Exam 8: Investment Decision Rules

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?

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%?

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?

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.

You are trying to decide between three mutually exclusive investment opportunities.The most appropriate tool for identifying the correct decision is:

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

Peter has a business opportunity that requires him to invest $10,000 today,and receive $12,000 in one year.He can either use $10,000 that he already has for this investment or borrow the money from his bank at an interest rate of 10%.However,the $10,000 he has right now is needed for urgent repairs to his home,repairs that will cost at least $15,000 if he delays them for a year.Should Peter undertake the investment?

The following show four mutually exclusive investments.Which is the best investment?

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

Jenkins Security has learned that a rival has offered to supply a parking garage with security for ten years for $50,000 up front and a further $20,000 per year.If Jenkins Security offers to provide security for eight years for an upfront cost of $70,000 and a separate yearly payment,what is the maximum that this yearly payment can be so that Jenkins' offer matches the equivalent annual annuity of their rival's offer? (Assume a cost of capital of 6%.)

A security company offers to provide CCTV coverage for a parking garage for ten years for an initial payment of $50,000 and additional payments of $20,000 per year.What is the equivalent annual annuity of this deal,given a cost of capital of 6%?

You have an investment opportunity that will cost $10,000 today and will return $10,500 in one year.If interest rates are 8%,what is the NPV of this investment?

Use the information for the question(s)below. -The owner of a hair salon spends $1,000,000 to renovate its premises,estimating that this will increase her cash flow by $220,000 per year.She constructs the above graph,which shows the net present value (NPV)as a function of the discount rate.If her discount rate is 6%,should she accept the project?

Which of the following decision rules might best be used as a supplement to net present value (NPV)by a firm that favours liquidity?

When using equivalent annual annuities to compare the costs of projects with different lives,you should not consider any changes in the expected replacement cost of equipment.

Use the information for the question(s)below. -The owner of a hair salon spends $1,000,000 to renovate its premises,estimating that this will increase her cash flow by $220,000 per year.She constructs the above graph,which shows the net present value (NPV)as a function of the discount rate.At what discount rate does her decision to renovate become untenable?

A print shop has contracted to print a number of jobs within 24 hours.Any jobs not completely printed within this time will result in a penalty,as shown in the table above.However too many jobs have been accepted,and not all can be printed.Which jobs should be printed in the next 24 hours?

What is a safe method to use when confronted with mutually exclusive projects?

Which of the following formulas regarding net present value (NPV)is correct?

Why is the internal rate of return (IRR)inadequate when comparing mutually exclusive investments with different timing of the cash flows?