Chapter 11 Review Session

Chapter 11 Review Session - Chapter 11 Review Session 2007...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
© 2007 Robert H. Smith School of Business University of Maryland “Chapter 11 Review Session”
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
© 2007 Robert H. Smith School of Business University of Maryland Chapter 11 Review Session 1. Projects A and B each have an initial cost of $5,000, followed by a series of positive cash inflows. Project A has total undiscounted cash inflows of $12,000, while B has total undiscounted inflows of $10,000. Further, at a discount rate of 10%, the two projects have identical NPVs. Which project’s NPV will be more sensitive to changes in the discount rate? Note that projects with steeper NPV profiles are more sensitive to discount rate changes. Project A Project B Both projects are equally sensitive to change in the discount rate since their NPVs are equal at all costs of capital. The solution cannot be determined unless the timing of the cash flows is known.
Background image of page 2
© 2007 Robert H. Smith School of Business University of Maryland Chapter 11 Review Session 1. A is correct. If we were to begin graphing NPV profiles for each of these projects, we would know two of the points for each project. The Y intercepts for projects A and B would be $7,000 and $5,000, respectively and the crossover would be 10%. So, Project A’s NPV profile would have the steeper slope and would be more sensitive to changes in the discount rate.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
© 2007 Robert H. Smith School of Business University of Maryland Chapter 11 Review Session 2. Which of the following is true? a. If a project has an IRR greater than zero, then taking on the project will increase the value of the company’s common stock because the project will make a positive contribution to net income. b.
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/22/2011 for the course BMGT 340 taught by Professor White during the Spring '08 term at Maryland.

Page1 / 13

Chapter 11 Review Session - Chapter 11 Review Session 2007...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online