2.

Briefly answer in Excel the questions that follow (each question is worth 4 points). An answer of 1-3 sentences for each question should suffice.

• A: If a business has sufficient cash, it should accept all projects, including ones with estimated positive NPV and those with estimated negative NPV.
• B: For the simulation approach that evaluates the merits of a project given uncertainty about future cash flows, we simulate the NPV calculation many times using a Data Table in Excel.
• C: The class concepts suggest that we estimate the most we would be willing to pay to purchase a piece of equipment for a capital investment by setting up the NPV calculation in Excel as normal, then using Goal-Seek to find the price of the piece of equipment that makes the NPV equal to zero.
• D: A proposed project has a negative cash flow today, then positive cash flows for several years before ending. How many IRRs does this proposed project generate?
• E: The IRR is technically the discount rate that sets the NPV equal to zero.
• F: When considering two mutually exclusive projects, if NPV gives one conclusion and IRR gives another, which one should we default to? Why?
• G: What alternative approach to estimate the project discount rate (or cost of capital) did we talk about in class if the riskiness of the project differs from the riskiness of the firm?
• H: When computing project cash flows, should we add or subtract net working capital investments? What about investments in PP&E (or capital expenditures)?