8.4.1

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? Project A Project B Neither project both have negative NPV. Both projects both have positive NPV.

B) NPVA= $615.55 , NPVB= $4521.61

Based on the above information, and with an interest rate of 7%, which is the best investment? A) Investment A -8 B) Investment B -12.2 C) Investment C -6 D) Investment D -2.2

B.

Two mutually exclusive investment opportunities require an initial investment of $7 million. Investment A pays $2.0 million per year in perpetuity, while investment B pays $1.4 million in the first year, with cash flows increasing by 4% per year after that. At what cost of capital would an investor regard both opportunities as being equivalent? A) 13% B) 7% C) 3% D) 15%

C) -7 + 2.0 / r = -7 + 1 / (r - 0.04); r = 13%

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? A. -5000 B. -6000 C. -7000 D. -8000

C) NPV = $5138

The following show four mutually exclusive investments. Which one is the best investment? A) Initial investment: $1.1 million; Cash flow in year 1: $160,000; Annual Growth Rate: 2%; Cost of Capital: 9.1% B) Initial investment: $1.2 million; Cash flow in year 1: $150,000; Annual Growth Rate: 2%; Cost of Capital: 7.2% C) Initial investment: $1.3 million; Cash flow in year 1: $160,000; Annual Growth Rate: 1%; Cost of Capital: 5.6% D) Initial investment: $1.4 million; Cash flow in year 1: $150,000; Annual Growth Rate: 2%; Cost of Capital: 8.4%

C) NPV project C = -1,300,000 + 160,000 / (0.056 - 0.01) = $2,178,261 NPV project A = -1,100,000 + 160,000 / (0.091 - 0.02) = $1,153,521 NPV project B = -1,200,000 + 150,000 / (0.072 - 0.02) = $1,684,615 NPV project D = -1,400,000 + 150,000 / (0.084 - 0.02) = $943,750

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

F

When comparing mutually exclusive projects which have different scales, you must know the dollar impact of each investment rather than percentage returns.

T

When different investment rules give conflicting answers, then decisions should be based on the Net Present Value rule, as it is the most reliable and accurate decision rule

T

T. 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? A. -20000 B. -15000 C. -18,000 D. -12,000

D) NPV = $5318 ; NPV(A) = $3831 ; NPV(B) = $1401 ; NPV(C) = $2176

An investor has the opportunity to invest in four new retail stores. The amount that can be invested in each store, along with the expected cash flow at the end of the first year, the growth rate of the concern, and the cost of capital is shown for each case. It is assumed each investment will operate in perpetuity after the initial investment. Which investment should the investor choose? Initial investment: $100,000; Cash flow in year 1: $12,000; Growth Rate: 1.25%; Cost of Capital: 9.1% Initial investment: $90,000; Cash flow in year 1: $10,000; Growth Rate: 1.50%; Cost of Capital: 9.3% Initial investment: $60,000; Cash flow in year 1: $6,000; Growth Rate: 2.50%; Cost of Capital: 7.2% Initial investment: $80,000; Cash flow in year 1: $8,000; Growth Rate: 1.75%; Cost of Capital: 8.0%

D) NPV project D= -60,000 + 6,000 / (0.072 - 0.025) = $67,660 NPV project A = -100,000 + 12,000 / (0.091 - 0.0125) = $52,866 NPV project B = -90,000 + 10,000 / (0.093 - 0.015) = $38,205 NPV project C = -80,000 + 8,000 / (0.08 - 0.0175) = $48,000 7.2%