A New Injection-Moulding Machine for Mobile Phones

ACCT 5507 – Jan ’20 Final Exam Name:
This test is worth 25% of your final grade. It includes four Sections. You have
from 11am-3:30pm.
Section 1 (15 Marks)
Section 2 (20 Marks)
Section 3 (25 Marks)
Section 4 (25 Marks)
Section 1 - (15 Marks)
1. (12 Marks) You are considering bidding on a project to make new cases for
mobile phones. The project details include:
 Upfront costs of $350,000 for a new injection-moulding machine.
 4 year life
 $30,000 in yearly pre-tax operating costs
 Initial investment of $50,000 in working capital
 Your company has a tax rate of 30%
 Your company's required rate of return is 10%
 At the end of 4 years you can sell the equipment for $30,000
 There is no depreciation consideration for this equipment
a. (6 marks) Complete the following table and calculate the net present
value for the project costs.
Section 1A
Cash Flows PV 0 1 2 3 4
Initial Investment -350,000.00$ 30,000.00$
Investment inW.C -50,000.00$
Pre-TaxOperatingIncome 30,000.00$ 30,000.00$ 30,000.00$ 30,000.00$
LessTax 9,000.00$ 9,000.00$ 9,000.00$ 18,000.00$
After TaxOperatingIncome 21,000.00$ 21,000.00$ 21,000.00$ 42,000.00$
Recoveryof WorkingCapital 50,000.00$
Free CashFlows -400,000.00$ 21,000.00$ 21,000.00$ 21,000.00$ 92,000.00$
Discount Factor 1.00 0.91 0.83 0.75 0.68
DiscountedCashFlow -400,000.00$ 19,090.91$ 17,355.37$ 15,777.61$ 62,837.24$
NPV -284,938.87$
Year
b. (3 marks)What is the projects Equivalent Annual Cost?
Section 1 B
Equivalent Annual
Yield
r(NPV)/(1-
(1+R)^-N)
R 0.1
NPV
-
284938.87
03
N 4

EAA
$ -
89,889.89
c. (3 marks) If the contract requires you to make 25,000 cases, what is the
minimum amount you would bid/case?
Section 1 C
Cash Flows PV 0 1 2 3 4
Initial Investment -350,000.00$ 30,000.00$
Investment inW.C -50,000.00$
No of Cases 25000.00 25000.00 25000.00 25000.00
Sale Price Per Case 6.34$ 6.34$ 6.34$ 6.34$
Pre-TaxOperatingIncome 158,414$ 158,414$ 158,414$ 158,414$
LessTax 47,524.25$ 47,524.25$ 47,524.25$ 56,524.25$
After TaxOperatingIncome 110,889.92$ 110,889.92$ 110,889.92$ 131,889.92$
Recoveryof WorkingCapital 50,000.00$
Free CashFlows -400,000.00$ 110,889.92$ 110,889.92$ 110,889.92$ 181,889.92$
Discount Factor 1.00 0.91 0.83 0.75 0.68
DiscountedCashFlow -400,000.00$ 100,809.02$ 91,644.56$ 83,313.24$ 124,233.26$
NPV 0$
The minimumamount that shouldbe bidpercase if $6.34
Year
2. (3 Marks) BikesAreBetter is now looking at an “Economy Version” of its
top selling bicycle. The new version will not include all the same features
as its top seller and hence will be offered at a lower price. What are some
of the cash flow and market conditions it must consider when evaluating
the project? Explain.
Section 2 - (20 Marks) – Show Your Work

1. (3 marks) What is the present value of the following set of cash flows at an
8% discount rate?
Year 1 2 3 4
Cash
Flo
w
$2,0
0
0
-$2,000 $2,0
0
0
-$2,000
2. (3 marks) Brad earns 7% per year on a past investment of $100,000. He
recently sold his investment for $450,000. How much sooner could Brad
have sold the investment if he only wanted $350,000 for it?
3. (3 marks) Your credit card company quotes you a rate of 22.5%. Interest is
billed monthly. What is the actual rate of interest you are paying?
4. (3 marks) You are able to contribute $50 a week to your retirement plan.
Assume that you work for 20 years and that you earn 5% per year. How
much will you have for retirement?