Download Problem 1: An individual estimates that the maintenance cost of a

IKT 356
Sample Final Questions
Problem 1(20 pts): Answer the following questions:
Part 1:
Compute the inflation rate per year if the market interest rate is 20% compounded quarterly
and the effective inflation-free interest rate is 5% per month. (3 pts)
Part 2:
The following table shows the cash flows for two mutually exclusive projects with equal lives
of 1 year. Determine the range of MARR that will indicate the selection of Project A
assuming that do-nothing is also an option. (6 pts)
Project A
Project B
0
-500
-1000
1
800
1400
Part 3: A person takes a loan of $100,000 from a bank at a yearly interest rate of 10% and
pays back this loan in equal annual installments over 40 years.
a) Find the total interest paid to the bank. (2 pts)
b) Find the interest payment and principal payment for the 20th payment. (3 pts)
Problem 2(30 pts): Assume that a company purchased a commercial building for $780,000 in
2005. The appraisal is divided into $250,000 for the land, $390,000 for the building and
$140,000 for the properties inside the building. Assume that the properties inside the building
will be depreciated according to double-declining balance method over their lives of 10 years
and the building will be depreciated according to the straight line method over its life of 30
years. Suppose that the company sold the whole building (including the propoerties and the
land) in 2008 for $700,000.
a) Calculate the depreciation amounts for the land, building and the properties for years
between 2005 and 2008.
b) What is the book value of the whole building at the time of sale? What is the amount of the
gain or loss?
c) Suppose that, besides the sale of the building, from other operations of the company, the
company has the following data for year 2008:
Sales revenue: $1,000,000
Material Costs: 500,000
Labor expenses: 200,000
Other Depreciation Expenses: 100,000
(Assets of the company other than the whole building)
Find the taxable income for the company and the tax paid in year 2008.
(In your calculations, don’t forget the values about the commercial building that you
found in part (a).)
d) What is the marginal and effective(average) tax rate for year 2008?
e) What is the net cash flow after tax for year 2008
Problem 3 (25 pts): Suppose that a company is considering to buy an asset which has a life
of 7-years at a cost of 200,000 TL and it will be depreciated according to 150% declining
balance method. The company takes a loan of 150,000 TL from the bank to finance a part of
this investment. The loan is going to be paid back in equal annual installments at 20% interest
rate per year over three years. The company plans to use this asset for 3 years and sell it in
year 3 at a price of 50,000 TL. The company expects to sell 10,000 units per year at a price of
9 TL and the unit cost to produce one unit of the product is 4 TL. In addition the company
has a fixed cost of 20,000 TL per year. The company needs 10,000 TL as working capital in
today’s dollars to continue its operations. Assuming that the marginal tax rate is 30%, the
market interest rate is 20% and the inflation rate is 10%,
Fill in the following table and construct the net cash flow structure. (Assume that all values in
the question are given in today’s dollars but you need to fill in the table below in actual
dollars.)
Year 0
Income Statement
Revenues
Expenses
Depreciation
Debt Interest
Taxable Income
Income Taxes
Net Income
Cash Flow Statement
Operating Activities
Net Income
Depreciation
Investment Activities
Investment
Salvage
Gains Tax
Working Capital
Financing Activities
Borrowed Funds
Principal Repayment
Net Cash Flow
Year 1
Year 2
Year 3
Problem 4(25 pts): The following table shows the relevant data for two mutually exclusive
alternative machines. Assume that if you buy one of the machines you will use it until the end
of its service life and then replace it with a new one. Both machines will be depreciated using
straight line depreciation method over their service lives. The costs given in the table are
actual dollars unless stated otherwise.
Machine A
Machine B
First cost
50,000
80,000
Life
7 years
11 years
Terminal book value (and
salvage value) at the end of
their service lives
Annual revenue for year n
6,000
14,000
15,000(1.1)n-1
20,000
Annual expense for year n
2,000
5,000+500(n-1)
The marginal income tax rate is 40%, market interest rate is 20% compounded quarterly
and the inflation rate is 10%.
a) Determine which machine should be chosen assuming an infinite analysis period.
b) Determine which machine should be chosen assuming that the machines are required for
only 7 years. Assume that machine B will be sold at a price of $20,000 (actual dollars) at the
end of year 7.