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Question;Frank Dewey;Esquire from the firm of Dewey, Cheatum, and Howe, has been offered an upfront;retainer of $30,000 to provide legal services over the next 12 months to;Taggart Transcontinental. In return for this upfront payment, Taggart;Transcontinental would have access to 8 hours of legal services from Frank for;each of the next 12 months. Frank's normal billable rate is $250 per hour for;legal services.;1) Assuming that;Dewey's cost of capital is 12% EAR, then the NPV of his retainer offer is;closest to;A) -$7,500;B) -$7,400;C) $6,000;D) $7,400;2) Assuming that;Dewey's cost of capital is 12% EAR, then the IRR of his retainer offer is;closest to;A) -39.3%;B) -3.3%;C) 20.0%;D) 39.3%;3) Assuming that;Dewey's cost of capital is 12% EAR, then the number of potential IRRs that;exist for this problem is equal to;A) 0;B) 1;C) 2;D) 12;Use the;following information to answer the question(s) below.;Rearden Metals;is considering opening a strip mining operation to provide some of the raw;materials needed in producing Rearden metal. The initial purchase of the land;and the associated costs of opening up mining operations will cost $100 million;today. The mine is expected to generate $16 million worth of ore per year for;the next 12 years. At the end of the 12th year Rearden will need to spend $20;million to restore the land to its original pristine nature appearance.;4) The number of;potential IRRs that exist for Rearden's mining operation is equal to;A) 0;B) 1;C) 2;D) 12;5) One of the;IRR for Rearden's mining operation is closest to;A) 0%;B) 10.6%;C) 12.4%;D) 72.0%;6) Which of the;following statements is false?;A) The IRR;investment rule will identify the correct decision in many, but not all;situations.;B) By setting;the NPV equal to zero and solving for r, we find the IRR.;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) The simplest;investment rule is the NPV investment rule.;7) Which of the;following statements is false?;A) The IRR;investment rule states you should turn down any investment opportunity where;the IRR is less than the opportunity cost of capital.;B) The IRR;investment rule states that you should take any investment opportunity where;the IRR exceeds the opportunity cost of capital.;C) Since the IRR;rule is based upon the rate at which the NPV equals zero, like the NPV decision;rule, the IRR decision rule will always identify the correct investment;decisions.;D) There are situations;in which multiple IRRs exist.;8) Assume the;appropriate discount rate for this project is 15%. The IRR for this project is closest to;A) 21%;B) 22%;C) 15%;D) 60%;Use the table;for the question(s) below.;Consider the;following two projects;Project;Year;0;Cash;Flow;Year;1;Cash;Flow;Year;2;Cash;Flow;Year;3;Cash;Flow;Year;4;Cash;Flow;Discount;Rate;A;-100;40;50;60;N/A;.15;B;-73;30;30;30;30;.15;9) The internal;rate of return (IRR) for project A is closest to;A) 7.7%;B) 21.6%;C) 23.3%;D) 42.9%;10) The internal;rate of return (IRR) for project B is closest to;A) 21.6%;B) 23.3%;C) 42.9%;D) 7.7%;11) Which of the;following statements is correct?;A) You should;accept project A since its IRR > 15%.;B) You should;reject project B since its NPV > 0.;C) Your should;accept project A since its NPV;IRRBeta.;C) Your should;invest i project Alpha since NPVAlpha;0.;Use the;information for the question(s) below.;The Sisyphean Company;is planning on investing in a new project.;This will involve the purchase of some;new machinery;costing $450,000. The Sisyphean Company;expects cash inflows from this project as;detailed below;Year;One;Year;Two;Year;Three;Year;Four;$200,000;$225,000;$275,000;$200,000;The appropriate;discount rate for this project is 16%.;16) The IRR for;this project is closest to;A) 18.9%;B) 22.7%;C) 34.1%;D) 39.1%;Use the;information for the question(s) below.;Larry the;Cucumber has been offered $14 million to star in the lead role of the next;three Larry Boy adventure movies. If;Larry takes this offer, he will have to forgo acting in other Veggie movies;that would pay him $5 million at the end of each of the next three years. Assume Larry's personal cost of capital is;10% per year.;17) The IRR for;Larry's three movie deal offer is closest to;A) 3.5%;B) 1.6%;C) -3.5%;D) -1.6%;18) Larry should;A) reject the;offer because the NPV < 0.;B) accept the;offer even though the IRR 0.;C) reject the;offer because the IRR 0%.;Use the;information for the question(s) below.;Boulderado has;come up with a new composite snowboard.;Development will take Boulderado four years and cost $250,000 per year;with the first of the four equal investments payable today upon acceptance of;the project. Once in production the;snowboard is expected to produce annual cash flows of $200,000 each year for 10;years. Boulderado's discount rate is;10%.;19) The IRR for;Boulderado's snowboard project is closest to;A) 10.4%;B) 10.0%;C) 11.0%;D) 15.1%;20) Calculate;the IRR for the snow board project and use it to determine he maximum deviation;allowable in the cost of capital estimate that leaves the investment decision;unchanged. The maximum deviation;allowable is closest to;A) 11.0%;B) 0.0%;C) 2.5%;D) 1.0%;21) When using;the internal rate of return (IRR) investment rule, we compare;A) the average;return on the investment opportunity to returns on all other investment;opportunities in the market.;B) the average;return on the investment opportunity to returns on other alternatives in the;market with equivalent risk and maturity.;C) the NPV of;the investment opportunity to the average return on the investment opportunity.;D) the average;return on the investment opportunity to the risk-free rate of return.;22) The internal;rate of return rule can result in the wrong decision if the projects being;compared have;A) differences;in scale.;B) differences;in timing.;C) differences;in NPV.;D) A and B are;correct.;Use the;information for the question(s) below.;Larry the;Cucumber has been offered $14 million to star in the lead role of the next;three Larry Boy adventure movies. If;Larry takes this offer, he will have to forgo acting in other Veggie movies;that would pay him $5 million at the end of each of the next three years. Assume Larry's personal cost of capital is;10% per year.;23) Explain why;the NPV decision rule might provide Larry with a different decision outcome than the IRR rule when;evaluating Larry's three movie deal offer.;6.3 The Payback Rule;Use the;following information to answer the question(s) below.

 

Paper#62444 | Written in 18-Jul-2015

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