Practice questions

These are questions from previous years' exams and midterms. They do not reflect the questions I will ask, but should be suitable for practice.

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A small aerospace company is evaluating two alternatives: the purchase of an automatically fed machine or a manually fed machine. All projects in the company are expected to return at least 10% (before tax).

The auto-fed machine has an initial cost of $23,000, an estimated salvage value of $4000 and a predicted life of ten years. The expected production rate is 8 tons per hour, and the operating costs are $12 per hour. The annual maintenance cost is expected to be $3500.

The manually fed machine has a purchase price of $8000, 0 salvage value, a 5-year life and a production rate 6 tons per hour. The operating costs are $24 per hour, and the annual maintenance cost is $1500.

Some additional information:

#. Both machines produce product using the same feed material and energy, and they both produce products with the same value. #. There is no delay between ordering the machine and placing it in operation. #. We assume that the production (ton/year) will be the same every year #. The project has a ten-year life.

How many tons per year must be produced in order to justify the higher purchase cost of the auto-fed machine? You may analyze this problem using a before tax approach (without considering taxes or depreciation).

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Generally, straight-line depreciation is more favorable to the company than double declining balance. Answer this question and concisely explain your answer.

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What are typical critical values for Payback Time (PT), Return on Original Investment (ROI), and Discounted Cash Flow (DCF). The critical values define the boundary between an attractive and unattractive project.

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For each of the investments given in the following, determine whether they can be depreciated completely in the year of there first use (expensed), depreciated over many years (as defined by tax laws) or not depreciated. All have been acquired for a profit-making company. State your answer with a short discussion for each part.

#. A personal computer #. Land for a plant #. Laboratory glassware with a life of 9 months #. Liquid inventory needed to start up and operate a chemical plant

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Give four quantitative methods for evaluating financial attractiveness. For each, provide the following.

1. A brief explanation/definition 2. One advantage 3. One disadvantage 4. Explain briefly how each measure is used to decide whether to invest or not. You must give a typical threshold value.

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Your company is establishing a new office in Calgary. You seem to be spending a lot of money. One of your co-workers says, “Don’t worry, we can depreciate the costs.”

1. Describe the key characteristics of costs that can be depreciated. 2. Explain how you determine the rate with which a specific cost is depreciated.

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