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Capital Budgeting2

# Capital Budgeting2 - If the cost of capital for both of...

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Old Exam Questions - Capital Budgeting Page 9 of 55 Pages If the cost of capital for both of these projects is 10%, then what is the IRR for the project that has the highest NPV? A. 18.48% B. 23.51% C. 24.83% D. 28.23% E. 31.92% YOU ARE GIVEN THE FOLLOWING INFORMATION FOR PROBLEMS 4 - 6: Year Project A 0 - 500.00 1 180.00 2 170.00 3 160.00 4 150.00 4. Assume that the appropriate cost of capital (risk-adjusted discount rate) for Project A is 10 percent. What is the Net Present Values (NPV) for Project A? 5. Assume that the appropriate cost of capital for Project A is 10 percent. What is the Modified Internal Rates of Return for Project A? 6. What is the net present value of Project A if you assume infinite replication and use the Equivalent Annual Annuity approach to determine NPV? 7. Your company is thinking about taking on an investment project that will require an initial outlay of \$2,000,000 at time period zero. You believe that this project will

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Old Exam Questions - Capital Budgeting Page 10 of 55 Pages produce expected after-tax cash flows of \$480,000 each year for 6 years (Years 1-6). Given a cost of capital for this project of 8 percent, you can calculate that the expected NPV for this project is \$218,982.24 and its IRR is 11.53 percent. Assume now that the firm has the option of delaying the start of this project for 1 year. If they delay the project its cost at Year 1 will increase to \$2,250,000. The firm will also have better information about what the cash flows will actually be in Years 2-7 (still a 6-year project). Specifically, there is a 50 percent probability that the cash flow will be \$280,000, and a 50 percent chance that the cash flow would be \$680,000. Ignoring option pricing, what is the incremental NPV that will arise, as of time period zero, if the firm delays implementation of this project for 1 year? A. \$194,702.10 B. \$201.343.45 C. \$187,294.38 D. \$218,327.71 E. \$209,845.27
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