Two mutually exclusive investment opportunities require an initial investment of $5 million. Investment A then generates $1.5 million per year in perpetuity, while investment B pays $1 million in the first year, with cash flows increasing by 3% per year after that. At a discount rate of 9%, both projects will have the same NPV. Which project would you prefer if the discount rate was 8% ? Prefer Project A because the NPV of A will be greater than NPV of B Prefer Project B because the NPV of B will be greater than NPV of A Insufficient information to determine NPV of A will be the same as NPV of B at 8% Question 2 1 pts MrXi has been offered an upfront payment today of $14 million to star in the lead role in three movies over the next 3 years. If Mr Xi takes this offer, he will have to forgo acting in other movies that would pay him $5 million at the end of each of the next three years. Assume Mr Xi's personal cost of capital is 10% per year. The NPV of the three-movie offer is closest to: $1.0 million \$1.0 million \$1.6 million \$3.5 million You are considering investing in a start-up project at a cost of $100,000. You expect the project to return a lumpsum of $750,000 to you in seven years. Given the risk of this project, your cost of capital is 20%. The IRR for this project is: 7.5%33.35%25.85%37.5% Question 4 1 pts You are considering adding a microbrewery onto one of your firm's existing restaurants. This will entail an increase in inventory of $8,000, and an increase in accounts payable of $2,500. All other accounts will remain unchanged. The change in net working capital resulting from the addition of the microbrewery is: $10,500 cash flow in $5,500 cash flow out $10,500 cash flow out $5,500 cash flow in Company ABC is a clothing manufacturer and is considering buying a new manufacturing machine to produce a new line of disposable hospital gowns. The machine has an estimated life of 3 years and costs $30,000. The machine falls under asset class 43 and has a capital cost at 30%. At the end of 3 years the machine will be scrapped as it will have a zero value. The tax rate for company ABC is 35%. ABC has a cost of capital of 10% The Present Value of the CCA Tax Shield is: $30,000 $3,150 $7,875 $7,517 Question 6 Company XYZ will invest in a 3-year project that will result in sales of 4,000 items in year 1 , at a selling price of $12 each, and a cost $8.40 each. The number of items sold is estimated to grow by 10% per year. The per unit selling price and cost will remain unchanged over the the the 35%. A machine for the project will cost $40,000. The present value of the CCA tax shield on the machine is $6,084. The production of this new product line will result in additional working capital balances at the end of each year as follows: - Year 0: Zero balance - Year 1: \$2,160 - Year 2: \$2,333 - Year 3: Zero balance The NPV of this project is: $5,449 $4,324 $1,760 $8,743 A decrease in the sales of an existing project because of the launching of a new project is: called cannibalization not relevant to decisions about the project an overhead an opportunity cost Question 8 You decide to use currently unused warehouse space for a new project. If you didn't use the warehouse for this project you could sell it. The use of this warehouse for the new project is an example of in your DCF model: cannibalization an opportunity cost an overhead not relevant in decisions about the project Question 9 Incremental cash flows are: Cash flows that lead to more than one IRR Cash flows that switch between positive and negative cash flows Cash flows that only occur if the project is accepted Cash flows that occur irregularly