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Question;23. Hammer;Company proposes to invest $6 million in a new type of hammer-making equipment.;The fixed costs are $1.0 million per year. The equipment is expected to last;for five years. The manufacturing cost per hammer is $1 and the selling price;per hammer is $6. Calculate the break-even (i.e. NPV = 0) volume per year.;(Ignore taxes.) a. 500,000;units B. 600,000 units c. 100,000;units d. None of;the above 24. Everything;else remaining the same, an increase in fixed costs: I) Increases the;break-even point based on NPV II) Increases the accounting break-even point;III) Decreases the break-even point based on NPV IV) Decreases the accounting;break-even point a. I and III;only b. III and;IV only c. II and;III only D. I and II only25. Petroleum;Inc. owns a lease to extract crude oil from sea. It is considering the;construction of a deep-sea;oil rig at a cost of $50 million (I0) and is expected to remain constant. The;price of oil is $50 /bbl and the extraction costs are $20 /bbl. The quantity of;oil Q = 200,000 bbl per year forever. The risk-free rate is 10% per year, which;is also the cost of capital (Ignore taxes). Calculate the NPV to invest today A. +10,000,000 b. +6,000,000;c. +4,000,000;26. Petroleum;Inc. owns a lease to extract crude oil from sea. It is considering the;construction of a deep-sea;oil rig at a cost of $50 million (I0) and is expected to remain constant. The;price of oil is $50 /bbl and the extraction costs are $20 /bbl. The quantity of;oil Q = 200,000 bbl per year forever. The risk-free rate is 10% per year which;is also the cost of capital (Ignore taxes). Suppose the oil price is uncertain;and can be $70 /bbl or $40 /bbl next year and then expected NPV of the project;if postponed by one year is: a. +10,000,000;B. +25,000,000 c. +5,000,000;d. None of;the above 50 Junjie Liu ? Econ 282 Practice;Multiple Choice27. Petroleum;Inc. owns a lease to extract crude oil from sea. It is considering the;construction of a deep-sea;oil rig at a cost of $50 million (I0) and is expected to remain constant. The;price of oil is $50 /bbl and the extraction costs are $20 /bbl. The quantity of;oil Q = 200,000 bbl per year forever. The risk-free rate is 10% per year which;is also the cost of capital (Ignore taxes). Suppose the oil price is uncertain;and can be $70 /bbl or $40 /bbl next year. If the project if postponed by one;year, calculate the value of the option to wait for one year: (approximately) A. +15,000,000 b. +40,000,000;c. +10,000,000;d. None of;the above 28. You are;planning to produce a new action figure called "Hillary ". However;you are very uncertain about the demand for the product. If it is a hit, you;will have net cash flows of $50 million per year for 3 years (starting next;year). If it fails, you will only have net cash flows of $10 million per year;for 2 years (starting next year). There is an equal chance that it will be a;hit or failure (probability = 50%) You will not know whether it is a hit or a failure;until the first year's cash flows are in. You have to spend $80 million;immediately for equipment and the rights to produce the figure. If the discount;rate is 10%, calculate the NPV without the abandonment option. A. -9.15 b. +13.99 c. +9.15 d. -14.4 29. You are;planning to produce a new action figure called "Hillary". However;you are very uncertain about the demand for the product. If it is a hit, you;will have net cash flows of $50 million per year for 3 years (starting next;year). If it fails, you will only have net cash flows of $10 million per year;for 2 years (starting next year). There is an equal chance that it will be a;hit or failure (probability = 50%) You will not know whether it is a hit or a;failure until the first year's cash flows are in. You have to spend $80 million;immediately for equipment and the rights to produce the figure. If you can sell;your equipment for $60 million once the first year's cash flows are received;calculate the NPV with the abandonment option. (The discount rate is 10%) a. -9.1 b. +9.1 C. +13.99 d. -14.451 Junjie Liu ? Econ 282 Practice;Multiple Choice30. You are;planning to produce a new action figure called "Hillary". However;you are very uncertain about the demand for the product. If it is a hit, you;will have net cash flows of $50 million per year for 3 years (starting next;year). If it fails, you will only have net cash flows of $10 million per year;for 2 years (starting next year). There is an equal chance that it will be a;hit or failure (probability = 50%) You will not know whether it is a hit or a;failure until the first year's cash flows are in. You have to spend $80 million;immediately for equipment and the rights to produce the figure..If you can;sell your equipment for $60 million once the first year's cash flows are;received, calculate the value of the abandonment option. (The discount rate is;10%) a. -9.15 b. +13.99 C. +23.14d. None of;the above 31. Given the;following net future values for harvesting trees: (one time harvest): If the cost of capital is 15%, calculate the optimal year to;harvest: a. Year 1 b. Year 2 C. Year 3d. Year 4 32. The;Consumer-Mart Company is going to introduce a new consumer product. If brought;to market without research about consumer tastes the firm believes that there;is a 60% chance that the product will be successful. If successful, the project;has a NPV = $500,000. If the product is a failure (40%) and withdrawn from the;market, then NPV = -$100,000. A consumer survey will cost $60,000 and delay the;introduction by one year. If the survey is successful, then there is an 80%;chance of consumer acceptance, in which case the NPV = $500,000. If, on the;other hand the survey is a failure, then NPV = -$100,000. The discount rate is;10%. By how much does the marketing survey change the expected net present;value of the project? (Approximately) A. Increase the NPV by $25,455 b. Decrease;the NPV by $5950 c. Decrease;the NPV by $8955 d. Decrease;the NPV by $25,455 52;="msonormal">

 

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