Exam 3: Opportunity Cost of Capital and Capital Budgeting

Samuel Survivor is planning to save for retirement 35 years from now.He expects to live 25 years beyond that,and would like an annual retirement income of $38,500 after tax of 30%.How much must Samuel Survivor save each year to accumulate the lump sum needed to fund retirement,at an expected annual return of 11.2%?

Gorgeous George is evaluating a five-year investment in an oil-change franchise,which costs $120,000 paid up front.Projected net operating cash flows are $60,000 per year.If Gorgeous George buys shares instead of the franchise,he expects an annual return of 12%.Which is true?

A lump sum of $5,000 is invested at 10% per year for five years.The company's cost of capital is 8%.Which is true?

Furious Fred expects cash flows from an investment as follows: Yr 1 $3,000,Yr 2 $5,000,Yr 3 $8,000 Using an opportunity cost of capital of 5.6%,the present value is:

Cash of $12,000 will be received in year 6.Assuming an opportunity cost of capital of 7.2%,which of the following is true?

Harriet Harvester (HH)plans to buy a haymaker.It costs $180,000 and is expected to last for five years.She presently hires 10 workers at $3,000 per month for each of the six harvesting months each year.The equipment would eliminate the need for six workers.HH uses straight-line depreciation and projects a salvage value of $23,000.Her tax rate is 21% and opportunity cost of funds is 8.0%.Which is true?

Which is true?

Peter Pontificator is proposing to purchase a paddle machine,which will cost $5 million,last ten years and have a salvage value of $80,000.Given a tax rate of 21%,and a cost of capital of 8%: What is the present value of the tax shield if straight-line depreciation is used?

Mirtha Mudflat has sufficient funds to choose one of two investments.The same amount will be invested in either case.Choice one: ten year $100,000 5% Treasury bonds issued to yield 4% per annum,the market rate.Choice two: a risky bond of the same amount that has expected cash flows of $9,000 per year for the same period.Assume Mirtha purchased the risky bond for $105,000 and the market rate is 6%.Which is false?

Peter Pontificator is proposing to purchase a paddle machine,which will cost $1 million,last eight years and have a salvage value of 20%.Given a tax rate of 35%,and a cost of capital of 6%: If double-declining balance depreciation is used,and PP switches to straight-line depreciation in year 6,the present value of the depreciation tax shield is:

Mirtha Mudflat has sufficient funds to choose one of two investments.The same amount will be invested in either case.Choice one: ten year $100,000 5% Treasury bonds issued to yield 4% per annum,the market rate.Choice two: a risky bond of the same amount that has expected cash flows of $9,000 per year for the same period. What is the issue price of the Treasury bond?

Mirtha Mudflat has sufficient funds to choose one of two investments.The same amount will be invested in either case.Choice one: ten year $100,000 5% Treasury bonds issued to yield 4% per annum,the market rate.Choice two: a risky bond of the same amount that has expected cash flows of $9,000 per year for the same period. What is the risk premium that makes Mirtha indifferent between the two investments?

Samuel Survivor is planning to save for retirement 35 years from now.He expects to live 25 years beyond that,and would like an annual retirement income of $38,500 after tax of 30%.What is the lump sum needed to fund retirement,at an expected annual return of 11.2%?