# Which of the following statements about these

• 12

Course Hero uses AI to attempt to automatically extract content from documents to surface to you and others so you can study better, e.g., in search results, to enrich docs, and more. This preview shows page 10 - 12 out of 12 pages.

Which of the following statements about these investments is true?A)The investor should take investment A since it has a greater net present value (NPV).B)The investor should take investment A since it has a greater internal rate of return(IRR).C)The investor should take investment B since it has a greater net present value (NPV).D)The investor should take investment B since it has a greater internal rate of return(IRR).Answer: CExplanation: C) Using a financial calculator, NPV(A) = -\$0.002 million, IRR(A) =8.896%, NPV(B) = \$0.027, IRR(B) = 10.652%;Use NPV to decide mutually exclusive projects.
(23) Mary is in contract negotiations with a publishing house for her new novel. She hastwo options. She may be paid \$100,000 up front, and receive royalties that are expected tototal\$26,000 at the end of each of the next five years. Alternatively, she can receive \$200,000 upfront and no royalties. According to the NPV rule, which of the two deals should she choose,given a discount rate of 8%?
(24) A project has the following expected cash flows:Project AYear 0-\$35,000Year 1\$0Year 2\$11,000Year 3\$13,500Year 4\$13,500Year 5\$2,500Which of the following investment rules would indicate that she should take the former deal,given a discount rate of 8%?Rule I: The Net Present Value ruleRule II: The Payback Rule with a payback deadline of 4 yearsRule III: The internal rate of return (IRR) Rule
B) Rule II onlyC) Rule III onlyD) Rule I and IIIAnswer: BExplanation: A) Using a financial calculator, enterCF0 = -35000, CF1 = 0, CF2 = 11000, CF3 = 13500, CF4 = 13500, CF5 = 2500; calculateIRR = 4.72%and NPV (for I = 8%) = - \$3,228.18. Both indicate the project to be value-diminishing. Payback rule: It takes less than 4 years to recover the initial \$35,000, so acceptit.(25)Project AProject BTime 0-10,000-10,000Time 15,0004,000Time 24,0003,000Time 33,00010,000If WiseGuy Inc is choosing one of the above mutually exclusive projects (Project A or ProjectB), given a discount rate of 8%, which should the company choose?

Upload your study docs or become a

Course Hero member to access this document

End of preview. Want to read all 12 pages?

Upload your study docs or become a

Course Hero member to access this document

Term
Summer
Professor
Mais