Q1 The projected net cash flows for an investment are (in $thousands):

YearYear 0Year 1Year 2Year 3Year 4Year 5$(850)$130$200$300$200$150

The net present value of the investment, assuming a 7% cost of capital is

Select one:

a.$49,500

b.$801,000

c.$(49,500)

d.$(801,000)

Q2 The present values of cash flows for projects, each of which has an initial capital outlay of $350,000, are

Project A: $450,000

Project B: $400,000

Project C: $375,000

The cash value added (of profitability index) for each project suggests that the preferred project is

Select one:

a.All projects are the same because the initial capital outlay is the same

b.Project B

c.Project C

d.Project A

Q3 Rex Products has been considering the purchase of a new machine.The existing machine will operate for 4 more years and will then have a zero disposal value.If the machine is disposed of now, it may be sold for $60,000.The new machine costs $250,000 and will result in labour savings of $60,000 in additional cash inflows each year.

What is the net present value of the investment, assuming that the cost of capital is 10%?Would the company want to purchase the new machine?

Select one:

a.$(200); no

b.$59,800; yes

c.$200; yes

d.$(59,800); no

Q4 Pajama Company wants to purchase a new sewing machine that will have a useful life of 5 years.The investment is expected to generate annual cash inflows of $30,000.The cost of capital for the company is 12%.What is the maximum that the company would be willing to pay for the sewing machine?

Select one:

a.$108,150

b.$18,000

c.$120,000

d.None of the above