The owner of a hair salon spends $1,000,000 to renovate its premises, estimating that this will increase her cash flow by $220,000 per year She constructs the above graph, which shows the net present value (NPV) as a function of the discount rate If her discount rate is 6 , should she accept the project a Yes, because the NPV is positive at that rate b No, because the NPV is negative at that rate c No, because the NPV is negative at that rate d Cannot be determined from the information given 2 Which of the following statements is FALSE a The payback rule is useful in cases where the cost of making an incorrect decision might not be large enough to justify the time required for calculating the net present value (NPV) b The payback rule is reliable because it considers the time value of money and depends on the cost of capital c Fifty percent of firms surveyed reported using the payback rule for making decisions d For most investment opportunities expenses occur initially and cash is received later 3 Consider a project with the cash flows shown below Assume the appropriate discount rate for this project is 15 The profitability index for this project is closest to Year Cash Flow 0 10,000 1 4000 2 4000 3 4000 4 4000 a 0 15 b 0 14 c 0 60 d 0 22 4 A manufacturer of video games develops a new game over two years This costs $850,000 per year with one payment made immediately and the other at the end of two years When the game is released, it is expected to make $1 2 million per year for three years after that What is the net present value (NPV) of this decision if the cost of capital is 9 a $1,564,559 b $991,220 c $1,841,093 d $1,071,432 5 A security firm is offered $80,000 in one year for providing CCTV coverage of a property The cost of providing this coverage to the security firm is $74,000, payable now, and the interest rate is 8 5 Should the firm take the contract a Yes, since net present value (NPV) is positive b It does not matter whether the contract is taken or not, since NPV 0 c No, since net present value (NPV) is negative d Yes, since net present value (NPV) is negative

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The owner of a hair salon spends $1,000,000 to renovate its premises, estimating that this will increase her cash flow by $220,000 per year. She

The owner of a hair salon spends $1,000,000 to renovate its premises, estimating that this will increase her cash flow by $220,000 per year. She constructs the above graph, which shows the net present value (NPV) as a function of the discount rate. If her discount rate is 6%, should she accept the project?

	a.	Yes, because the NPV is positive at that rate.
	b.	No, because the NPV is negative at that rate.
	c.	No, because the NPV is negative at that rate.
	d.	Cannot be determined from the information given.

Which of the following statements is FALSE?

The payback rule is useful in cases where the cost of making an incorrect decision might not be large enough to justify the time required for calculating the net present value (NPV).

The payback rule is reliable because it considers the time value of money and depends on the cost of capital.

Fifty percent of firms surveyed reported using the payback rule for making decisions.

For most investment opportunities expenses occur initially and cash is received later.

Consider a project with the cash flows shown below.

Assume the appropriate discount rate for this project is 15%. The profitability index for this project is closest to:

Year	Cash Flow
0	-10,000
1	4000
2	4000
3	4000
4	4000

0.15

0.14

0.60

0.22

A manufacturer of video games develops a new game over two years. This costs $850,000 per year with one payment made immediately and the other at the end of two years. When the game is released, it is expected to make $1.2 million per year for three years after that. What is the net present value (NPV) of this decision if the cost of capital is 9%?

$1,564,559

$991,220

$1,841,093

$1,071,432

A security firm is offered $80,000 in one year for providing CCTV coverage of a property. The cost of providing this coverage to the security firm is $74,000, payable now, and the interest rate is 8.5%. Should the firm take the contract?

	a.	Yes, since net present value (NPV) is positive.
	b.	It does not matter whether the contract is taken or not, since NPV = 0.
	c.	No, since net present value (NPV) is negative.
	d.	Yes, since net present value (NPV) is negative.