Chapter 10 1 If the Net-Present-Value of the cash flows from an investment is greater

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UNIVERSITY AT ALBANY

Rockefeller College of Public Affairs and Policy

PAD-646: Financial Management

Midterm Examination

Spring 2007

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

5) The points for each question are indicated in parentheses next to the question.

6) Look through the exam before you begin.

Good Luck

SOLUTIONS

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(6 points) 1. Select from the following to answer questions A to C:

i. Zero-Based

ii. Formula

iii. Cash

iv. Operating

v. Capital

(2 points) 3. A master budget includes all of the following elements except:

(10 points) 5. The fixed costs of running a fund-raising gala for the Albany Symphony are

$10,000 and the variable costs are $75 per attendee. The facility where the event is

being held can accommodate 500 people. Answer the following question about the

event:

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(4) a. If City Opera charged $275 per ticket, how many people would have to attend the

gala for the organization to break even on the event?

(4) b. Assuming 500 people attend the event, how much does the organization have to

charge each attendee to earn $100,000?

(2) c. If the variable costs of running the gala increased from $75 per person to $100 per

person, the break-even quantity would:

(circle the correct answer)

(18 points) 6. Answer the following questions about the time value of money.

(2) a. You have $100 today and invest it at 5% interest. At the end of five years, the

future value of that investment will always be:

(circle the correct answer)

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(2) d. If the Net-Present-Value of the cash flows from an investment is greater than zero

and you base the decision solely on financial considerations, you should

______________ the investment? (circle the correct answer)

(4) e. If City Opera Endowment purchased a Zero-Coupon bond with a principal value

of $100,000 and 15 years left to maturity, assuming annual compounding, how much

would the Endowment have to pay for the bond today if current interest rates are 6%

per annum? You may round your answer to the nearest penny.

(6) f. The New York State Pension System wants to sell a twenty-year original maturity

General Motors’ bond that it purchased in 1997. The bond pays interest twice each

year. The par value of the bond is $100,000,000. The coupon rate is 7.5%. If the

current market interest rate is 6.8% and there are exactly 10 years left until maturity,

how much will the pension plan be paid for the bond?

(10 points) 7. The Old School is trying to decide whether they should purchase or lease a new

high-speed photocopier machine. It will cost the school $12,000 to purchase the

copier and $800 each year to maintain the machine over the course of its six year

useful life. A dealer has offered to lease the school the same copier for $4,000 per

year for four years and to include the maintenance in the lease. The school’s cost of

capital is 12%. Which alternative should the Old School choose and why?

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(10 points) 8. The Metro Ambulance Center (MAC) operates a 911-response center for

Rensselaer County. Under its contract with the county, MAC earns $200 per

ambulance run and pays its own cost for fuel and maintenance out of those proceeds.

All of the ambulance drivers and attendants are volunteers.

MAC’s actual revenue and expenses for the fourth quarter of fiscal year 2006 and

budgeted revenue and expenses for the first three months of fiscal year 2007 are

shown in the table below. The County pays MAC three months after it is billed and

MAC pays its suppliers one month after it uses resources. In addition, on the first day

of fiscal year 2005, MAC must pay its bank $25,000. MAC expects to start the year

with $15,000 in cash.

Prepare a properly-formatted cash-budget for the first quarter of fiscal year 2007 for

MAC. Be sure to include the following:

a. The amount MYC expects to collect from the County during the first quarter

of Fiscal Year (FY) 2007.

b. The amount MYC expects to pay its suppliers during the first quarter of fiscal

year 2007.

c. MAC’s expected cash balance at the end of the first quarter of fiscal year

2007.

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FY 2004

Month 10

FY 2004

Month 11

FY 2004

Month 12

FY 2005

Month1

FY 2005

Month 2

FY 2005

Month 3

Revenue

$150,000 $200,000 $175,000 $175,000 $225,000 $300,000

Expenses

$115,000 $180,000 $170,000 $150,000 $200,000 $260,000

Gain/(Loss)

$35,000 $20,000 $5,000 $25,000 $25,000 $40,000

(15 points) 9. The Berne-Knox-Westerlo Consolidated School District (BNW) expected to have

2,700 aggregate degree days during the school year. Degree-days occur whenever the

outside temperature goes low enough to require the school district to heat their

facilities. Historically, the district has used 160 gallons of fuel oil for each degree

day. The budget for fiscal year 2005-06 was based on an average price of $1.25 per

gallon of heating oil. By the end of the fiscal year, there had been 2,450 degree days

and the district had used 404,250 gallons of oil. The actual average cost per gallon of

heating oil was $1.47. Calculate the following variances and indicate whether they

were favorable or unfavorable.

a. BNW’s total fuel-expense variance for the fiscal year

b. the portion of the fuel-oil expense-variance that was due to volume

c. the portion of the fuel-oil expense-variance that was due to quantity

d. the portion of the fuel-oil expense-variance that was due to cost

SOLUTION

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(25 points) 10. Albany County provides a county-wide van service for senior citizens. The

County receives a $100,000 grant each year from a consortium of local organizations

in support of the van service. The County expects to spend $2,500 each year to pay

for copying and the supplies needed to operate the service. Insurance will cost the

County $1,750 per year for each of the two vans that it operates.

The County employs a supervisor to run the van service. There are also six part-time

coordinators that organize the routing of the vans and provide outreach to the senior

community. Each coordinator works an average of 17 hours per week for 50 weeks

in the year.

Salary and Wage Schedule (including benefits)

Supervisor $36,000 per year

Coordinator $10 per hour

All drivers are volunteers. The costs associated with carrying each passenger are

$0.35 per mile. The average ride for each passenger is 5 miles. Seniors are asked to

pay $0.75 for each ride, but only 80% of the riders are able to afford the donation.

Prepare an operating budget for the upcoming year, assuming 5,000 seniors use the

van service during the year. In the past, there have been fluctuations in ridership so

the County would also like to see what would happen should there be a 10% increase

or decrease in the number of rides.

SOLUTION

Revenue 10% Decrease 5000 10% Increase

Grant $100,000 $100,000 $100,000

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