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QUESTION 1

  1. You purchased land 3 years ago for $60000 and believe its market value is now $90000. You are considering building a hotel on this land instead of selling it. To build the hotel, it will initially cost you $150000, an expense that you plan to depreciate straight line over the next three years. Wells Fargo offered you a loan for $60,000 at an 8% interest rate to be repaid over the next 4 years. You anticipate that the hotel will earn revenues of $165000 each year, while expenses will be a mere $30000 each year. The initial working capital requirement will be $7000 which will be recovered in the last year. The tax rate is 35%. Your estimated cost of capital is 10%. What is the net present value of this project?

    $24,918.55

    $20,000.38

    $38,020.13

    $45,200.80

    $33,869.93

10 points

QUESTION 2

  1. The NPV rule states that you should accept an investment if the NPV:

    is negative.

    is positive.

    is less than or equal to zero.

    is less than the investment's initial cost.

    exceeds the investment's initial cost.

5 points

QUESTION 3

  1. The payback period is the period of time it takes an investment to generate sufficient cash flows to:

    earn the required rate of return.

    produce the required net income.

    produce a yield equal to or greater than the market rate on similar investments.

    have a cash inflow, rather than an outflow, for the year.

    recover the investment's initial cost.

5 points

QUESTION 4

  1. A proposed project will increase a firm's accounts payables. This increase:

    should be ignored when conducting scenario analysis.

    is a cash outflow at time zero.

    is an initial cash inflow only.

    is a sunk cost and should be ignored.

    is a cash inflow at time zero and a cash outflow at the end of the project.

5 points

QUESTION 5

  1. What is the net present value of a project with the following cash flows if the discount rate is 7 percent?

    Year 0: $-3500

    Year 1: $1200

    Year 2: $1000

    Year 3: $900

    Year 4: $0

    -$1,112.30

    $305.75

    -$770.40

    $2,007.99

    $946.31

10 points

QUESTION 6

  1. The change in a firm's future cash flows that results from adding a new project are referred to as _____ cash flows.

    eroded

    deviated

    incremental

    direct

    residual

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Nelly Stracke
Nelly StrackeLv2
28 Sep 2019

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