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? A. $26.79 B. $27.83 C. $25.24 D. $28.51 E. $29.37 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? A. 10.21% B. 11.16% C. 10.53% D. 10.81% E. 11.44% 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? A. $87.25 B. $80.12 C. $84.51 D. $76.94 E. $91.86 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 8. The cash flows associated with a project can be represented by the following decision tree (conditional probabilities are in parentheses): Year 0 Year 1 Year 2 Year 3 $ 0 (.5) $100 (.5) $200 (.5) $200 (.5) $200 (.5) $300 (.5) $400 (.5) -$400 $400 (.5) $500 (.5) $600 (.5) $600 (.5) $600 (.5) $700 (.5) $800 (.5) What is the expected NPV for this project if the appropriate cost of capital is 10 percent?
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Capital Budgeting2 - If the cost of capital for both of...

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