Fin 4424 Quiz 2

An initial investment of $400,000 is expected to produce an end-of-year cash flow of $480,000. What is the NPV of the project at a discount rate of 20 percent?

$0 (zero) NPV = -400,000 + (480,000/1.2) = 0.

If the present value of $1 received n years from today at an interest rate of r is 0.621, then what is the future value of $1 invested today at an interest rate of r% for n years?

$1.610 FV = 1/(0.621) = 1.61.

Halcyon Lines is considering the purchase of a new bulk carrier for $8 million. The forecasted revenues are $5 million a year and operating costs are $4 million. A major refit costing $2 million will be required after both the fifth and tenth years. After 15 years, the ship is expected to be sold for scrap at $1.5 million. What is the NPV if the opportunity cost of capital is 8%?

-$1255212.

A project produces a cash flow of $32 in year 1, $137 in year 2, and $797 in year 3. If the cost of capital is 15%, what is the project's PV? If the project requires an investment of $1,200, what is its NPV?

-$544.54 PV = $32 / 1.15 + $137 / 1.152+ $797 / 1.153 PV = $655.46 NPV = PV - investment NPV = $655.46 - 1,200 NPV = -$544.54

Which of the following statements regarding the NPV rule and the rate of return rule is false?

Accept a project if its rate of return > 0.