1. You are evaluating purchasing the rights to a project that will generate after tax expected cash flows of $90,000 at the end of each of the next five years, plus an additional $1,000,000 at the end of the fifth year as the final cash flow. You can purchase this project for $950,000. If your firm's cost of capital (aka required rate of return) is 15%, what is the NPV of this project? (Answer to the nearest $1000.)

500,000

950,000

-106,000

-151,000

insufficient information to estimate an NPV

2. You are evaluating purchasing the rights to a project that will generate after tax expected cash flows of $90,000 at the end of each of the next five years, plus an additional $1,000,000 at the end of the fifth year as the final cash flow. You can purchase this project for $950,000. At this price, what rate of return would you earn on the investment (aka what is the internal rate of return)?

10.3%

7.7%

9.6%

52.6% ((90*5+1000)/950 -1)

15%

insufficient information to estimate a return rate

3. If accepting 1 project implies that you can NOT also accept another alternative project, we would say these 2 projects are:

mutually exclusive

independent

profitable

synergistic

none of the above

4. You are considering the purchase of an investment that would pay you $5,000 per year for Years 15, $3,000 per year for Years 68, and $2,000 per year for Years 9 and 10. If you require a 14 percent rate of return, and the cash flows occur at the end of each year, then what is the MOST you would be willing to pay for this investment?

a. $15,819.27

b. $21,937.26

c. $32,415.85

d. $38,000.00

e. $52,815.71

5. When evaluating whether to proceed with a project, the firm should consider all of the following factors EXCEPT which one? (i.e., Which is a "not relevant" versus " relevant" cash flow?)

a. changes in working capital attributable to the project

b. sunk costs already incurred

c. the current market value of any equipment to be sold and replaced

d. the resulting difference in depreciation if the project involves a replacement decision

e. all of the above should be considered.

6. While doing a capital budgeting analysis you realized that the project would require an immediate increase in inventory levels of $8000. You should

a. ignore the inventory requirement because it is not an operating cash flow

b. record the $8000 at time zero as an additional benefit of taking the project

c. remember to depreciate the $8000 over the depreciable life of the project

d. record the $8000 at time zero as an additional cost of taking the project

e. none of the above are accurate