Urgent: Finance Questions!

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  1. What is meant by each of the following statements?

    1. “The present value of the future cash flows expected from an investment project is $20,000,000.”

    2. “The net present value (NPV) of an investment project is $10,000,000.”

    3. “A project’s cost of capital is 10 percent.” 

  2. Perfect Color Company (PCC) is in the business of dyeing material. Business is booming, and PCC is considering buying a new color printer. Two printers are available on the market: printer X costs $50,000, requires $5,000 per year to oper- ate, and has a useful life of two years; printer Y costs $60,000, requires $7,000 per year to operate, and will need to be replaced every three years. PCC’s cost of capi- tal is 10 percent.
    1. What are the present values of the total costs of the two printers over their useful life?
    2. Why are the two present values not comparable?
    3. What is the annual-equivalent cost for each of the printers?
    4. Which printer should PCC purchase? 
  3. Pasta Uno is operating an old pasta-making machine that is not expected to last
    more than two years. During that time, the machine is expected to generate a cash inflow of $20,000 per year. It could be replaced by a new machine at a cost of $150,000. The new machine is more efficient than the current one and, as a result, is expected to generate a net cash flow of $75,000 per year for three years. The management of Pasta Uno is wondering whether to replace the old machine now or wait another year. Pasta Uno’s cost of capital is 10 percent.
    1. Assume that the current resale value of the old machine is zero and that the new machine will also have a zero resale value in the future. What is the annual-equivalent cash flow of using the new machine?
    2. What should the management of Pasta Uno do? Explain. 
  4. You expect that your daughter will go to college ten years from now. Taking ac- count of inflation, you estimate that you will need $160,000 to support her during her years in college. Assume an interest rate of 4 percent on your saving accounts. How much will you have to pay into those accounts in the next ten years to get $160,000 by then? 
  5. Rollon Inc. is comparing the operating costs of two types of equipment. The stan-
    dard model costs $50,000 and will have a useful life of four years. Operating costs are expected to be $4,000 per year. The superior model costs $90,000 and will have a useful life of six years. Its operating costs are expected to be $2,500 per year. Both models will be able to operate at the same level of output and quality and generate the same cash earnings. Rollon’s cost of capital is 8 percent.
    1. Compute the present values of the cash costs over the useful life of each model.
    2. Can the two present values be compared? If not, why not?
    3. What is the annuity-equivalent cost of each model?
    4. Which model should the company purchase? Explain. 
  6. Constructing income statements and balance sheets.
    Based on the information provided below, prepare the following financial state- ments for VideoStores:
    1. An income statement for the calendar year 2010
    2. A balance sheet on December 31, 2009
    3. A balance sheet on December 31, 2010
      1. Accounts receivable increased by $6,400,000 in 2010
      2. Profits in 2010 were taxed at 36 percent
      3. At the end of 2010, inventories equaled 10 percent of the year’s sales
      4. The net book value of fixed assets at the end of 2009 was $76 million
      5. Cost of goods sold, other than the direct labor expenses related to the assembling of computers, equaled 70 percent of sales in 2010
      6. The average interest rate on short- and long-term borrowing in 2010 was 10 percent of the amount borrowed at the beginning of the year
      7. Accounts receivable at the end of 2010 equaled 12 percent of sales
      8. Accounts payable at the end of 2009 equaled $30 million
      9. Depreciation expense was $9 million in 2010
      10. The company owed its employees $4 million at the end of 2009; a year later it owed them $2 million
      11. Material purchased in 2010 amounted to $228 million
      12. Selling, general, and administrative expenses for 2010 were $18 million
      13. Taxes payable in 2009 equaled $6 million, and the company paid in advance the same amount on December 15, 2009
      14. The balance of long-term debt was $27 million at the beginning of 2009, of which $4 million was due at year-end
      15. The company did not issue shares of common stocks or repurchase out- standing shares in 2010
      16. Direct labor expenses equaled 11.25 percent of 2010 sales
      17. Repayment of long-term debt is $4 million per year
      18. Inventories rose from $28 million at the end of 2009 to $32 million at the end of 2010
      19. In 2010, one of the company’s warehouses was enlarged at a cost of $14 million, which was partly financed with a $6 million long-term loan
      20. In 2010, dividends were $9,200,000
      21. Accounts payable at the end of 2010 equaled two months of purchases
      22. Equity capital at the end of 2009 was $81 million
      23. At the end of 2009, the company had enough cash to pay a quarter of its accounts payable; at the end of 2010, to pay 30 percent
      24. The company paid in advance $10,800,000 of taxes on December 15, 2010
      25. The company borrowed $3 million short-term at the end of 2009. A year later, it borrowed $5 million short-term
      26. The company’s prepaid expenses were $1,500,000 (prepaid rent and in- surance premium) in 2009, and $2,200,000 a year later 
  7. Ambex Inc. expects sales to increase to $36 million next year, from $27 million
    this year. Its current assets are $9 million, accounts payable is $2.7 million, fixed assets are $9 million, long-term debt is $3.6 million, owners’ equity is $11 mil- lion, and earnings after tax-to-sales ratio is 5 percent. Current assets and accounts payable can be assumed to increase in the same proportion as sales. Other current liabilities are expected to stay at the same level. Net fixed assets will increase by $1 million, and the firm plans to pay $800,000 as dividends.
    1. What are Ambex’s total financing needs for next year?
    2. How much money would Ambex have to borrow to finance its needs? 


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Answer: Time value of money and Financial statements
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Added: 12 December 2018, 18:35
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