Final Examination Financial Management 2018
Final Examination Financial Management 2018
Final Examination Financial Management 2018
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Your Uncle Otto has struck it rich by investing in racehorses and desires to share some of his
newfound wealth with you. Assume that you must choose from among the following three
options:
Required:
A. Why is it inappropriate to compare $400,000 (no. 1) vs. $200,000 (no. 2) vs. $90,000 (no. 3)
and conclude that no. 1 is the best option? Explain.
B. What should you do to determine which option is the best? What does this process do?
C. If Uncle Otto agreed to revise option no. 1 so that you could receive $200,000 in 10 years
and the remaining $200,000 in another 10 years, would you likely prefer the revision or the
option as originally stated? Why?
D. What is an annuity? Do any of the options involve an annuity?
a. The cash flows do not occur at the same points in time, and such an analysis disregards the time
value of money. Dollars received in earlier years are worth more than dollars received in the
future
b.The cash flows should be discounted, and the option with the highest present value should be
selected. Such a process integrates the time value of money into the decision process
c. The revision should be preferred. Both options involve the same total dollars; however, because
significance inflows occur sooner with the revision, this option would have a higher present
value
d.An annuity is a series of uniform cash inflows or outflows over a period of years. Option no. 2
involves an annuity
Pullman carries a part that is popular in the manufacture of automatic sprayers. Demand for this part
is 4,000 units per year; order costs amount to $30 per order, and holding costs total $1.50 per unit.
Pullman currently places four orders per year with its suppliers.
Required:
A. Compute Pullman's economic order quantity.
B. Compute total annual inventory costs if Pullman follows the EOQ policy.
C. How much will the company save by adopting the EOQ model?
D. Briefly explain the philosophical difference between the EOQ model and the just-in-time
model. Which of the two models will likely result in lower holding costs for the firm? Why?
You Cee Maine is the managing director of XYZ Ltd. a small, family-owned company which
manufactures cutlery. His company belongs to a trade association which publishes a monthly
magazine. The latest issue of the magazine contains a very brief article based on the analysis of the
accounting statements published by the 40 companies which manufacture this type of product. The
article contains the following table:
XYZ Ltd.
Income Statement
for the year ended 31 October
(in thousands)
XYZ Ltd
Balance Sheets
as of 31 October
(in thousands)
A. Calculate each of the ratios listed in the magazine article for this year for XYZ, and comment
briefly on XYZ Ltd’s performance in comparison to the industrial averages.
B. Explain why it could be misleading to compare XYZ Ltd ratios with those taken from the
article.
The Airways Company is planning a project that is expected to last for six years and generate
annual net cash inflows of $75,000. The project will require the purchase of a $280,000 machine,
which is expected to have a salvage value of $10,000 at the end of the six-year period. In addition to
annual operating costs, the machine will require a $50,000 overhaul at the end of the fourth year. The
company presently has a 12% minimum desired rate of return.
Required:
A. What criticism(s) would you make of the accountant's evaluation?
B. Use the net-present-value method and determine whether the project should be accepted.
C. Based on your answer in requirement "B," is the internal rate of return greater or less than
12%? Explain.
Problem 6
The following terms are used to describe various economic characteristics of costs:
Does a project that generates a positive internal rate of return also have a positive net present
value? Explain.