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Unformatted text preview: FNAN 301, Spring 2010, quiz 4, solutions Conceptual and quantitative: maximum amount of value created 1. 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 A. $42.7 million (plus or minus $0.2 million) B. $13.0 million (plus or minus $0.2 million) C. $31.6 million (plus or minus $0.2 million) D. $52.7 million (plus or minus $0.2 million) E. None of the above is within $0.2 million of the correct answer or the correct answer cannot be determined without knowing the cost of capital for projects A, B, C, and D 1. 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 3.0 2.2 2.9 3.8 14.6 23.4 B 6.04.5 1.2 ∞ 15.3 22.2 C 5.0 31.6 1.7 3.7 6.57.6 D 4.0 17.3 4.7 6.2 12.1 15.3 Expected cash flows (number of years from today) in millions of dollars Project Cost of capital 1 2 3 4 E 10.0%7.0 4.4 3.3 2.2 1.1 A. $53.2 million (plus or minus $0.2 million) B. $19.0 million (plus or minus $0.2 million) C. $39.9 million (plus or minus $0.2 million) D. $67.2 million (plus or minus $0.2 million) E. None of the above is within $0.2 million of the correct answer or the correct answer cannot be determined without knowing the cost of capital for projects A, B, C, and D 1 FNAN 301, Spring 2010, quiz 4, solutions 1. 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?...
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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

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