Question 3

A firm intends to embark upon an aggressive investment to fend off competition from new entrants into the market. The initial costs of the new investment are 10 million today, with further expenditure on maintenance costs of 1.5m in each of the years 3 and 4 to maintain operational efficiency. The net cash inflow for the years 1 to 4 is 5 million per year. Production is expected to cease at the end of year 5 at which point some machinery will be sold for 2.5 million. The cost of capital is 15%. Calculate the net present value (NPV) and the internal rate of return (IRR) of the project.

2,430,987.60; 31.80%

3,673,929.43; 31.80%

3,673,929.43; 15.0%

2,517,833.65; 15.0%

Question 4

Skyline plc has just determined that the net present value (NPV) of a new investment is 4.55m. If the company has 25 million shares outstanding with a current market price of 3.50 per share, what should be the effect of the new investment on the share price?

5.72

3.68

3.50

7.18

Question 5

The importance and benefits of portfolio diversification suggest that as an investor adds more and more different assets to his portfolio what is likely to happen?

The idiosyncratic risk will be unchanged.

Both the systematic risk and the idiosyncratic risk will reduce.

The systematic risk of the portfolio will reduce.

The idiosyncratic risk will reduce.