Exam 8: Investment Decision Rules

Martin is offered an investment where for $6000 today, he will receive $6180 in one year. He decides to borrow $6000 from the bank to make this investment. What is the maximum interest rate the bank needs to offer on the loan if Martin is at least to break even on this investment?

You are considering investing in a zero-coupon bond that will pay you its face value of $1000 in twelve years. If the bond is currently selling for $496.97, then the internal rate of return (IRR) for investing in this bond 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. What is the best alternative for Peter out of the following choices?

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

A car dealership offers a car for $14,000, with up to one year to pay for the car. If the interest rate is 5%, what is the net present value (NPV) of this offer to buyers who elect not to pay for the car for one year?

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 16,000 square feet of retail space available to be leased, to which businesses should you lease and why?

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? Cost of Capital: 6.0% Cost of Capital: 7.5% Cost of Capital: 7.5% Cost of Capital: 9.2%

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

Net present value (NPV) is the difference between the present value (PV) of the benefits and the present value (PV) of the costs of a project or investment.

Consider a project with the following cash flows: Assume the appropriate discount rate for this project is 13%. The payback period for this project is closest to ________.

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

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 $30,000 per year. What is the equivalent annual annuity of this deal, given a cost of capital of 5%?

If WiseGuy Inc. is choosing one of the above mutually exclusive projects (Project A or Project B), given a discount rate of 7%, which should the company choose?

Is there a unique way for calculating the MIRR to resolve the multiple IRR situation?

A bakery is deciding whether to buy an extra van to help deliver its products. The van will cost $28,000, but is expected to increase profits by $6,500 per year over the five years of its working life. Which of the following is the correct net present value (NPV) profile for this purchase?

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

Trial and error is the only way to compute the internal rate of return (IRR) when interest is calculated over five or more periods.

What is the decision criteria using internal rate of return (IRR) rule?

Consider the following two projects: The payback period for project A is closest to ________.

You are offered an investment opportunity that costs you $28,000, has a net present value (NPV) of $2278, lasts for three years, has interest rate of 10%, and produces the following cash flows: The missing cash flow from year 2 is closest to ________.