Chapter 06 1 If the organizations that owned the properties that were exempt from taxation agreed

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UNIVERSITY AT ALBANY

Rockefeller College of Public Affairs and Policy

PAD-501: Financial Management

Midterm Examination

Fall 2009

Your Name: ______________________________________________

Turn off all cell phones and pagers during the exam

Directions:

1) You may use one page of notes. Place all other materials on the floor.

2) You may use, but not share a calculator. Remember to clear your calculator

4) Show all your work. I can only give you partial credit if you show how you

approached the problem! For the time value of money computations show what

information you used to calculate the answer. Do not just write down the final

answer.

Good Luck

SOLUTIONS

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(7 points) 1. Select from the following to answer questions A to C. Note: some questions may

have multiple answers. (NOTE: Answers may be used more than once.)

i. Zero-Based

ii. Formula

iii. Cash

iv. Operating

v. Capital

vi. Flexible

vii. Performance

(2 points) 2. Give two examples of specific line item expenses that might appear on an operating

budget.

(6 points) 3. The total value of all of the properties in the Village of Westerlo is $200,000,000

and the approved budget is $3,500,000. Properties are assessed at their full value.

Based on historical results, the Village manager expects to be unable to collect

$200,000 in taxes and $10,000,000 worth of Village properties are exempt from

taxation. How much does the Village have to charge per $1,000 of assessed valuation

to raise the needed $3.5 million? Show your calculations.

SOLUTION

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(1 points) 4. If the organizations that owned the properties that were exempt from taxation

agreed to pay Westerlo Village $100,000 in lieu of taxes, the Village tax rate would:

(choose one)

(10 points) 7. Answer the following questions about the time value of money.

(1) a. At any interest rate above zero, the future value of an investment will always be

(4) b. How much would you have at the end of five years if interest on a $100 deposit

was compounded daily at 3.65%? You may round your answer to the nearest penny.

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(4) d. If the UAlbany Foundation purchased a $1,000,000 par-value bond with an 8%

annual coupon-rate paying interest twice each year with exactly five years left to

maturity and the current market interest rate is 6.4%, how much would the UAlbany

Endowment have to pay for that bond? You may round the bond’s value to the

nearest penny.

(8 points) 8. The Albany Youth Center (AYC) has an after-school contract with the city. Under

the contract, MYC earns $3 per day for each child who uses the program. AYC

served the number of children shown below. The city pays one-third of the amount

AYC earns one quarter after the services are delivered, one-third two quarters after

and one- third three quarters after.

a. How much can MYC expect to earn from the city during the fourth quarter?

b. How much can MYC expect to collect from the city during the fourth quarter?

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(3 points) 9. Answer the following questions about break-even analysis:

(1 point) a. In a break-even analysis, an increase in variable cost per unit: (circle the correct

answer)

(2 points) b. If a soup kitchen has marginal revenues of $3.00 per meal delivered, marginal

expenses of $4.00 per meal, $50,000 of annual fixed costs and annual donations

of $150,000, it will (circle the correct answer)

SECTION TWO – PROBLEMS

(25 Points) 10. The Hudson Valley Consolidated Fire System (CFS) provides fire protection

services to a seventy square mile area containing one city and five outlying villages.

CFS is also part of the State’s network of first responders for forest-fires.

CFS gets its funding from three sources. The State gives CFS a flat block grant of

$300,000 per year and pays CFS an extra $13,000 for each forest fire it fights. Each

of the five outlying villages contributes $80,000 per year to CFS’s budget. The City

pays CFS $50,000 for each of the four fire officers who manage CFS’s four

firehouses and $50,000 for each firefighter employed by CFS.

During fiscal year 2010, CFS expects to fight 1,800 fires of the types described in the

table below. As one might expect, the average staffing required to fight each type of

fire varies according to its severity. The average number of firefighter hours required

to fight each type of fire is also shown in the table below.

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SOLUTION

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(10 points) 11. When CFS fights residential and commercial fires, it uses a substance called “fast

water” to improve the flow rate of the water they spray on the buildings. The

department expected to use approximately 2 gallons of fast water per hour of fire

fighting and has budgeted $2.50 per gallon of the material. During the 2009 fiscal

year, CFS expected to use 18,750 hours fighting 1,250 residential and commercial

fires or an average of 15 hours per fire.

By the end of the year, CFS had spent 20,000 hours fighting residential and

commercial fires and had used 42,000 gallons of fast water. CFS’s total fast water

expenditure for the year was $115,000. Calculate the following variances for CFS’s

fast-water usage and indicate whether they were favorable or unfavorable. Be sure to

add up the flexible (partial) variances and check to make sure that sum equals the

total variance.

a. CFS’s total fast-water cost variance for the 2009 fiscal year

b. the portion of the fast-water cost variance that was due to volume

c. the portion of the fast-water cost variance that was due to quantity

d. the portion of the fast-water cost variance that was due to cost

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(8 points) 12. CFS is considering purchasing one of two types of pumper trucks to replace the

ones in its aging fleet. They have narrowed the choice down to one of two trucks –

the Mega-Pumper or the Super-Soaker. The Mega-Pumper costs $125,000 to acquire

and $7,500 each year to maintain and operate for the six years that CFS intends to use

it. If CFS buys the Mega-Pumper, it plans to sell the truck after it has finished using

it. Experience suggests that used fire trucks are difficult to sell. As a result, CFS

expects to sell the truck at the end of the seventh year for $55,000.** Super-Soakers

cost $75,000 to acquire and $15,000 per year to maintain and operate. CFS would use

the Super-Soakers for ten years at which point, they would be worth nothing. If CFS’s

cost of capital is 6%, which truck should they buy based solely on financial

considerations. Support your answer with the appropriate time-value-of-money

calculations

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(8 points) 13. CFS is considering applying for a stimulus funding grant that would allow it to

install solar panels on each of its four fire houses. The roofs on each of the firehouses

are big enough to accommodate 30,000 square feet of panels. Panels cost $8 per

square foot. In addition, CFS will have to pay $8,000 per fire house for batteries and

other equipment costs and $10,000 per fire house for installation. CFS expects the

solar panels on the four buildings to generate a total of $6,000 worth of electricity

each month for the next ten years. In addition, the stimulus program will give CFS

$500,000 toward the cost of buying and installing the solar-power system. Federal

stimulus money will be received at the start of the project. If CFS’s cost of capital is

6%, should CFS install the panels based solely on financial considerations? Support

your answer with the appropriate time-value-of-money calculations.

SOLUTION

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(6 points) 14. CFS runs a fund-raising sports day each year to support the regions youth soccer

program. It costs CFS $500 to rent a facility and $1,500 for promotional materials. In

addition, CFS spends $10 per person for food at the fund raiser. If tickets are $25

each, how many people have to attend the fund raiser for CFS to raise enough to give

$25,000 to the youth-soccer program?