1. You need to decide between two mutually exclusive projects. Project A is investing in Machine A with a useful live of 3 years or investing in machine B with a useful life of 5 years. Additional information.

Machine A: Initial investment of $10 million and annual cost of $500,000 on years 1 to 3.

Machine B: Initial investment of $9 million and annual cost of $800,000 on years 1 to 5.

If the discount rate is 11%, which machine should be chosen?

Select one:

a. Machine A

b. Choose the machine with the lowest present value of annual costs.

c. Choose machine with the lowest total cost.

d. Choose the machine with the lowest IRR.

e. Machine B

2.Assume you hold 10-year annual coupon bonds and it is highly likely the market interest rates will increase next day. From this information it is recommended ______________________.

Select one:

a. to switch immediately your 10-year bonds for bonds with longer maturity

b. to sell immediately all your bonds

c. to switch immediately your 10-year bonds for bonds with shorter maturity

d. to switch immediately your 10-year bonds for zero coupon bonds with longer maturity

3.If a non-dividend paying common stock increases by 50% in one year and decreases by 50% in the next year, then the geometric average return is zero.

Select one:

True

False