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Unformatted text preview: FNAN 301 Test bank problems capital budgeting criteria 1. What is the NPV of project A if it has the following expected cash flows and the cost of capital for project A is 11%? Years from today 1 2 3 4 Expected cash flow (in $)50,000 40,000 30,00010,000 20,000 2. Which assertion is true if a project has the following expected cash flows and the cost of capital for the project is 3.7%? Years from today 1 2 3 Expected cash flow (in $)9,000 4,0007,000 6,500 A. The NPV of the project is $5,823.34 (plus or minus $10) B. The NPV of the project is $5,500.00 (plus or minus $10) C. The NPV of the project is $5,303.76 (plus or minus $10) D. The NPV of the project is not within $10 of any of the numbers cited in answers A, B, and C E. The NPV of the project can not be computed because the cash flows are not conventional (Fall 2009, quiz 3, question 6) (Summer C 2010, quiz 3, question 3) 3. The managers of Green Lizard Incorporated have evaluated 5 potential projects. Based on the information presented in the table, what is the maximum amount of value that the managers can create for the firm if they can choose to undertake none, one, some, or all of the projects? Project Initial investment (in $ millions) Net present value (in $ millions) Payback period (in years) Discounted payback period (in years) Internal rate of return (in %) Average accounting return (in %) A 1.0 0.5 2.5 3.3 12.2 22.2 B 2.0 32.5 5.4 6.8 13.4 13.8 C 3.0 15.5 2.4 3.7 15.6 25.3 D 4.02.5 4.2 18.5 32.3 E 5.0 6.5 14.9 19.4 7.3 3.4 (Fall 2009, quiz 3, question 9) 4. The managers of Holey Donut Incorporated are evaluating 5 potential projects (A, B, C, D, and E). Based on the information presented in the 2 tables, what is the maximum amount of value that the managers can create for the firm if they can choose to undertake none, one, some, or all of the 5 potential projects? Project Initial investment (in $ millions) Net present value (in $ millions) Payback period (in years) Discounted payback period (in years) Internal rate of return (in %) Average accounting return (in %) A 1.0 0.8 3.3 3.8 17.43.5 B 3.0 26.4 2.7 5.7 11.4 16.2 C 4.0 12.2 1.2 3.7 21.2 37.2 D 6.01.5 2.2 8.3 19.1 Expected cash flows (number of years from today) in millions of dollars Project Cost of capital 1 2 3 4 E 10.0%5.0 1.1 2.2 3.3 4.4 (Spring 2010, quiz 4, question 1) (Fall 2010, quiz 3, question 7) 5. Gonzaga Corporation is currently looking at an opportunity with conventional cash flows that would last for 3 years and have a discount rate of 10 percent. The project would require an initial investment of $50,000, produce expected cash flows of $18,000 in the first year, and produce expected cash flows of $26,000 in the second year....
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This note was uploaded on 02/03/2011 for the course FINANCE 301 taught by Professor Murray during the Spring '09 term at George Mason.
 Spring '09
 MURRAY
 Cost Of Capital

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