# solution

1. XYZ is evaluating the Reno project. The project would require an initial investment of $149,000 that would be depreciated to $15,400 over 6 years using straight-line depreciation. The project is expected to have operating cash flows of $51,300 per year forever. XYZ expects the project to have an after-tax terminal value of $348,000 in 3 years. The tax rate is 30%. What is (X+Y)/Z if X is the project’s relevant expected cash flow in year 3, Y is the project’s relevant expected cash flow in year 5, and Z is the project’s relevant expected cash flow in year 2?

A number equal to or greater than 7.28 but less than 9.39 |
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A number less than 7.28 or a rate greater than 15.69 |
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A number equal to or greater than 11.92 but less than 13.79 |
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A number equal to or greater than 13.79 but less than 15.69 |

2. XYZ operates indoor tracks. The firm is evaluating the Santa Fe project, which would involve opening a new indoor track in Santa Fe. During year 1, XYZ would have total revenue of $171,000 and total costs of $76,000 if it pursues the Santa Fe project, and the firm would have total revenue of $155,000 and total costs of $72,100 if it does not pursue the Santa Fe project. Depreciation taken by the firm would be $75,200 if the firm pursues the project and $35,700 if the firm does not pursue the project. The tax rate is 45.50%. What is the relevant operating cash flow (OCF) for year 1 of the Santa Fe project that XYZ should use in its NPV analysis of the Santa Fe project?

$30,933.00 (plus or minus $1) |
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$43,400.00 (plus or minus $1) |
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$24,567.00 (plus or minus $1) |
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$18,833.00 (plus or minus $1) |
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None of the above is within $1 of the correct answer |

3. What is the expected after-tax cash flow from selling a piece of equipment if XYZ purchases the equipment today for $89,800.00, the tax rate is 23.00%, the equipment is sold in 2 years for $16,600.00, and MACRS depreciation is used where the depreciation rates in years 1, 2, 3, and 4 are 40.00%, 35.00%, 20.00%, and 5.00%, respectively?

$23,796 (plus or minus $10) |
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$12,782 (plus or minus $10) |
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$17,946 (plus or minus $10) |
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$17,286 (plus or minus $10) |
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None of the above is within $10 of the correct answe |

4. XYZ is considering a project that would last for 3 years and have a cost of capital of 19.10 percent. The relevant level of net working capital for the project is expected to be $2,179.50 immediately (at year 0); $4,610.00 in 1 year; $15,200.00 in 2 years; and $0.00 in 3 years. Relevant expected revenue, costs, depreciation, and cash flows from capital spending in years 0, 1, 2, and 3 are presented in the following table. The tax rate is 49.00 percent. What is the net present value of this project? .

Year 0 | Year 1 | Year 2 | Year 3 | |
---|---|---|---|---|

Revenue | $ 0.00 | $13,500.00 | $13,700.00 | $10,700.00 |

Costs | $ 0.00 | $3,960.00 | $3,580.00 | $2,700.00 |

Depreciation | $ 0.00 | $2,450.00 | $2,250.00 | $2,700.00 |

Cash flows from capital spending | $-7,550.00 | $1,170.00 | $ 640.00 | $3,700.00 |

$6091.98 (plus or minus $10) |
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$10018.32 (plus or minus $10) |
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$850.49 (plus or minus $10) |
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$11469.45 (plus or minus $10) |
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None of the above is within $10 of the correct answer |