University of the Poonch Rawalakot

(FACULTY OF MANAGEMENT SCIENCES)

MID TERM:

PAPER: FM

MBA/M.Com

MARKS 30

TIME: 1 HOURS

Question No 1

Using the project cash flows presented , compute NPV, IRR and Payback Period of
the each project's cash flows and determine for each project whether it should be
accepted or rejected.Assume that the cost of capital is 10%.
Year (t)
0
1
2
3
4

Expected Net After-Tax Cash Flows

Project A
Project B
-$2,000
-$2,000
1,000
200
800
600
600
800
200
1,200

Question No 2
Last year Cole Furnaces had $5 million in operating income (EBIT). The company had a net
depreciation expense of $1 million and an interest expense of $1 million; its corporate tax
rate was 40%. The company has $14 million in operating current assets
and $4 million in operating current liabilities; it has $15 million in net plant and equipment. It
estimates that it has an after-tax cost of capital of 10%. Assume that Coles only noncash
item was depreciation.
a. What was the companys net income for the year?
b. What was the companys net cash flow?
c. What was the companys net operating profit after taxes (NOPAT)?
d. Calculate net operating working capital and total net operating capital for the
current year.
e. If total net operating capital in the previous year was $24 million, what was the
companys free cash flow (FCF) for the year?
f. What was the companys Economic Value Added (EVA)?
Question No 3
Assume that 1 year from now you plan to deposit $1,000 in a savings account that
pays a nominal rate of 8%.
a. If the bank compounds interest annually, how much will you have in your
account 4 years from now?
b. What would your balance be 4 years from now if the bank used quarterly compounding
rather than annual compounding?
c. Suppose you deposited the $1,000 in 4 payments of $250 each at the end of
Years 1, 2, 3, and 4. How much would you have in your account at the end of

Year 4, based on 8% annual compounding?

d. Suppose you deposited 4 equal payments in your account at the end of Years 1,
2, 3, and 4. Assuming an 8% interest rate, how large would each of your payments
have to be for you to obtain the same ending balance as you calculated in
part a?

University of the Poonch Rawalakot

(FACULTY OF MANAGEMENT SCIENCES)

FINAL EXAM:

PAPER: FM

BBA( REPEATERS)

MARKS 50

TIME:

3 HOURS

QUESTION NO 1
Find the interest rate (or rates of return) in each of the following situations.
a. You borrow $700 and promise to pay back $749 at the end of 1 year.
b. You lend $700 and receive a promise to be paid $749 at the end of 1 year.
c. You borrow $85,000 and promise to pay back $201,229 at the end of 10 years.
d. You borrow $9,000 and promise to make payments of $2,684.80 at the end of
each of the next 5 years.

QUESTION NO 2
You are a financial analyst for the Hittle Company. The director of capital budgeting
has asked you to analyze two proposed capital investments, Projects X and Y. Each
project has a cost of $10,000, and the cost of capital for each is 12%. The projects
expected net cash flows are as follows:

Expected Net Cash Flows

Year

Project X

Project Y

$10,000

$10,000

6,500

3,500

3,000

3,500

3,000

3,500

1,000

3,500

a. Calculate each projects payback period, net present value (NPV), internal rate
of return (IRR), modified internal rate of return (MIRR), and profitability
index (PI).
b. Which project or projects should be accepted if they are independent?
c. Which project should be accepted if they are mutually exclusive?
d. How might a change in the cost of capital produce a conflict between the NPV

and IRR rankings of these two projects? Would this conflict exist if r were 5%?
(Hint: Plot the NPV profiles.)
e. Why does the conflict exist?

QUESTION NO 3
The following data apply to Jacobus and Associates (millions of dollars):

Cash and marketable securities $ 100.00

Fixed assets

$ 283.50

Sales

$1,000.00

Net income

$ 50.00

Quick ratio

2.0

Current ratio

3.0

DSO

40.55 days

ROE

12%

Jacobus has no preferred stockonly common equity, current liabilities, and longterm
debt.
a. Find Jacobuss (1) accounts receivable, (2) current liabilities, (3) current assets, (4) total
assets, (5) ROA, (6) common equity, and (7) long-term debt.
b. In part a, you should have found Jacobuss accounts receivable = $111.1 million.
If Jacobus could reduce its DSO from 40.55 days to 30.4 days while holding other things
constant, how much cash would it generate? If this cash were used to buy back common
stock (at book value), thus reducing the amount of common equity, how would this affect (1)
the ROE, (2) the ROA, and (3) the ratio of total debt to total assets?
Question 4
Describe in words how an NPV profile is constructed. How does one determine the
intercepts for the x-axis and the y-axis?
What is the crossover rate, and how does it interact with the cost of capital to
determine whether or not a conflict exists between NPV and IRR?
What two characteristics can lead to conflicts between the NPV and the IRR when
evaluating mutually exclusive projects?
Question No 5
Davis Industries must choose between a gas-powered and an electric-powered forklift truck
for moving materials in its factory. Since both forklifts perform the same function, the firm
will choose only one. (They are mutually exclusive investments.) The electric-powered truck
will cost more, but it will be less xpensive to operate; it will cost $22,000, whereas the gas-

powered truck will cost $17,500. The cost of capital that applies to both investments is 12%.
The life for both types of truck is estimated to be 6 years, during which time the net cash
flows for the electric-powered truck will be $6,290 per year and those for the gas-powered
truck will be $5,000 per year. Annual net cash flows include depreciation expenses.
Calculate the NPV and IRR for each type of truck, and decide which to recommend.