*Question 2 (NPV to evaluate projects in companies)

What can we generally say about the correct use of net present value calculations in the evaluation of investment projects, and the execution of investment projects with positive net present value?

(a)That the investment project will contribute to positively accounted profits in all period of the project's lifetime

(b)That the expected return on the investments the company makes is a greater or equal to the return the owners can get by investing in other projects with similar role

(c)That the cash flow from the project is positive at all times

(d)That the internal rate of return of the projects being completed is less than the required rate of return on the company's total capital

*Question 3 (The time value of money)

Time value of money affects the choices companies and individuals make when managing their funds. Below are some claims related to the time value of money. Choose the statement that is correct.

(a)The time value of money in when talking about investment projects corresponds to the interest rate on government bonds

(b)Due to the time value of money, it is more desirable to receive money in one year than to receive the same sum today

(c)Due to the time value of money, it is most desirable to receive money today than the same sum in one year

(d)The alternative cost of capital has no significance in assessing the time value of money

*Question 4 (Cash Flow)

Which of the following financial variables is not in itself part of the cash flow that will be included in a net present value calculation linked to an investment project?

(a) Changes in tax resulting from the investment project

(b) Alternative costs of resources that the company already owns or are used in the investment project

(c)Payments made in the beginning of or during the project, to buy products or services for the investment project

(d) Depreciation of equipment that has been purchased for the investment project

*Question 5.1 (Calculate NPV before Tax)

Calculate the net present value (NPV) before tax of investment A: a factory. Base your calculation on the following information:

The investment cost is paid in full in quarter 0, and the cost of the factory is 100000.

The factory has a lifetime of 20 quarters (5 years) and the value of the factory at the end of quarter 20 is 0

Only Basic jetpacks should be manufactured at the factory throughout its lifetime.

There is no investment in research to streamline production or material consumption.

Suppose the quarterly demand in the market is constant and given at P = 228 - 0.007 * Q, where P is price and Q is the number of jetpacks in demand.

There are 5 competitors in the market (including you), and all sell the same number of jetpacks each quarter at the price of 193 each.

You produce as much as you sell.

The costs associated with the quarterly production at the factory are given at K = 158 * Q + 20000, where 158 * Q is direct labor cost and materials, and 20000 is quarterly maintenance cost when Q is the number of jetpacks produced.

The company has an annual discount rate of 20% on the investment. This means you need to divide it by 4 to get the quarterly rate.

Fill in the calculated NPV before tax in the field. A deviation of 5% from the facets are accepted Recommendation: use Excel or similar tools to perform the calculation for this task. When using the Net Value function in Excel (NPV), pay particular attention to how you handle immediate cash flows.

*Question 5.2 (Calculate IR before Tax)

Use the calculations you made in Problem 5, to calculate the internal rate of return before tax for investment project A described in Problem 5. Internal interest rates can be calculated in several ways. Below you will find some options when using Excel. Solve the problem graphically and double check the answer using the built-in function for calculating the internal rate. Graphic Solution: By varying the yield requirement (interest rate) in the calculation for NPV, you can find several sets of values for the interest rate and NPV: (r1, NPV1), (r2, NPV2), (r3, NPV3), etc. Set the values for r and npv in two columns, and plot a line graph based on this data. Read off the internal rate. The method provides an inaccurate solution, but illustrates the evolution of npv (s). Built-in IR function: Excel's built-in function for calculating the internal rate is called IRR, and can be used for an accurate calculation of IRR. (Note: The investment cost in year 0 is treated here differently than in the NPV function).

Fill in the internal interest rate before tax in % in the field below. It is sufficient to answer with one decimal (eg an interest rate of 0.5467231 = 54.7%). A deviation of 5% from the answer is accepted.

*Question 6.1 (Calculate NPV before Tax)

Now suppose you invest in both a factory and the research for the production of Green jetpacks. Look at the factory and research as a total investment. Calculate the net present value (NPV) before tax on the investment based on the following information:

1. The investment cost is paid in full in quarter 0, and the cost of the factory is 100000 while the cost of the research is also 100000.

2. The factory has a lifetime of 20 quarters (5 years) and the value of the factory at the end of quarter 20 is 0

3. Only green jetpacks should be produced at the factory throughout its lifetime.

4. There is no investment in research to streamline production or material consumption.

5. Suppose the quarterly demand in the market is constant and given at P = 338 - 0.018 * Q, where P is price and Q is the number of jetpacks in demand.

6. There are 5 competitors in the market (including you), and all sell the same number of jetpacks each quarter at the price of 248 each.

7. You produce as much as you sell.

8. The costs associated with the quarterly production at the factory are given at K = 178 * Q + 20000, where 178 * Q is direct labor cost and materials, and 20000 is quarterly maintenance cost when Q is the number of jetpacks produced.

9. The company has an annual discount rate of 20% on the investment. This means you need to divide it by 4 to get the quarterly rate.

Fill in the calculated NPV before tax in the field. A deviation of 5% from the facets are accepted. Recommendation: use Excel or similar tools to perform the calculation for this task. When using the Net Value function in Excel (NPV), pay particular attention to how you handle immediate cash flows.

*Question 6.2 (Calculate IR before Tax)

Use excel or similar tools, as well as the set up and calculations you have from Problem 7 to calculate the internal rate of return before tax for investment project B, described in Problem 7.

Fill in the internal rate in % in the field below. it is sufficient to answer with one decimal (eg an interest rate of 0.5467231=54.7%). A deviation of 5% from the answer is accepted.

*Question 7 (Choosing an investment)

If investment A & B (from questions 5 & 6) were two real, but mutually exclusive, investment alternatives, with net present value as calculated, which investment should you choose?

For this question, do not take into consideration risks of changes in prices, costs, demands etc

(a) invest in factory to produce basic jetpacks

(b) invest in factory and develop Green Jetpacks to produce Green Jetpacks

(c) none of the investment options