FNAN 522 FINAL EXAM PREP QUESTIONS AND ANSWERS 2023 (GRADED 100%)

FNAN 522 FINAL EXAM PREP QUESTIONS AND ANSWERS 2023 (GRADED 100%) You have an opportunity to invest $115,000 now in return for $81,200 in one year and $43,200 in two years. If your cost of capital is 9.6%, what is the NPV of this investment? a. -$9,400 b. $4,948.85 c. -$4,948.85 d. $9,400 You run a construction firm. You have just won a contract to build a government office building. Building it will require an investment of $10.6 million today and $5.8 million in one year. The government will pay you $22.2 million in one year upon the building's completion. Suppose the interest rate is 11.3%. What is the NPV of this opportunity? a. $4.14 million b. $5.8 million c. $12.4 million d. $6.3 million Marian Cebrian owns his own business and is considering an investment. If he undertakes the investment, it will pay $6,840 at the end of each of the next 3 years. The opportunity requires an initial investment of $1,710 plus an additional investment at the end of the second year of $8,550. What is the NPV of this opportunity if the interest rate is 2.6% per year? Should Marian take it? a. The NPV is -$9,665. Yes, he should take it. b. The NPV is -$9,665. No, he should not take it. c. The NPV is $9,665. Yes, he should take it. d. The NPV is $9,665. No, he should not take it. You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $6,300 and will be posted for one year. You expect that it will generate additional revenue of $1,386 a month. What is the payback period? a. 0.22 years b. 4.5 months c. 6 months d. 0.22 months You have just been offered a contract worth $1.28 million per year for 6 years. However, to take the contract, you will need to purchase some new equipment. Your discount rate for this project is 12.6%. You are still negotiating the purchase price of the equipment. What is the most you can pay for the equipment and still have a positive NPV? a. $7.68 million b. $3.49 million c. $6.71 million d. $5.17 million You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $11.0 million. Investment A will generate $2.40 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.70 million at the end of the first year, and its revenues will grow at 3.2% per year for every year after that. Which investment has the higher IRR? Which investment has the higher NPV when the cost of capital is 8.1%? Which investment should you select? a. Project B had the higher IRR, project A has the higher NPV. Select project A with the higher NPV. IRR can only be used to compare projects with equal initial investments. b. Both projects are equally valuable. IRR and NPV are both reliable methods to compare projects' value. c. Project A had the higher IRR, project B has the higher NPV. Select project B with the higher NPV. IRR can only be used to compare projects with equal initial investments. d. Project A had the higher IRR, project B has the higher NPV. Select project A with the higher IRR. NPV can only be used to compare projects with equal initial investments. You are considering the following two projects and can take only one. Your cost of capital is 11.9%. The cash flows for the two projects are as follows ($ million): Project Year 0 Year 1 Year 2 Year 3 Year 4 A -$ B -$ What is the IRR of each project? Which project should you choose? a. IRR cannot be used to compare these projects. Choose project B because it has a higher NPV. b. IRR of Project A = 11.9%, IRR of Project B = 17.7%. Choose project B. c. IRR of Project A = 17.7%, IRR of Project B = 21.7%. Choose project B. d. IRR of Project A = 17.7%, IRR of Project B = 21.7%. Choose project A. You need a particular piece of equipment for your production process. An equipment-leasing company has offered to lease the equipment to you for $10,600 per year if you sign a guaranteed 5-year lease (the lease is paid at the end of each year). The company would also maintain the equipment for you as part of the lease. Alternatively, you could buy and maintain the equipment yourself. The cash flows from doing so are listed below (the equipment has an economic life of 5 years). If your discount rate is 7.9%, what should you do? Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 -$41,500 -$2,400 -$2,400 -$2,400 -$2,400 -$2,400 a. b. The NPV of the leasing alternative is -$53,000. The NPV of the purchase alternative is -$53,500. Choose the leasing alternative because it has the lowest NPV. c. The NPV of the leasing alternative is -$42,435. The NPV of the purchase alternative is -$51,108. Choose the buying alternative because it has the highest NPV. Incorrect d. The NPV of the leasing alternative is -$42,435. The NPV of the purchase alternative is -$51,108. Choose the leasing alternative because it has the lowest NPV. e. The NPV of the leasing alternative is -$53,000. The NPV of the purchase alternative is -$53,500. Choose the buying alternative because it has the highest NPV. Your storage firm has been offered $102,000 in one year to store some goods for one year. Assume your costs are $97,200, payable immediately, and the cost of capital is 9.1%. Should you take the contract? a. The NPV will be $3,708. Yes, you should take the contract, as the NPV of the contract is positive. b. The NPV will be $4,800. Yes, you should take the contract, as the NPV of the contract is positive. c. The NPV will be −$3,708. No, you should not take the contract, as the NPV of the contract is negative. d. The NPV will be −$4,800. No, you should not take the contract, as the NPV of the contract is negative. CHAPTER 5 A company has $2 million in machinery expenses and $3 million in rent. It costs $30 per unit in labor costs to produce the good, which is sold for $50 per unit. What is the break even point? a. 100,000 units b. 166,667 units c. 250,000 units d. 50,000 units A company produces 100,000 units that sell for $40. The company's variable costs per unit is $25. The company's total fixed costs are $800,000. What is the company's degree of operating leverage? a. 1.14 b. 2.14 c. 1.25 d. 1.47