TUTORIAL PRACTICE OF PAST EXAM QUESTIONS WEEK 12

QUESTION ONE
Alicias Clothing Goods just borrowed $235,000 to build a new shop. The mortgage calls for
equal annual payments at the end of each month. The loan is for 30 years at an annual interest
rate (annual percentage rate) of 7.25%. Answer the following questions. Show all calculations
clearly.

i. How much is the monthly loan repayment?
ii. How much of the first monthly payment will be interest payment?
iii. How much of the first monthly payment will be used to reduce the principal?
iv. What is the loan balance after the first monthly payment is made?
v. Compare the portions of the first monthly payment that are used for paying interest and
for paying off the principal.

QUESTION TWO
A small business has imported some dairy products from New Zealand and has an outstanding
accounts payable to be paid in New Zealand dollars. The owner-manager obtained from research
that the Fijian dollar is forecasted to appreciate against New Zealand dollars in the near future.

i. To efficiently manage a companys working capital and accounts payable, determine if
the owner-manager should adopt a lead or lag strategy to pay for the companys accounts
payable due in 30 days in New Zealand dollars. Fijian dollar is expected to appreciate
against New Zealand dollars. Briefly explain your answer.

ii. Demonstrate the lead and lag payments with a simple example which involves a payable
amount of NZ$10,000, the current exchange rate being NZ$0.68 per Fijian dollar and a
forecast of 10% appreciation of Fijian dollar against New Zealand dollar in 30 days.
Show all calculations and currency values clearly.

iii. Compare the Fijian dollars required under lead versus lag payments. How much Fijian
dollars can be saved under your suggested strategy in (i)? Show all calculations and
currency values clearly.

iv. What other information will you need to obtain in order to consider a money market
hedge? Discuss the procedure in conducting a money market hedge. Draw a timeline to
demonstrate your point.

v. What other information will you need to obtain in order to consider a forward market
hedge? Discuss the procedure in conducting a forward market hedge.
QUESTION THREE
Your small business faces the following investment projects:


CASH FLOWS (DOLLARS)
Project Year: 0 1 2 3 4
A -1,000 0 +1,000 +2,000 +3,000
B -5,000 +1,000 +1,000 +3,000 0
C -5,000 +1,000 +1,000 +3,000 +5,000


These projects are mutually exclusive, so you will invest in only one of the projects. The
opportunity cost of capital is 10%. You will conduct a capital budgeting analysis using the
Payback as well as the Net Present Value (NPV) methods.


a. What is the payback period for each of the projects? Show all work clearly.


Project A: ___________



Project B: ___________



Project C: ___________



b. If you use a payback rule with a cut-off period of three years, which one of these projects
would you accept? Why?


c. If you use an NPV rule, which one of these projects would you accept? Show all work
clearly. Why?


d. Which of the two methods would you use to make your investment decision? Why?

e. Which project should your company invest in? Briefly state the reasoning that has led to
your final investment decision.


QUESTION FOUR
Your small business is using an old machine that is expected to produce a cash inflow of $5,000
in each year for the next three years before it fails. You can replace it now with a new machine
that costs $20,000 but is much more efficient and will provide a cash inflow of $10,000 a year
for the next four years. The relevant discount rate is 15%. Should you replace your equipment
now? Show all work clearly to support your decision. Circle your final answers. [Round only
the final answer.]