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Question;Corporate Finance, 2e;(Berk/DeMarzo);Chapter 6;Investment Decision Rules;6.1 NPV and Stand-Alone Projects;1) Which of the;following statements is false?;A) About 75% of;firms surveyed used the NPV rule for making investment decisions.;B) If you are unsure;of your cost of capital estimate, it is important to determine how sensitive;your analysis is to errors in this estimate.;C) To decide;whether to invest using the NPV rule, we need to know the cost of capital.;D) NPV is;positive only for discount rates greater than the internal rate of return.;Use the;following information to answer the question(s) below.;Sarah Palin;reportedly was paid a $11 million advance to write her book Going Rogue.;The book took one year to write. In the time she spent writing, Palin could;have been paid to give speeches and appear on TV news as a political;commentator. Given her popularity, assume that she could have earned $8 million;over the year (paid at the end of the year) she spent writing the book. Assume that she was able to write the book;while simultaneously fulfilling her media commitments of appearing on TV news;as a political commentator and give speeches.;2) Assume that;once her book is finished, it is expected to generate royalties of $5 million;in the first year (paid at the end of the year) and these royalties are;expected to decrease by 40% per year in perpetuity. Assuming that Palin's cost;of capital is 10% and given these royalties payments, the NPV of Palin's book;deal is closest to;A) $3.75 million;B) $12.20;million;C) $13.00;million;D) $13.75;million;3) Which of the;following statements is false?;A) In general;the difference between the cost of capital and the IRR is the maximum amount of;estimation error in the cost of capital estimate that can exist without;altering the original decision.;B) The IRR can;provide information on how sensitive your analysis is to errors in the estimate;of your cost of capital.;C) If you are;unsure of your cost of capital estimate, it is important to determine how sensitive;your analysis is to errors in this estimate.;D) If the cost;of capital estimate is more than the IRR, the NPV will be positive.;Use the;following information to answer the question(s) below.;You are;considering investing in a start up project at a cost of $100,000. You expect;the project to return $500,000 to you in seven years. Given the risk of this;project, your cost of capital is 20%.;4) The NPV for;this project is closest to;A) $29,200;B) $39,500;C) $129,200;D) $139,500;5) The IRR for;this project is closest to;A) 15.60%;B) 18.95%;C) 20.00%;D) 25.85%;6) The decision;you should take regarding this project is;A) reject the;project since the NPV is negative.;B) reject the;project since the NPV is positive.;C) accept the;project since the IRR 20%.;Use the;following information to answer the question(s) below.;Sarah Palin;reportedly was paid a $11 million advance to write her book Going Rogue.;The book took one year to write. In the time she spent writing, Palin could;have been paid to give speeches and appear on TV news as a political;commentator. Given her popularity, assume that she could have earned $8 million;over the year (paid at the end of the year) she spent writing the book. Assume that she was able to write the book;while simultaneously fulfilling her media commitments of appearing on TV news;as a political commentator and give speeches.;7) Assuming that;Palin's cost of capital is 10%, then the NPV of her book deal is closest to;A) $2.00 million;B) $2.20 million;C) $3.00 million;D) $3.75 million;8) The IRR of;Palin's book deal is closest to;A) -27.25%;B) -37.50%;C) 27.25%;D) 37.50%;Use the table;for the question(s) below.;Consider a;project with the following cash flows;Year;Cash;Flow;0;-10,000;1;4,000;2;4,000;3;4,000;4;4,000;9) If the;appropriate discount rate for this project is 15%, then the NPV is closest to;A) $6,000;B) -$867;C) $1,420;D) $867;10) The NPV of;project A is closest to;A) 12.0;B) 12.6;C) 15.0;D) 42.9;11) The NPV of;project B is closest to;A) 12.6;B) 23.3;C) 12.0;D) 15.0;12) The NPV for;this project is closest to;A) $176,270;B) $123,420;C) $450,000;D) $179,590Use the table;for the question(s) below.Consider the;following two projects;Project;Year;0;C/F;Year;1;C/F;Year;2;C/F;Year;3;C/F;Year;4;C/F;Year;5;C/F;Year;6;C/F;Year;7;C/F;Discount;Rate;Alpha;-79;20;25;30;35;40;N/A;N/A;15%;Beta;-80;25;25;25;25;25;25;25;16%;13) The NPV for;project alpha is closest to:A) $20.96B) $16.92C) $24.01D) $14.4114) The NPV for;project beta is closest to:A) $24.01B) $16.92C) $20.96D) $14.41: 15) The NPV of;Larry's three movie Larry Boy offer is closest to:A) 3.5 millionB) -1.6 million AnswerC) 1.6 millionD) -1.0 million16) The NPV for;Boulderado's snowboard project is closest to:A) $228,900B) $46,900C) $51,600D) $23,80017) The NPV;profile graphsA) the project's;NPV over a range of discount rates.B) the project's;IRR over a range of discount rates.C) the project's;cash flows over a range of NPVs.D) the project's;IRR over a range of NPVs.18) The NPV;profileA) shows the;payback period - the point at which NPV is positive.B) shows the;internal rate of return - the point at which NPV is zero.C) shows the NPV;over a range of discount rates.D) B and C are;correct.;="normaltext">

 

Paper#62443 | Written in 18-Jul-2015

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