Section 1


  1. 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. Complete the following table and calculate the net present value for the project costs.


Cash Flows PV 0 1 2 3 4


b. What is the projects Equivalent Annual Cost?


c. If the contract requires you to make 25,000 cases, what is the minimum amount you would bid/case?


  1. 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 – Show Your Work


  1. 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
  1. 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?  
  1. 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?
  1. 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?
  1. 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? 
  1. 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


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)  
Profitability Index?  


Section 4

a. Based on the following projections complete both the cash flow tables. Use 2 decimal places for all values.

Cash Collections & Disbursements ($’000s)
  Q1 Q2 Q3 Q4
Cash Collections        
Beginning A/R        
Cash Collections        
Ending A/R        
Cash Disbursements        
Beginning A/P        
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. Based on both tables above, what can you say about this projects viability? What plans might the company have to make?

  1. 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        



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