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Evaluating a proposed investment project

Question 1. The CEO of a highly profitable company, noticing that the excess cash not needed to fund business operations has accumulated in a company bank account that pays no interest, contemplates declaring and paying a cash dividend to common shareholders before year's end. The likely effect of paying the dividend would be to

A. have no effect on ROI because dividends are paid out of retained earnings.

B. decrease ROI because the investment in the business would decrease while income would be unchanged.

C. increase ROI because all shareholders prefer dividends to capital gains.

D. increase ROI because the investment in the business would decrease while income would be unchanged.

E. cannot be determined from the information given because paying a dividend decreases profit and investment.

(For question illustrated below)

Initial Investment ----- $280,000

Annual cash recepits ----- $196,000

Life of the project ----- 6 years

Annual cash expenses ----- $78,000

Salvage Value ----- $28,000

Question 2: Shufflebarger Inc. has provided the above data to be used in evaluating a proposed investment project.

The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 16%.

When computing the net present value of the project, what is the annual amount of the depreciation tax shield? In other words, by how much does the depreciation deduction reduce taxes each year in which the depreciation deduction is taken?

A. $16,800

B. $39,200

C. $14,000

D. $32,667

Question 3: Shufflebarger Inc. has provided the above data to be used in evaluating a proposed investment project.

The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 16%.

When computing the net present value of the project, what is the after-tax cash flow from the salvage value in the final year?

A. $28,000

B. $8,400

C. $19,600

D. $0

Question 4: You have just turned 60 and an endowment insurance policy has paid you a lump sum of $200,000. If you invest the sum at 5%, how much money can you withdraw from your account in equal amounts each year so that at the end of 15 years (age 75) there will be nothing left?

A. $17,342

B. $9,268

C. $19,268

D. $15,415

E. $2,075,932

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