Question :
Exhibit 8-2
A piece of equipment costs $1.2m. The equipment has : 1325698
Exhibit 8-2
A piece of equipment costs $1.2m. The equipment has a useful life of 4 years. In each of the four years, the investment generates a cash inflow of $0.5m. The impact of the investment project on net income is derived by subtracting depreciation from cash flow each year.
11.Refer to Exhibit 8-2. Assume the equipment is depreciated on a straight-line basis over 4 years, what is the average contribution to net income across all four years?
a.$0.2m
b.$0.5m
c.$0.3m
d.$0.8m
12.Refer to Exhibit 8-2. The project’s average accounting rate of return equals the average contribution to net income divided by the average book value of the investment.
Assume the equipment is depreciated on a straight-line basis over 4 years, what is the average accounting rate of return?
a.16.7%
b.33.3%
c.66.7%
d.Cannot tell from the given information
13.Suppose a particular investment project will generate an immediate cash inflow of $1,000,000 followed by cash outflows of $500,000 in each of the next three years. What is the project’s IRR? Suppose a company’s hurdle rate is 15%, should it accept the project?
a.23%; reject the project
b.23%; accept the project
c.15%; reject the project
d.15%; accept the project
14.Suppose a particular investment project will require an initial cash outlay of $1,000,000 and will generate a cash inflow of $500,000 in each of the next three years. What is the project’s IRR? Suppose a company’s hurdle rate is 15%, should it accept the project?
a.23%; reject the project
b.23%; accept the project
c.15%; reject the project
d.15%; accept the project
15.Future Semiconductors is evaluating a new etching tool. The equipment costs $1.0m and will generate after-tax cash inflows of $0.4m per year for six years. Assume the firm has a 15% cost of capital. What’s the NPV of the investment?
a.$0.51m
b.$0.45m
c.$1.51m
d.$1.69m
16.Should a firm invest in projects with NPV = $0?
a.Yes
b.No
c.The firm is indifferent between accepting or rejecting projects with zero NPVs
d.The firm should look at the PI and IRR of the projects
17.A firm has 10 million shares outstanding with a current market price of $20 per share. There is one investment project available to the firm. The initial investment of the project is $20 million, and the NPV of the project is $10 million. What will be the firm’s stock price if capital markets fully reflect the value of undertaking the project?
a.$19
b.$20
c.$21
d.$22
18.Delta Pharmaceuticals has 200 million shares outstanding with a current market price of $30 per share. Its stock rose to $32 on the news that Delta Pharmaceuticals’ long-awaited new drug Zentac is to hit the market next month. What’s the market’s consensus of the NPV that the new drug will generate for Delta Pharmaceuticals?
a.$400 million
b.$6,400 million
c.$6,000 million
d.None of the above
19.Kelley Industries has 100 million shares of common stock outstanding with a current market price of $50. The firm is contemplating undertaking an investment project which requires an initial cash outflow of $100 million. The IRR of the project is equal to the firm’s cost of capital. What will be the firm’s stock price if capital markets fully reflect the value of undertaking the project?
a.$50
b.$49
c.$51
d.Cannot tell from the given information
20.Consider a project with the following cash flows.
YearCash Flow
0-$16,000
142,000
2-27,000
What’s the IRR of the project? If a firm’s cost of capital is 15%, should the firm accept the project?
a.50%; accept the project
b.12.5%; reject the project
c.12.5% and 50%; accept the project
d.12.5%, and 50%; reject the project
21.Consider a project with the following stream of cash flows.
YearCash Flow ($ in millions)
0+80
1-388
2+700
3-557
4+165
What’s the IRR of the project? If a firm’s cost of capital is 15%, should the firm accept the project?
a.10%, 25%, 50%; accept the project
b.10%, 25%, 50%; reject the project
c.0%, 10%, 25%, 50%; accept the project
d.10%, 25%; accept the project
