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Q2 - A - Key new 2

The document is a quiz for a finance course that includes a short answer question about the optimal time to abandon a luxury taxi business fleet of Audi Q7 cars based on NPV calculations. It also contains multiple-choice questions regarding real options in project NPV analysis and subjective risk factors in investment timing. A bonus question asks about the concept of post-audit and its usefulness in improving forecasts and operations.

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7 views

Q2 - A - Key new 2

The document is a quiz for a finance course that includes a short answer question about the optimal time to abandon a luxury taxi business fleet of Audi Q7 cars based on NPV calculations. It also contains multiple-choice questions regarding real options in project NPV analysis and subjective risk factors in investment timing. A bonus question asks about the concept of post-audit and its usefulness in improving forecasts and operations.

Uploaded by

Fatmah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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FIN 327 – Fall 2018

Quiz #2
Dr. Saad Alnahedh

Version A

Student Name: KEY Student Number:

Short Answer: 2 points


You recently started a luxury taxi business where you will only be using the Audi Q7 for
your fleet. Each car costs $70,000, and each car is expected to generate after-tax cash flows,
including depreciation, of $20,000 per year. The car has a 3-year expected life. The expected
year-end abandonment values (salvage value after tax) are given below. The company’s
WACC is 10%.
Year Annual After-Tax Cash Flow Abandonment Value
0 ($70,000) -
1 $20,000 $60,000
2 $20,000 $50,000
3 $20,000 $20,000

Should you operate these cars until the end of their 3-year physical life? If not, what is the
optimal time for you to stop and sell the fleet?

Abandon at 1st year: NPV= $2,727


Abandon at 2nd year: NPV= $6,033
Abandon at 3rd year: NPV= $-5,236
 Choose to abandon at 2nd year

Multiple Choice (Choose the best answer): 1 point each


1. In general, when real options are introduced into project NPV analysis, they can:
a) Minimize risk and increase the cost of capital.
b) Increase risk and Increase the cost of capital.
c) Minimize risk and minimize the cost of capital.
d) Increase risk and minimize the cost of capital.
e) It depends, we need more information.
2. Which of the following is a subjective risk factor when performing a project investment timing option.
a) Post Audit.
b) Flexibility Options.
c) Change in demand.
d) Tax Rates.
e) Salvage Value.

BONUS: 1 point
What is post-audit? And how/why is it useful?
Comparing actual results versus those forecasted for the project and explaining any possible differences.
It improves forecasts and operations.

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