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Unformatted text preview: 1. An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay premiums of $100 per year at the end of each year for 20 years. Find the internal rate of return to the nearest whole percentage point. a. 9% b. 7% c. 5% d. 3% e. 11% 2. Your company has a cost of capital equal to 10%. If the following projects are mutually exclusive, and you only have the information that is provided, which should you accept? A B C E Payback (years) 1 5 2 5 IRR 18% 20% 20% 12% NPV (Millions) $40 $75 $35 $100 a. A b. B c. C d. B and C e. E 3. Which of the following statements is most correct? a. If a projects internal rate of return (IRR) exceeds the cost of capital, then the projects net present value (NPV) must be positive. b. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV. c. The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the cost of capital. d. Answers a and c are correct. e. None of the answers above is correct. 4. Which of the following are not real options? a. The option to expand production if the product is successful. b. The option to buy additional shares of stock if the stock price goes up. c. The option to expand into a new geographic region. d. The option to abandon a project. e. The option to switch sources of fuel used in an industrial furnace. 5. Nebraska Instruments (NI) is considering a project that has an up-front cost at t = 0 of $1,500,000. The projects subsequent cash flows critically depend on whether its products become the industry standard. There is a 75 percent chance that the products products become the industry standard....
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This note was uploaded on 08/14/2010 for the course BUSINESS 222 taught by Professor Azaa during the Spring '10 term at Abraham Baldwin Agricultural College.
- Spring '10