,000, $4,000, $6,000, -$10,000

The spread sheet says the NPV = -$368 but IRR = 15%.  Is Project D acceptable?  It has a negative NPV but IRR > k.  Explain.


 5.          I am planning on investing for retirement. I estimate that I will need $100,000 per year for twenty years.  I expect to earn 7% while accumulating and 3% in retirement.   I am now 25 expecting to retire at 70 and have nothing in the plan yet, and from this year I will be contributing equal annual amounts.

.   (a)    How big must those contributions be?

.   (b)     I started on that plan ten years ago and am now 35 and have $80,000 in the plan.  If I still want the $100,000 per year, what contributions should I make?

.   (c)     The week after making the calculation in part (b), a market crash causes me to lose 30% of my $80,000. If I go on making the contributions from part (b) and retire two years later, can I still expect at least the $100,000 per year?