Stevens Institute Of Technology *

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Feb 20, 2024





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Part 1 (5pt for each question): Use the following information to answer the question(s) below. Sarah Palin reportedly was paid a $11 million advance to write her book Going Rogue . The book took one year to write. In the time she spent writing, Palin could have been paid to give speeches and appear on TV news as a political commentator. Given her popularity, assume that she could have earned $8 million over the year (paid at the end of the year) she spent writing the book. 1) Assume that once her book is finished, it is expected to generate royalties of $5 million in the first year (paid at the end of the year) and these royalties are expected to decrease by 40% per year in perpetuity. Assuming that Palin's cost of capital is 10% and given these royalties payments, the NPV of Palin's book deal is closest to: A) $3.75 million. B) $12.20 million. C) $13.00 million. D) $13.75 million . Use the information for the question(s) below. Boulderado has come up with a new composite snowboard. Development will take Boulderado four years and cost $250,000 per year, with the first of the four equal investments payable today upon acceptance of the project. Once in production the snowboard is expected to produce annual cash flows of $200,000 each year for 10 years. Boulderado's discount rate is 10%. 2) The NPV for Boulderado's snowboard project is closest to: A) $228,900. B) $46,900. C) $51,600. D) $23,800. 3) Which of the following statements is FALSE? A) The IRR investment rule will identify the correct decision in many, but not all, situations. B) By setting the NPV equal to zero and solving for r , we find the IRR. C) If you are unsure of your cost of capital estimate, it is important to determine how
sensitive your analysis is to errors in this estimate. D) The simplest, though least accurate, investment rule is the NPV investment rule. Use the following information to answer the question(s) below. Rearden Metals is considering opening a strip-mining operation to provide some of the raw materials needed in producing Rearden metal. The initial purchase of the land and the associated costs of opening up mining operations will cost $100 million today. The mine is expected to generate $16 million worth of ore per year for the next 12 years. At the end of the 12th year Rearden will need to spend $20 million to restore the land to its original pristine nature appearance. 4) The number of potential IRRs that exist for Rearden's mining operation is equal to: A) 0. B) 1. C) 2. D) 12. 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: Year One Year Two Year Three Year Four $200,000 $225,000 $275,000 $200,000 The appropriate discount rate for this project is 16%. 5) The profitability index for this project is closest to: A) .44. B) .26. C) 0.39. D) .34. Use the table for the question(s) below. Consider the following two projects with cash flows in $:
Project Year 0 Cash Flow Year 1 Cash Flow Year 2 Cash Flow Year 3 Cash Flow Year 4 Cash Flow Discount Rate A -100 40 50 60 N/A .15 B -73 30 30 30 30 .15 6) The internal rate of return (IRR) for project A is closest to: A) 7.7%. B) 21.6%. C) 23.3%. D) 42.9%. 7) The internal rate of return (IRR) for project B is closest to: A) 21.6%. B) 23.3%. C) 42.9%. D) 7.7%. 8) Which of the following statements is correct? A) You should accept project A since its IRR > 15%. B) You should reject project B since its NPV > 0. C) You should accept project A since its NPV < 0. D) You should accept project B since its IRR < 15%. 9) The maximum number of IRRs that could exist for project B is: A) 3. B) 1. C) 2. D) 0. 10) Which of the following statements is FALSE? A) Because value is lost when a resource is used by another project, we should include the opportunity cost as an incremental cost of the project. B) Sunk costs are incremental with respect to the current decision regarding the project and should be included in its analysis. C) Overhead expenses are associated with activities that are not directly attributable to a single business activity but instead affect many different areas of the corporation. D) When computing the incremental earnings of an investment decision, we should include all changes between the firm's earnings with the project versus without the project.
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