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Date Posted: 09:36:36 10/09/00 Mon
Author: Charles Hodges
Subject: Re: Solutions to Sample Exam
In reply to: Sean Wilson 's message, "Solutions to Sample Exam" on 08:27:47 10/09/00 Mon

Thanks for posting your answers.

Unless otherwise noted I agree with your answers. Also, remember that the sample exam did not cover accounting topics. Accounting topics will account for about 20% of the points in exam 1.

> 5.
see page 28.

> 6. False, should say to adjust cash flows to "now".
True, while we tradtionally set the value at time=0, we can actually use any common point in time. E.g., we sometime look for the highest Future Value instead of Present Value.

> 8. Set of obligations to the stakeholders
I would like a little bit more.

> 9. Diversification, 2-sided, Self-Interest, . .
Note, the discussion contained 7 of the points, listing the axioms was worth about 1 point.

> 13. False
True, the reinvestment rate assumption is the key difference thus causing possible different answers when project scale or scope differ.

> 2. Rev 4.3
> Depr .215
> Net 4.085
> Tax 1.2255
> Net 2.8595
> +Dep .215
> Oper 3.0745

There is a mistake here. Net Income is already after-tax thus we simply add Net income of 4.3 to the deprecation of 2.35 (47/20) to get operating cash flows of 6.65.
Thus the cash flows are -47, 6.65 for 19, and 6.65 + 2.0 (sell cyclo) - .6 (tax on cyclo profit) for year 20.
With this you can then calculate the IRR.

The rest appear to be correct.

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