Question 17 10 pts Part 4 You finish the day with various meetings, phone calls, and tasks. You receive a phone call from a real estate broker who represents the owner of land next to your factory. The owner is willing to sell you the land so that you can expand operations of your factory. You run some quick numbers and come up with the following cash flows for a factory expansion: Year 0 -12,500,000 Year 1-4 2,250,000 Year 5 10,000,000 If the firm's cost of capital is 10% for this, is the project worth looking at further? Yes, the NPV is $250,000 which indicates that it will generate wealth for the firm's shareholders. O Yes, the NPV is +841,410 which indicates that it will add wealth to the firm's shareholders. No, expansions are not types of projects that firms evaluate. O No, the IRR is 12.02% which is an indicator that it will not maximize shareholder wealth. Question 18 10 pts Part 4 You finish the day with various meetings, phone calls, and tasks. You meet with your VP of Finance to discuss various tools to use to evaluate the risk of projects. Your VP of Finance makes the following statements: 1. If we use sensitivity analysis we will be able to capture the effects of changes in multiple value drivers in a single project. 2. Break-even analysis will tell us when we have a $0 NPV. 3. Accounting Break-even (EBIT) will tall us the number of units that must be sold for operating profit to equal $0. 4. Any sales below an economic break-even will produce an economic profit for the firm. Which comment is correct: Statement 1 O Statement 3 O Statement 4 O Statement 2 Question 19 10 pts Part 4 You finish the day with various meetings, phone calls, and tasks. You receive a phone call from a real estate broker who represents the owner of land next to your factory. The owner is willing to sell you the land so that you can expand operations of your factory. Which of the following would NOT be included in the cash flow analysis for a project to expand the factory: Construction costs for the expansion of the factory. Incremental after-tax cash flows. The sunk cost of paying an appraiser to determine the value of the land. Utility cost above and beyond the existing utility costs at the factory. > Question 20 10 pts Part 4 You finish the day with various meetings, phone calls, and tasks. You put a memo together for the CEO and board members that summarizes the decisions made by the investment committee for new projects and the status of various projects that the firm is pursuing. There is an error on this memo. What is the error: Project PI NPV IRR Disc Rate* Status | 1,75 +1.25MM 15% 12% B .95 -.98 MM 11% 12% .67 +3.24 MM 14% 10% Approved Rejected Approved Rejected Approved D .73 -1.2 MM 7% 10% E 3.20 +6 MM 21% 15% *Discount rate used to discount project cash flows (WACC). MM = millions O Project A IRR Project E Approved O Project B Rejected O Project C Profitability Index (PI)