Question

Q 1

Project A has an IRR of 23.4%. Project B has an IRR of 33.1%. The firm's cost of capital is 18%. Now you are told that the cash flows of the two projects are as shown below. Which project is better, A or B, or can't you tell?

	Period 0	Period 1	Period 2	Period 3	IRR
Project A	-500	+250	+250	+250	23.4%
Project B	-200	+115	+115	+115	33.1%

Question options:

1-	Project A is better because it has a larger NPV
2-	Project B is better because it has a larger NPV
	''''''''''''''''''''''''''''' Q 2 Consider the following cash flows for the two investments. What are the payback periods on the two investments? Year Investment A Investment B 0 -$100 -$100 1 58 31 2 73 58 3 87 180 Question options: 1- Project A 1.58 years; Project B 2.53 years 2- Project A 1.46 years; Project B 2.21 years ''''''''''''''''''''''''''''' Q 3 You are in the lucky situation of having several customers that want to place large orders with your firm. Unfortunately you do not have the capacity to accept all of them and each order will require the purchase of a new machine. Your boss wants to know what rate of return you would get from each of the orders so that she can decide which one to accept and which ones to pass on to your competitors. Realizing the problems with IRR, you decide to use MIRR instead. Suppose you are going to select two of these three orders. Which projects should you recommend if the company’s required return is 16%? Year Order 1 Order 2 Order 3 0 -$30,000 -$50,000 -$43,000 1 15,000 70,000 34,000 2 27,000 -19,000 28,000 Question options: 1- Order 1 and Order 2 2- Order 1 and Order 3 '''''''''''''''''''''''''''''''''''''''''''' Q 4 DeeDee Industries must choose between a gas-powered and an electric-powered forklift for moving materials in its factory. Since both forklifts perform the same function, the firm will choose only one.   The electric-powered forklift will cost $22,000, whereas the gas-powered forklift will cost $17,600. The cost of capital that applies to both investments is 10%. The life for both types of forklift is estimated to be 6 years, during which time the net cash inflows for the electric-powered forklift will be $6,600 per year and those for the gas-powered forklift will be $5,300 per year. Annual net cash inflows include depreciation expenses. Calculate the NPV for each forklift, and decide which to recommend for purchase. Question options: 1- Purchase electric with an NPV of $6,744.72 which is greater than gas with an NPV of $5,482.88. 2- Purchase electric with an NPV of $5,344.93 which is greater than gas with an NPV of $5,844.59. ''''''''''''''''''''''''''''''''''''''''''' Q 5 You decide to start a new taxi service in your spare time. The first thing you need to do is buy a car. After visiting Mr. Charming Salesman at Sundance Used Cars, you have narrowed your choice to 3 possibilities. The three cars you can afford and their yearly net revenues (fares - gas & maintenance) are listed below. Remember each car must be replaced when it finally dies if you are to remain in business. Assuming an appropriate discount rate of 3.5% which one would you buy? Year VW Bug Yugo Ford Tempo 0 -$500 -$1,800 -$3,000 1 800 1,400 1,400 2 800 1,400 1,400 3 800 1,400 4 1,400 Question options: 1- Buy the Yugo it has the highest NPV at $859.57 2- Buy the VW it has the highest EAA at $621.53 ''''''''''''''''''''''''''''''''''''''' Q6 A common stock pays quarterly dividends. A dividend of $1.00 per share has just been paid. Dividends are expected to grow 5% per quarter for the next two years, then 2% per quarter forever. If the required rate of return is 16% per year, compounded quarterly, find the price of the stock. Question options: 1- $63.41 2- $68.77 '''''''''''''''''''''''''''''''''''''''''''''''''''' Q7 The following two bonds are identical in every respect except for their coupon rates (assume both have a face value of $1,000). If interest rates suddenly increased by 5%, what will happen to the prices of these two bonds, all else held constant? Bond Coupon Rate Bond Value A 16% $1,229.40 B 10% $885.30 Question options: 1- Bond A’s percentage drop in price will be greater than Bond B’s percentage drop in price 2-Bond B’s percentage rise in price will be greater than Bond A’s percentage rise in price 3-Bond B’s percentage drop in price will be greater than Bond A’s percentage drop in price