{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

fin1set05spr09 - CARNEGIE MELLON UNIVERSITY Tepper School...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
CARNEGIE MELLON UNIVERSITY Tepper School of Business INTRO FINANCE – FIN 70-391 Prof. Spencer Martin Problem Set 5: Firms and Wealth Creation A Multiple Choice Warmup Note: sometimes multiple choice questions may have multiple correct answers. Read carefully. 1. Which of the following cash flows should be treated as incremental flows when deciding whether to go ahead with production of a new car model? (Note: More than one answer is possible.) (a) The consequent reduction in the sales of the company’s existing models (b) The expenditure on new plant and equipment (c) The value of tools that can be transferred from the company’s existing plants (d) The cost of research and development undertaken on the model during the past three years (e) The salvage value of plant and equipment at the end of the project’s life (f) The annual depreciation charge (g) The reduction in the tax bill resulting from the depreciation charge (h) Interest Payments (i) Dividend Payments (j) A proportion of existing head office overhead expenses 2. A project has the following expected cash flow: C 0 C 1 C 2 C 3 (80) 30 20 10 The opportunity cost of capital is 13.4%. What is the NPV? 3. A machine important to supporting operations lasts 3 years and has the following year by year costs : C 0 C 1 C 2 C 3 30,000 8,000 8,000 8,000 Think of C 0 as the acquisition cost and the others as operating and maintenance costs. If the cost of capital is 8%, what is the present value of the costs of operating a series of these machines in perpetuity? 1
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}