Bennett Griffin and Chula Garza organized Cole Valley Book Store as a corporation; each contributed $70,100 cash to start the business and received 5,600 shares of common stock. The store completed its first year of operations on December 31, current year. On that date, the following financial items for the year were determined: December 31, current year, cash on hand and in the bank, $68,750; December 31, current year, amounts due from customers from sales of books, $42,000; unused portion of store and office equipment, $73,500; December 31, current year, amounts owed to publishers for books purchased, $13,600; one-year note payable to a local bank for $3,900. No dividends were declared or paid to the stockholders during the year.

What was the amount of net income for the year? (Hint: Use the retained earnings equation [Beginning Retained Earnings + Net Income − Dividends = Ending Retained Earnings] to solve for net income.)

Nicole’s Getaway Spa (NGS) purchased a hydrotherapy tub system to add to the wellness programs at NGS. The machine was purchased at the beginning of the year at a cost of $9,500. The estimated useful life was five years and the residual value was $500. Assume that the estimated productive life of the machine is 10,000 hours. Expected annual production was year 1, 2,200 hours; year 2, 2,300 hours; year 3, 2,400 hours; year 4, 2,100 hours; and year 5, 1,000 hours.

Assume NGS sold the hydrotherapy tub system for $2,850 at the end of year 3.The following amounts were forecast for year 3: Sales Revenues $43,000; Cost of Goods Sold $34,000; Other Operating Expenses $4,300; and Interest Expense $900. Create an income statement for year 3 for each of the different depreciation methods, ending at Income before Income Tax Expense. (Don't forget to include a loss or gain on disposal for each method.).

1. One year ago, you bought a put option on 200,000 euros with an expiration date of one year. You paid a premium on the put option of $.05 per unit. The exercise price was $1.32. Assume that one year ago, the spot rate of the euro was $1.29, the one-year forward rate exhibited a discount of 3%, and the one-year futures price was the same as the one-year forward rate. From one year ago to today, the euro depreciated against the dollar by 4%. Today the put option will be exercised (if it is feasible for the buyer to do so).

a. Determine the total dollar amount of your profit or loss from your position in the put option.

b. Now assume that instead of taking a position in the put option one year ago, you sold a futures contract on 200,000 euros with a settlement date of one year. Determine the total dollar amount of your profit or loss.

A machine costs $10,000 and has a discount rate of 7.5%. Calculate the profitability index of the project if the net present value of cash inflows is $4,600 in year 1, $3,400 in year 2, $2,600 in year 3, and $1,500 in year 4 when the machine is sold to salvage dealer.
A. 2.38
B. 2.21
C. 2.04
D. 1.21
E. 1.04

. A project costs $6,000 and has a discount rate of 7.5%. Calculate the profitability index of the project that has cash flows of $5,200 in year 1 and $4,500 in year 2.
A. 1.62
B. 1.14
C. 1.80
D. 1.46
E. 1.14

A project costs $15,350 and has a discount rate of 8.5%. Calculate the profitability index of the project that has cash flows of $3,500 in years 1 and 2, $4,000 in year 3, $3,200 in year 4 and $2,800 in year 5.
A. 0.88
B. 0.75
C. 0.24
D. 0.12
E. 1.28

The president of Lowell Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price is $60,000, and it falls into the MACRS 3-year class (33% in year 1, 45% in year 2, 15% in year 3, and 7% in year 4). Purchase of the computer would require an increase in net operating working capital of $2,000. The computer would increase the firm's before-tax revenues by $20,000 per year but would also increase operating costs by $5,000 per year. The computer is expected to be used for 4 years and then be sold for $25,000. The firm's marginal tax rate is 40 percent, and the project's cost of capital is 14 percent. What is the total value of the terminal year non-operating cash flows (after-tax salvage value + working capital recovered) at the end of Year 4?

Rotorua Products, Ltd., of New Zealand markets agricultural products for the burgeoning Asian consumer market. The company’s current assets, current liabilities, and sales over the last five years (Year 5 is the most recent year) are as follows:

Required:

1. Express all of the asset, liability, and sales data in trend percentages. Use Year 1 as the base year. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

A machine can be purchased for $252,000 and used for five years, yielding the following net incomes. In projecting net incomes, double-declining depreciation is applied, using a five-year life and a zero salvage value.

Compute the machine’s payback period (ignore taxes). (Round payback period answer to 3 decimal places.)

Computation of Annual Depreciation Expense

Year       Beginning Book Value    Annual Depr. (40% of Book Value)            Accumulated Depreciation at Year-End                Ending Book Value          

1                                                                             

2                                                             

3                                                             

4                                                             

5                                                             

Annual Cash Flows

Year       Net income         Depreciation      Net Cash Flow   Cumulative Cash Flow   

0              $(252,000)                                           $(252,000)          

1              13,000                                  

2              28,000                                  

3              62,000                                  

4              48,000                                  

5              101,000                                                

Payback period =                              years

Sunset Bakers needs to purchase an oven. They are considering two alternatives:

Alternative 1: A Conventional Oven will cost $12,000 and can be expected to last 8 years, and will have a salvage value of $1,000 at the end of year 8. The cost of electricity used will be $2,500 per year. Maintenance cost will be $200 per year. In year 4 the heating element will need to be replaced at a cost of $850.

Alternative 2: A High efficiency Oven will cost $14,500 and can be expected to last 8 years, and will have a salvage value of $2,000 at the end of year 8. The cost of electricity used will be $2,000 per year. Maintenance cost is will be $250 per year. In year 4 the heating element will need to be replaced at a cost of $850. In year 5 the fan motor will need to be replaced at a cost of $500. Assume the services provided by the ovens are identical; assume an interest rate of 10%.

Compare the ANNUAL EQUIVALENT costs of the 2 alternatives and make a recommendation for selection.

Assume we start with a total government debt of $0. What happens at the end of each year? Hint if I borrow $10 million then my debt is equal to $10 million.

In year 1 the government spends $405 million and collects $356 million in taxes. Public saving in year 1 is equal to $__million and the government debt is equal to $ __ million.

In year 2 the government spends $390 million and collects $360 million in taxes. Public saving in year 2 is equal to $ __million and the government debt is now equal to $ __million.

In year 3 the government spends $360 million and collects $358 million in taxes. Public saving in year 3 is equal to $ __ million and the government debt is now equal to $ __ million.

In year 4 the government spends $405 million and collects $425 million in taxes. Public saving in year 4 is equal to $__ million and the government debt is now equal to $ __million.

One year ago, you bought a put option on 500,000 euros with an expiration date of one year. You paid a premium on the put option of $.03 per unit. The exercise price was $1.30. Assume that one year ago, the spot rate of the euro was $1.29, the one-year forward rate exhibited a discount of 3%, and the one-year futures price was the same as the one-year forward rate. From one year ago to today, the euro depreciated against the dollar by 2 percent. Today the put option will be exercised (if it is feasible for the buyer to do so).

a. Determine the total dollar amount of your profit or loss from your position in the put option.

b.Now assume that instead of taking a position in the put option one year ago, you sold a futures contract on 500,000 euros with a settlement date of one year. Determine the total dollar amount of your profit or loss.