1011quiz2_2002

# 1011quiz2_2002 - 1.011 Project Evaluation Quiz#2 1(20...

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1.011 Project Evaluation March 22, 2002 Quiz #2 1. (20 points) Suppose that you are evaluating various projects, each of which has an expected net cash flow of \$100,000 per year for 20 years. Circle the discount rate that you would recommend in each of the following situations and state why that is the best: a. You work for International Paper Company, which owns vast forests in northern New England. The \$100,000 will come from sales of paper products from a new mill that you are planning to construct. IP has built several similar mills in throughout the region that have provided returns on investment of 10% to 20%. You are trying to decide whether to build another mill: 5 % 10% 15% 20% 25% b. You are a banker, and a very large, financially stable company is willing to pay \$100,000 a year for 20 years toward principal and interest on a loan. The prime rate for corporate customers is currently 7%. What rate do you offer this very attractive customer?: 5.5% 6.5% 7.5% 8.5% c. Your friend has a great scheme for a web site and wants you to cash in your trust fund in order to finance his new business. He promises to pay you \$100,000 per year for 20 years. What discount rate do you use in deciding the upper limit of what you might invest? 5% 10% 15%

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1011quiz2_2002 - 1.011 Project Evaluation Quiz#2 1(20...

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