1) Bill purchased a residential building and the land it sits on for $250,000 fo
ID: 1095557 • Letter: 1
Question
1) Bill purchased a residential building and the land it sits on for $250,000 for his business.
The land is worth $50,000 and building $200,000. Bill completed the purchase on 30th May
2009. How much tax depreciation can he take for the year 2009?
a) $4,545
b) $3,633
c) $5,152
d) $3,205
2) If you anticipate an annual inflation rate of 2.5% in the current economy, and can make an
investment in a stock that is expected to appreciate at 11.0% compounded annually. What
would be your inflation-free rate of return for this investment (pick the closest answer)?
a) 8.30%
b) 5.50%
c) 10.45%
d) 5.37%
3) A company purchased a commercial building for $100,000 and sold it 2 years later for
$150,000. They depreciated the building by $5,000 during this time. Their gains tax rate is
34%. What taxes do they owe?
a) $20,000
b) $34,000
c) $18,700
d) $55,000
4) The probability distributions for NPW for two mutually exclusive alternatives are shown in
the table. Assume the NPW random variables are independent.
Project 1 Project 2
x P(NPW1 = x) y P(NPW2 = y)
$1,000 0.3 $500 0.4
$2,000 0.7 $3,000 0.6
a. Project 2 is preferred to project 1 because E[NPW2] > E[NPW1] and Var[NPW2] <
Var[NPW1].
b. Project 2 might be preferred to project 1 because P(NPW2 > NPW1) > 0.5.
c. Both A and B are true.
d. Neither A nor B is true.
Explanation / Answer
2)
inflation free rate = (1+11%)/(1+2.5%) -1
= 8.30%
4)
E(NPW1) = 1000 * 0.3 + 2000 * 0.7 = 1700
E(MPW2) = 500 * 0.4 + 3000 *0.6 = 2000
similarly
Var(NPW2) <V(NPW1)
hence answer is a
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