NEW YORK UNIVERSITY
ROBERT F. WAGNER GRADUATE SCHOOL OF PUBLIC SERVICE
CORE-GP.1021: Financial Management
Midterm Examination
Professors Smith and West
Fall 2011
SOLUTIONS
Name: ______________________________________________________
Student ID: __________________________________________________
Please circle the lecture you normally attend:
Tuesday Tuesday Wednesday
12:30 pm 6:45 pm 12:30 pm
(Smith) (West) (Smith)
Instructions:
1) Please turn off your cell phone.
2) Print your initials at the top of each page.
3) You may use one double-sided page of notes. Put away all other written materials.
4) You may use, but not share, a calculator. Be sure to clear your calculator before each
calculation.
5) Write clearly, show your work, and circle your final answer. Only one answer will be
accepted for each problem.
6) When you are done, hand in your exam and your page of notes.
Good luck!
===============================================================
This section for graders:
Initials: _____________
Section 1: Multiple Choice (17 points)
1. (2 points) If Urban University allocates indirect costs to schools and departments based
on classroom square footage, this is an example of Activity Based Costing (ABC).
2. (2 points) For time value of money calculations (circle all that apply):
3. (1 point) Cash budgets have a beginning balance, while operating budgets do not.
4. (2 points) Under accrual accounting, the following are expenses on the operating budget
(circle all that apply):
5. (2 points) The current value (price) of a term bond is calculated using that bond’s coupon
rate to solve for present value.
Initials: _____________
6. (2 points) A favorable revenue variance (assuming at least two products) may indicate
(circle all that apply):
7. (1 point) A flexible budget shows profitability under different assumptions of production
volume.
8. (2 points) Operating budgets may differ from cash budgets due to (circle one):
9. (1 point) The annualized cost method is used to evaluate alternatives when their useful
lives are different.
10. (2 points) A vaccination program has a fixed cost of $1,000 and there are no step-fixed
costs. If the variable cost is $1.00 and the variable revenue is $1.50 (circle one):
Initials: _____________
3
Section 2: Analytical Problems (43 points)
SHOW YOUR WORK AND CIRCLE YOUR ANSWERS
1. (8 points) A not-for-profit childcare center is planning to expand its services by offering
an after–school program. The childcare center operates 40 weeks out of the year, with the
after-school program running 4 hours a day, 5 days a week. The program will have a
capacity of 20 students per week and plans to operate at capacity through the year. The
program will be staffed by two teachers who will each be paid $25 per hour. The
program will pay $15,000 a year in rent and utilities, spread evenly throughout the year,
and will also pay $200 per week it is open for childcare insurance. The program will
purchase furniture and media equipment at a cost of $10,000. The furniture and
equipment are expected to last 5 years and to have no salvage value. In order to purchase
the furniture and equipment, the program will take out a bank loan of $8,000 on the first
day of operations. The bank loan has an annual interest rate of 4%; no principal
repayment will be due during the first year. Supplies will cost $5 per student per week
and snacks will cost $3 per student per week. What fee should the center charge per child
per week in order to break even? Use break-even analysis to solve this problem; other
approaches will not receive any credit.
2. (5 points total) The parks department is currently evaluating proposals from different
food vendors to award a contract for a new food kiosk in the town’s main park. The net
cash flows associated with each vendor’s proposal are listed below:
3. (7 points) You are the investment manager for a local government. Exactly 4 years ago
you invested some of the government’s money in the bond market by purchasing a 20-
year semiannual term bond with a face value of $10,000. At the time of purchase, the
bond had a coupon rate of 4.5%. The current market rate for similar bonds is 3.9%, so
you decide to sell the bond and immediately invest the money in a new investment
account that offers a 5.1% interest rate, compounded monthly. How much will the
government’s investment account be worth 10 years from today?
5
4. (6 points total) A regional not-for-profit organization builds homes for low-income
families in need of safe and affordable housing. The organization must hire contractors
to oversee the construction of these homes. During the past year, the organization spent
more than expected on contractors and the manager is trying to figure out what factors
led to this increase in expenses. The organization had expected to build 50 homes and
hire 10 contractors for a total of 2,000 hours; however, the organization was actually able
to build 55 homes during the past year, and they hired 12 contractors who worked 2,090
hours in total. The contractors were expected to be paid $35 per hour but were actually
paid $37 per hour. Use the space below to perform a variance analysis and then respond
to the following questions:
a. (2 points) What is the price variance? Make sure to label the variance as
favorable or unfavorable.
b. (2 points) What variance contributed most to the total variance? What percentage
of the total variance is attributable to this variance?
c. (2 points) Without using financial jargon, explain why the quantity variance in
this scenario is either favorable or unfavorable.
– – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –
(use the space below to perform the variance analysis)
Volume x Quantity x Price = Total
Original Budget 50 40 $35 $70,000
Volume Variance = ($7,000) U
Flex Budget 55 40 $35 $77,000
Quantity Variance = $3,850 F
VQA Budget 55 38 $35 $73,150
Price Variance = ($4,180) U
Actual Budget 55 38 $37 $77,330
Total Variance = ($7,330) U
Initials: _____________
6
5. (8 points) A not-for profit organization has three programs: a soup kitchen, a thrift shop,
and a homeless shelter. These three programs share an administrative office and space in
the same building. The director of the organization is trying to estimate the total annual
cost of running the organization’s soup kitchen. The salaries for the soup kitchen’s
employees total $85,000 per year. The soup kitchen uses $500 in supplies each month
and records an annual depreciation expense of $12,000 for its kitchen equipment. The
cost of salaries for the administrative office, including the director’s salary, is $190,000
per year. The administrative staff uses $300 in supplies each month and records an
annual depreciation expense of $8,000 for its office equipment. The administrative office
estimates that it spent 2700 staff hours on the soup kitchen, 1500 staff hours on the thrift
shop, and 1800 staff hours on the homeless shelter. The entire cost of the administrative
office is allocated to the three programs using staff hours as the cost base. The
organization’s lease payments are $4,000 per month and utilities cost $1,250 per month.
Additionally, maintenance costs on the space are equal to $48,000 for the year. The soup
kitchen uses 5,700 square feet of the organization’s total 15,000 square feet of space.
The entire cost of space and maintenance is allocated to the three programs using square
footage as the cost base. Calculate the soup kitchen’s total annual cost.
Initials: _____________
7
6. (9 points total) A community farm needs to purchase a new tractor for the upcoming year.
The manager is trying to make a decision between three different tractor options. Tractor
A is a 6-year lease with monthly payments of $9,000 due at the beginning of each month.
This amount includes $100 a month for maintenance. Tractor B is the purchase of a new
tractor for $575,000. The tractor’s estimated useful lifetime is 6 years and it would
require yearly maintenance payments of $1,000 throughout its lifetime. The maintenance
payments are due at the beginning of each year. Tractor C also has an estimated useful
lifetime of 6 years. This tractor would require an initial down payment of $200,000 and
then monthly payments of $5,500 due at the end of each month. These payments include
a small monthly maintenance fee. The community farm uses a discount rate of 3.5%.
a) (8 points) Calculate the net present cost of Tractors A, B, and C and enter your
answers below.
Initials: _____________
8
Section 3: Budget Preparation (40 points)
QwikShare is a not-for-profit organization that provides environmentally friendly transportation
options at QwikStops in suburban areas. It rents bicycles and low-emissions automobiles to
customers by the hour or by the day at a rate of $5 per hour or $65 per day for bicycle rentals, and
$15 per hour or $175 per day for automobile rentals. Its fiscal year is January 1–December 31.
QwikShare’s full-time staff includes a Chief Executive Officer, a Chief Financial Officer, an
Operations Manager, two software developers, two customer service agents, and two mechanics.
Full-time staff salaries will total $750,000 in FY 2012 (up from $700,000 in FY 2011), and health
benefit expenses will be 30% of full-time payroll (up from 27.5% in FY 2011). (Full-time staff
salaries and benefits should be one line-item.) The organization also employs 10 part-time staff
members who will earn an average of $12.50 per hour in wages and work an average of 20 hours
per week. The average wage and workweek for part-timers was the same in FY 2011.
QwikShare’s depreciation expense in FY 2011, for all property and equipment, was $110,000 (the
organization uses the straight-line method of depreciation). The organization retained all of the
property and equipment it owned in FY 2011 and, at the beginning of FY 2012, it acquired 5 new
bicycles and 3 new automobiles (as stated above, it now has a total of 25 bicycles and 15
automobiles). Each automobile was purchased for $25,000, has a useful life of 5 years, and can be
sold for $5,000 at the end of its useful life. Each bicycle cost $1,750, has a salvage value of $250,
and has a useful life of 3 years. The organization began FY 2012 with $55,000 in cash, and
partially financed these purchases with a 3-year, $60,000 loan (the remainder was paid for with
preexisting cash). The loan has an annual interest rate of 12% with equal annual loan repayments
beginning on December 31. Interest payments are also made on the last day of the fiscal year.
All of QwikShare’s expenses are paid on-time except full-time salaries and benefits, which are
paid with a one-month lag, part-time wages, which are paid with a two-week lag, and supplies,
which are paid with a one-quarter lag. The organization’s revenues are received as they are earned,
but federal grant payments will be received with a two-quarter lag.
Hint: As always, assume there are 12 months per year and 52 weeks per year.
Do not convert months to weeks or vice versa.
Initials: _____________
9
Initials: _____________
10
Prepare an annual operating budget for QwikShare for FY 2012. (18 points)
Revenues & Support
Bicycle rentals 107,500$ [2]
Automobile rentals 945,000 [2]
Federal grant 368,750 [2]
Total 1,421,250$
QwikShare
Annual Operating Budget
Fiscal Year 2012
Initials: _____________
11
Prepare a semiannual cash budget showing the first half of the year, the second half of the year, and
the annual total in three side-by-side columns for QwikShare for FY 2012. (22 points)
First Half Second Half Annual
Beginning Balance 55,000$ (30,725)$ 55,000$
[1]
Receipts
Bicycle rentals 53,750 53,750 107,500
[1]
Automobile rentals 472,500 472,500 945,000
[1]
Federal grant – 184,375 184,375
[2]
Total 526,250$ 710,625$ 1,236,875$
Available Cash 581,250$ 679,900$ 1,291,875$
[1]
QwikShare
Semiannual Cash Budget
Fiscal Year 2012
[2]
[1]
[1]
[1]
[2]
[1]
[1]
[1]
[1]
[2]