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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

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