Exam 8: Investment Decision Rules

An investor is considering a project that will generate $800,000 per year for four years.In addition to upfront costs,at the completion of the project at the end of the fifth year there will be shut-down costs of $500,000.If the cost of capital is 5%,based on the NPV,at what upfront costs does this project cease to be worthwhile?

A furniture store offers no money down and no payment for one year.You decide to purchase a couch,which you will take home today,and pay the $2,000 purchase price one year from now.If interest rates are 4.5%,what is the NPV of this offer?

A car dealership offers a car for $14,000,with up to one year to pay for the car.If the interest rate is 7%,what is the net present value (NPV)of this offer to buyers who elect not to pay for the car for one year?

When an alternative decision rule disagrees with the net present value (NPV),the NPV should be followed.

An investor has a budget of $10 million.He can invest in the projects shown above.If the cost of capital is 6%,what investment or investments should he make?

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: The appropriate discount rate for this project is 16%. -The internal rate of return (IRR)for this project is closest to:

The cash flows for four projects are shown below,along with the cost of capital for these projects.If these projects are mutually exclusive,which one should be taken?

Use the table for the question(s) below. Consider the following list of projects: -Assuming that your capital is constrained,which project should you invest in last?

A company has four projects it wishes to undertake.Which of these investments should be the lowest priority,given a discount rate of 5%?

What is the general shape of the net present value (NPV)profile?

Investment A: Investment B: Investment C: Investment D: Investment E: The cash flows for three projects are shown above.The cost of capital is 7.5%.If an investor decided to take projects with a payback period two years or less,which of these projects would he take?

Use the table for the question(s) below. Consider the following list of projects: -Assume that your capital is constrained,so that you only have $600,000 available to invest in projects.If you invest in the optimal combination of projects given your capital constraint,then the total net present value (NPV)for all the projects you invest in will be closest to:

You have an investment opportunity in the United Kingdom that requires an investment of $500,000 today and will produce a cash flow of £320,000 in one year with no risk.Suppose the risk-free rate of interest in the United Kingdom is 6% and the current competitive exchange rate is $1.70/£.What is the net present value (NPV)of this project? Would you take the project?

The internal rate of return (IRR)rule will agree with the Net Present Value rule even when positive cash flows precede negative cash flows.

Use the table for the question(s) below. Consider a project with the following cash flows: -Assume the appropriate discount rate for this project is 15%.The profitability index for this project is closest to:

Use the table for the question(s) below. Consider a project with the following cash flows: -If the appropriate discount rate for this project is 15%,then the net present value (NPV)is closest to:

You are considering an investment opportunity that will cost you $8,000 up front,but return a single cash flow of $18,000 6 years from now.What is the IRR for this investment?

A mining company plans to mine a beach for rutile.To do so will cost $10 million up front and then produce cash flows of $3 million per year for five years.At the end of the sixth year the company will incur shut-down and clean-up costs of $2 million.If the cost of capital is 11%,then what is the NPV for this project?

Use the information for the question(s) below. Your firm is preparing to open a new retail strip mall and you have multiple businesses that would like lease space in it. Each business will pay a fixed amount of rent each month plus a percentage of the gross sales generated each month. The cash flows from each of the businesses has approximately the same amount of risk. The business names, square footage requirements, and monthly expected cash flows for each of the businesses that would like to lease space in your strip mall are provided below: -If your new strip mall will have 15,000 square feet of retail space available to be leased,to which businesses should you lease and why?

Use the table for the question(s) below. Consider the following two projects: -Why is the internal rate of return (IRR)inadequate when comparing mutually exclusive investments of different scale?