Humber College ACCT 5507 - Jan 2020 Finance Final Exam

This document presents a comprehensive solution to the ACCT 5507 final exam, focusing on financial concepts and calculations. The exam covers four sections, including Net Present Value (NPV), Equivalent Annual Cost (EAC), and cash flow analysis. The assignment also explores topics like discounted payback, profitability index, and internal rate of return (IRR). Furthermore, the solution addresses short-term financing plans and cash budget projections. This exam assesses the student's ability to apply financial principles to real-world scenarios, demonstrating their understanding of investment decisions and financial planning. The solution provides detailed calculations and explanations to help students grasp the core concepts of finance.

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 $30,000
 There is no depreciation consideration for this equipment
a. (6 marks) Complete the following table and calculate the net present value for the project costs.
Section 1 A
Cash Flows PV 0 1 2 3 4
Initial Investment -350,000.00$ 30,000.00$
Investment in W.C -50,000.00$
Pre-Tax Operating Income 30,000.00$ 30,000.00$ 30,000.00$ 30,000.00$
Less Tax 9,000.00$ 9,000.00$ 9,000.00$ 18,000.00$
After Tax Operating Income 21,000.00$ 21,000.00$ 21,000.00$ 42,000.00$
Recovery of Working Capital 50,000.00$
Free Cash Flows -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
Discounted Cash Flow -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 -284938.8703
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 in W.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-Tax Operating Income 158,414$ 158,414$ 158,414$ 158,414$
Less Tax 47,524.25$ 47,524.25$ 47,524.25$ 56,524.25$
After Tax Operating Income 110,889.92$ 110,889.92$ 110,889.92$ 131,889.92$
Recovery of Working Capital 50,000.00$
Free Cash Flows -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
Discounted Cash Flow -400,000.00$ 100,809.02$ 91,644.56$ 83,313.24$ 124,233.26$
NPV 0$
The minimum amount that should be bid per case 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
Flow
$2,000 -$2,000 $2,000 -$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?
5. (3 marks) Humber College recently purchased some fixed assets that belong in a 20% CCA class. The
assets cost $550,000. What is the amount of the depreciation expense in the third year?

6. (5 marks) Would you be willing to pay $1000 today in exchange for $10,000 in 20 years? What would
you consider in answering yes or no to above?
Section 3 - (25 Marks)
Andrew David is thinking of buying some new equipment for his family business. The equipment costs
$300,000 and last for 5 years. It is expected that the new equipment will generate after-tax cash flows of
$50,000 in the 1st year and increase by $20,000 each year until it reaches $130,000 in year 5. After the
project they will sell the equipment for $50,000, making the total cash flow in year 5 $180,000. Complete the
following table. The companies required return is 15%.
Calculate Project’s Accept or Reject Project?
Why?
Payback? (Benchmark <4years)
Discounted Payback? (Benchmark <4years)
NPV?

Profitability Index?
IRR?
Section 4 - (25 Marks)
1. (20 Marks)
a. (16 Marks) Based on the following projections complete both the cash flow tables. Use 2 decimal
places for all values.
Q1 Q2 Q3 Q4
Estimated Sales ('000s) 100$ 125$ 150$ 175$
Capital Investment Requirements ('000s) 25 30
A/R @ the beginning of year 25$
A/P @ the beginning of year 20$
Cash 20
A/R Collection Period (days) 30
A/P Payment Period (days) 45
Purchases ( % of Next Quarters Sales) 40%
Next Years Q1 Sales Projection ('000s) 225$
Operating Expenses (% of sales) 30%
Interest & Dividends per quarter ('000s) 10
Minimum Required Cash Balance ('000s) 25
Given Info
Opening Balances @ Jan 1st ('000s)
Sales & Payment Terms
Cash Collections & Disbursements ($'000s)
Q1 Q2 Q3 Q4
Cash Collections
Beginning A/R

Sales
Cash Collections
Ending A/R
Cash Disbursements
Beginning A/P
Purchases
Payment A/P
Ending A/P
Total Cash Outflows
Beginning A/P
Operating Expenses
Capital Investments
Interest & dividends
Total cash disbursements
Cash Budget ('000s)
Q1 Q2 Q3 Q4
Total Cash Collections
Total Cash Disbursements
Net Cash Inflow
Beginning cash balance
Ending cash balance
Minimum cash balance
Cumulative surplus (deficit)
b. (4 Marks) Based on both tables above, what can you say about this projects viability? What plans
might the company have to make?
2. (5 Marks) Complete the following Short Term Financing Plan. Interest on new short-term borrowing is 2%
per quarter. Note: This is a separate question to above.
Short-Term Financing Plan ($‘000s)
Q1 Q2 Q3 Q4

Beginning cash balance 100.00
Net cash inflow 25.00 -50.00 -25.00 125.00
Ending Cash Balance (before borrowing)
Interest on short-term borrowing
New short-term borrowing
Short-term borrowing repaid
Ending cash balance (after borrowing)
Minimum cash balance 100.00 100.00 100.00 100.00
Cumulative surplus (deficit)
Beginning short-term debt
Change in short-term debt
Ending short-term debt