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Unformatted text preview: FNAN 301 Test bank problems – relevant cash flows and NPV analysis 1. Blizzard Inc. is evaluating a 1year project that would involve an initial investment of $1,000,000 and an expected cash flow of $1,210,000 in 1 year. The project has a cost of capital of 10 percent. If Blizzard used $1,000,000 in cash that was in its bank account, the net present value (NPV) of the project would be $100,000. Blizzard has no cash in its bank account and would need to borrow $1,000,000. If Blizzard borrows the money, the interest rate on the loan would be 15 percent. Blizzard would receive $1,000,000 at the start of the project and would pay $1,150,000 one year later. Which of the following assertions is true? A. The NPV of the project assuming Blizzard borrows the money would be greater than $100,000 B. The NPV of the project assuming Blizzard borrows the money would be less than $100,000 C. The NPV of the project assuming Blizzard borrows the money would be equal to $100,000 D. It is not clear whether the NPV of the project assuming Blizzard borrows the money would be greater than, less than, or equal to $100,000 2. Blizzard Inc. is evaluating a 1year project that would involve an initial investment of $1,000,000 and an expected cash flow of $1,210,000 in 1 year. The project has a cost of capital of 10 percent. If Blizzard used $1,000,000 in cash that was in its bank account, the net present value (NPV) of the project would be $100,000. Blizzard has no cash in its bank account and would need to issue $1,000,000 worth of shares of common stock to raise $1,000,000. If Blizzard issues stock shares, the expected return on the stock would be 25 percent. Which of the following assertions is true? A. The NPV of the project assuming Blizzard issues stock shares would be greater than $100,000 B. The NPV of the project assuming Blizzard issues stock shares would be less than $100,000 C. The NPV of the project assuming Blizzard issues stock shares would be equal to $100,000 D. It is not clear whether the NPV of the project assuming Blizzard issues stock shares would be greater than, less than, or equal to $100,000 3. The Bagel Bistro Company operates 5 bagel stores, all in Northern Virginia, and is considering the “DC project.” This project would involve opening a 6 th store, which would be in Washington, DC. Without the DC project, each of the 5 stores in Northern Virginia would be allocated annual marketing costs of $900,000. With the DC project, each of the 6 stores that would exist would be allocated annual marketing costs of $800,000. When determining the relevant net income for the DC project, how much in annual marketing costs should Bagel Bistro’s financial managers include in their analysis of the DC project?...
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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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