Week06_TutorialQuest - SCHOOL OF BANKING AND FINANCE FINS1613 BUSINESS FINANCE Semester 2 2011 TUTORIAL QUESTIONS WEEK 6 Capital Budgeting

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Tutorial Questions 1 SCHOOL OF BANKING AND FINANCE FINS1613 BUSINESS FINANCE Semester 2, 2011 TUTORIAL QUESTIONS WEEK 6 –Capital Budgeting Applications I Please note that some answers are exact when rounded to 2 or 3 decimal places because of the use of PV tables rather than calculators. Multiple-choice Questions 1. Project A and Project B are mutually exclusive projects with equal risk. Project A has an internal rate of return of 12%, while Project B has an internal rate of return of 15%. The two projects have the same net present value when the discount rate is 7%. (In other words, the "crossover rate" is 7%.) Assume each project has an initial cash outflow followed by a series of inflows. Which of the following statements is most correct? a. If the discount rate is 10%, each project will have a positive NPV. b. If the discount rate is 6%, Project B has a higher NPV than Project A. c. If the discount rate is 13%, Project B has a higher NPV than Project A. d. Statements a and b are correct. e. Statements a and c are correct. 2. Your company is choosing between the following non-repeatable, equally risky, mutually exclusive projects with the cash flows shown below. Your cost of capital is 10%. How much value will your company sacrifice if it selects the project with the higher IRR? Project
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This note was uploaded on 10/20/2011 for the course COMMERCE 3502 taught by Professor All during the One '11 term at University of New South Wales.

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Week06_TutorialQuest - SCHOOL OF BANKING AND FINANCE FINS1613 BUSINESS FINANCE Semester 2 2011 TUTORIAL QUESTIONS WEEK 6 Capital Budgeting

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