View the step-by-step solution to:


1.Please consider the following two statements and choose the correct answer.

(a) When we

compare several alternatives using IRR, we should obtain each alternative's IRR and choose the greatest one.

(b) When we compare multiple uncertain projects, in general, a project with the biggest E[NPV] has the smallest Var[NPV]

A.Both (a) and (b) are correct.

B.Both (a) and (b) are incorrect.

C.(a) is incorrect, and (b) is correct.

D. (a) is correct, and (b) is incorrect.

2.Please consider the following two statements and choose the correct answer.

(a) Labor costs (salary) are not always variable costs.

(b) Opportunity costs are implied costs of the best rejected opportunity.

A.(a) is correct, and (b) is incorrect.

B.(a) is incorrect, and (b) is correct.

C.Both (a) and (b) are incorrect.

D.Both (a) and (b) are correct.

3.An oil field has a 40% probability of being rich, a 30 % probability of being normal, and a 30 % probability of being poor. In each case, it will produce cash inflows of $5 million, $3 million, and $1 million per year, respectively, for 15 years starting from 2 years after an oil well is drilled. Drilling a well costs $15 million. If you spend $1 million testing the oil field, then after 2 years you will learn whether the oil field is rich, normal, or poor, and you can decide whether or not to drill. The MARR is 10% per year.

(a) Find the expected net present value when you do the test now.

(b) Find the value of doing the test.

A.(a) $7.1 million; (b) $0.2 million

B.(a) $6.9 million; (b) $0.2 million

C.(a) $7.1 million; (b) -$0.2 million

D.(a) $6.9 million; (b) -$0.2 million

Top Answer

The solution is... View the full answer

NPV of the project.JPG

Sign up to view the full answer

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question