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ECF5220 Principles of Finance – Final Exam 1/11 Suggested Answers

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ECF5220 Principles of Finance – Final Exam 1/11 Suggested Answers

 ECF5220 Principles of Finance – Final Exam 1/11  Suggested Answers

Note these are brief solutions only. For theory questions a fuller coverage would be required in an exam

 

 

Question 1

 

 

 

 

Tax rate

30%

 

 

 

After-tax RRoR

15%

 

 

 

Year

0

1

2

3

 

(‘000)

(‘000)

(‘000)

(‘000)

Sell old machinery

$850.0

 

 

 

Tax shield on disposal loss

$15.0

 

 

 

Cost of new machinery

-$1,200.0

 

 

 

Investment allowance tax savings

$90.0

 

 

 

After-tax redundancy payment

-$28.0

 

 

 

After-tax cost savings:

 

 

 

 

Labour costs

 

$84.0

$84.0

$84.0

On-costs

 

$16.8

$16.8

$16.8

Depreciation tax savings:

 

 

 

 

Old machinery

 

-$90.0

-$90.0

-$90.0

New machinery

 

$118.8

$162.0

$54.0

Sale of new machinery

 

 

 

$0.0

Tax shield on disposal loss

 

 

 

$25.2

Net Cash Flows

-$273.0

$129.6

$172.8

$90.0

NPV @ 15%

$29.53

 

 

 

IRR

21.72%

 

 

 

 

Decision: The NPV is positive - purchase the new machinery.

 

Assumptions:

 

1)  All cash flows received at the end of the year

2)  Company is profitable and tax paid at the end of the year

3)  After-tax revenues ($560,000) and after-tax factory and labour costs ($112,000) are not incremental cash flows.

Question 2

 

 

(A) Glasswork Ltd.

 

 

Mortgage loan:

 

 

PV = -$1,000,000

n = 15

i = 9%

PMT = $124,058.83

 

 

PMT = -$124,058.83

n =15

i = 8%

PV = $1,061,878.91

 

 

 

After-tax cost = 8.% (1 - 0.3) = 5.6%

Debentures:

 

PMT = -12%x$100/4           i = 2.5%



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