Exam 8: Investment Decision Rules

Use the table for the question(s) below. Consider a project with the following cash flows: -Given the cash flows in the table above,the point at which the NPV profile crosses the vertical axis is:

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 payback period for this project is closest to:

A restaurant is contemplating replacing its service staff with an electronic ordering process.Installing computers at each table will cost $150,000,but is expected to generate a cost savings of $40,000 per year for the next 10 years,when the computers will need to be replaced.If the restaurant has a cost of capital of 10%,what is the NPV of this investment?

Two mutually exclusive investment opportunities require an initial investment of $8 million.Investment A then generates $1 million per year in perpetuity,while investment B pays $500,000 in the first year,with cash flows increasing by 5% per year after that.Determine the NPV for which an investor would regard both opportunities as being equivalent.

Use the information for the question(s) below. -A manufacturer of video games develops a new game over two years.This costs $850,000 per year with one payment made immediately and the other at the end of two years.When the game is released,it is expected to make $1.2 million per year for three years after that.What is the net present value (NPV)of this decision if the cost of capital is 9%?

Preference for cash today versus cash in the future in part determines net present value (NPV).

Use the table for the question(s) below. Consider the following two projects: -The net present value (NPV)of project A is closest to:

Which of the following is a disadvantage of the Net Present Value rule?

Use the information for the question(s) below. An independent film maker is considering producing a new movie. The initial cost for making this movie will be $20 million today. Once the movie is completed, in one year, the movie will be sold to a major studio for $25 million. Rather than paying for the $20 million investment entirely using its own cash, the film maker is considering raising additional funds by issuing a security that will pay investors $11 million in one year. Suppose the risk-free rate of interest is 10%. -Refer to the information above.Assuming that the film maker issues the new security,the net present value (NPV)for this project is closest to what amount? Should the film maker make the investment?

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

The cash flows for five investments have been identified as follows: Based on the above information,and with an interest rate of 6%,which is the best investment?

Internal rate of return (IRR)can reliably be used to choose between mutually exclusive projects.

Use the information for the question(s) below. An independent film maker is considering producing a new movie. The initial cost for making this movie will be $20 million today. Once the movie is completed, in one year, the movie will be sold to a major studio for $25 million. Rather than paying for the $20 million investment entirely using its own cash, the film maker is considering raising additional funds by issuing a security that will pay investors $11 million in one year. Suppose the risk-free rate of interest is 10%. -Refer to the information above.What is the net present value (NPV)of this project if the film maker does not issue the new security? What is the net present value (NPV)if the film maker issues the new security?

A steel company wishes to replace the lighting in its warehouse with an energy efficient LED system.Installing the new lighting system will cost $1.5 million,but is expected to generate a cost savings of $140,000 per year for the next 25 years,when the new lights will need to be replaced.If the steel company has a cost of capital of 6%,what is the NPV of this investment?

Use the table for the question(s) below. Consider the following two projects: -The net present value (NPV)for project beta is closest to:

The owners of a chain of fast-food restaurants spend $28 million installing donut makers in all their restaurants.This is expected to increase cash flows by $10 million per year for the next five years.If the discount rate is 6.5%,were the owners correct in making the decision to install donut makers?

You have an investment opportunity in Germany that requires an investment of $250,000 today and will produce a cash flow of €208,650 in one year with no risk.Suppose the risk-free rate of interest in Germany is 6% and the current competitive exchange rate is €0.78 to $1.00.What is the net present value (NPV)of this project? Would you take the project?