Reference no: EM132587138

Question - XY Enterprise is considering a new project. The project will require RM325,000 for new fixed assets, and RM195,000 for additional investment in current assets. The project has a 5-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 25 percent of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of RM554,000 and costs of RM430,000. The tax rate is 35 percent and the required rate of return is 15 percent.

1. What is the amount of the terminal cash flow at the end of this project?

a. RM255,009.50

b. RM232,917.25

c. RM247,812.50

d. RM223,438.50

2. Which one of the following statements concerning financial leverage is correct?

a. A firm employing leverage will always have a higher earnings per share than a firm which does not employ leverage

b. If a firm employs financial leverage, the shareholders will be exposed to greater risk.

c. Financial leverage is always beneficial to a firm when the interest rate on the debt is less than 10 percent.

d. The benefits of leverage are unaffected by changes in a firm's earnings before interest and taxes.

3. Which of the following cash flows is the relevant cash flows associated with the purchase of a new production machine to replace the old machine?

a. Annual interest payment of RM1,500 on outstanding loan acquired to purchase the new machine

b. An additional training costs you have incurred to train the employees on the sophistication of the new machine.

c. An additional floor space to accommodate the new production machine, which is currently being leased to another company for RM10,000 per year

d. A professional fee of RM30,000 paid to outside consultants hired to do feasibility study on the need to purchase the new machine.