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Unformatted text preview: 1 Final Exam – Solutions Finance 325 December 17, 2010 N a m e : Exam Instructions: • This exam should have 14 pages (including this one) and 11 questions. The point value is given for each problem. The entire exam is worth 100 points. • There is a page at the back of the exam that has information that you will need to solve problems on the test. You may remove this page if it makes it easier for you to reference it during the test. • You may use a calculator and the provided formula sheet on this exam. • You must show your work in order to receive credit for your answers. Partial credit will be given for partially correct answers. • If a question asks “Why/Explain”, you should give an explanation that would convince a skeptic. • You may use the back of a page if you need additional space to write an answer. Suggestions: • Use your time wisely. Move on to another problem if you feel like you’re stuck. • You may ask me questions if you are unclear about a problem. I may be able to clarify the problem for you. GOOD LUCK!! Enjoy your winter break! 2 1. You are in a meeting in which one of your peers is presenting his analysis of two mutuallyexclusive investments. There are no other possible investments at the present time. The information for the investments is below. Investment Today Yr 1 Yr 2 Yr 3 IRR NPV A $10 million $7 million $6 million $10 million 52% $4.792 million B  $8 million $6 million $9 million $4 million 63% $4.790 million He goes on to argue that, since the discount rate for these investments is 24%, the firm should take Investment B because it has the highest rate of return. You raise your hand and tell him that, since these two projects are mutuallyexclusive, IRR should not be used to determine the investment. You argue that NPV should be used instead. His response is as follows: “The NPV of A is slightly higher than B. But this doesn’t take into consideration the fact that A costs $2 million more than B. We can invest $8 million in B at a higher rate of return and invest the remaining $2 million at our...
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 Winter '09
 FREEDMAN

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