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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.