Fin 431 Practice Problem

Topics: Depreciation, Investment, Net present value Pages: 9 (2528 words) Published: February 24, 2013

Note: Problems 1,3,5,7 are from Chapter 4 in the textbook.

1. A group of businesspeople from Gwynne Island are considering filing an application with the state banking commission to charter a new bank. Due to a lack of current banking facilities within a 10-mile radius of the community, the organizing group estimates that the initial banking facility would cost about $2.7 million to build along with another $500,000 in other organizing expenses and would last for about 20 years. Total revenues are projected to be $410,000 the first year, while total operating expenses are projected to reach $180,000 in year 1. Revenues are expected to increase 5 percent annually after the first year, while expenses will grow an estimated 3 percent annually after year 1. If the organizers require a minimum of a 10 percent annual rate of return on their investment of capital in the proposed new bank, are they likely to proceed with their charter application given the above estimates?

2. Do problem 1 under the following assumptions: a tax rate of 30% and straight line depreciation of physical assets.

3. Hampton Savings Bank is considering the establishment of a new branch office at the corner of Queen Street and Victoria Boulevard. The savings association’s economics department projects annual operating revenues of $1.6 million from fee income generated by service sales and annual branch operating expenses of $795,000. The cost of procuring the property is $1.75 million and branch construction will total an estimated $2.65 million; the facility is expected to last 16 years. If the savings bank has a minimum acceptable rate of return on its invested capital of 12 percent, will Hampton savings likely proceed with this branch office project?

4. Do problem 2 under the assumptions of a tax rate of 34%, straight line depreciation and a salvage value of $439,000. For this problem, assume value of land has increased by 3% a year and can be sold for that amount. The physical assets have a salvage value of $439,000.

5. First National Bank of Leesville is considering installing three ATMs in its Westside branch. The new machines are expected to cost $37,000 apiece. Installation costs will amount to about $12,000 per machine. Each machine has a projected useful life of 10 years. Due to rapid growth in the Westside district, these three machines are expected to handle 75,000 cash transactions per year. On average, each cash transaction is expected to save 50 cents in teller expenses. If First National has a 12 percent cost of capital, should the bank proceed with this investment project?

6. 1. Do problem 5 under the assumptions of SLD, no salvage value and a tax rate of 29% 2. Do problem 5 under the assumptions of SLD, no salvage value, tax rate of 29% and a growth rate in transactions of 4.67%.

7. First State Security Bank is planning to set up its own web page to advertise its location and services on the INTERNET and to offer customers selected service options, such as paying recurring household bills, verification of account balances, and dispensing deposit account and loan application forms. What factors should First State take into account as it plans its own web page and INTERNET service menu? How might the bank effectively differentiate itself from other banks currently present on the INTERNET? How might the bank be able to involve its own customers in designing its web site and pricing its INTERNET service package?

8. First Bank of Evanston has been told by its experts in capital budgeting that the NPV for opening an additional branch is $740,000. The decision, now, is how to finance the new branch. The bank can buy land and build a branch within a year or they can lease a nearby building, which the owner will renovate to...
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