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Finance problems: IRR, NPV.

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1) Which one of the following is correct?

a. A major disadvantage of a partnership or a corporation as a form of business is the fact that they do not offer their owners limited liability, whereas proprietorships do.

b. There are more partnerships and sole proprietorships than corporations in the US, and
unincorporated businesses produce more goods and services than do corporations.

c. Because corporations enjoy the benefits of limited liability, easy transferability of ownership interests, unlimited life, and favorable tax status relative to the situation for partnerships and proprietorships, most large business choose to incorporate.

d. Since lawyers have the incorporation process so automated (word processors for drawing up the necessary papers), it is less expensive to form a corporation than to form a proprietorship or partnership.

e. None of the above statements are correct.

Discuss fully the reasons for your choice, then discuss briefly why the other choices are not correct.

2) Find the present values of the following cash flow streams. The interest rate is 8%.

Year Cash Stream A Cash Stream B

1 $100 $300

2 400 400

3 400 400

4 400 400

5 300 100

3) Find the amount to which $500 will grow under the following conditions:

a. 12% compounded annually for 5 years.
b. 12 % compounded semiannually for 5 years
c. 12 % compounded quarterly for 5 years
d. 12 % compounded monthly for 5 years

4) You have a chance to buy an annuity that pays $1,000 at the end of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

5) Which of the following could explain why a business might choose to organize as a corporation rather than as a sole proprietorship or a partnership?
Corporatations generally face fewer regulations
Corporations generally face lower taxes.
Corporations generally find it easier to raise capital
Corporations enjoy unlimited liability.
Statements c and d are correct

6) Which of the following statements is true?
One of the benefits of incorporating your business is that your become entitiled to receive unlimited liability.
Sole proprietorships ae subject to more regulations thatn corporations.
Sole proprietorships do not have to pay corporate tax.
All of the above are correct.
None of the answers above is correct.

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Solution Summary

The problems include Internal rate of return calculations, Net present value estimation, and future value.

Solution provided by:
  • B. Sc., University of Nigeria
  • M. Sc., London South Bank University
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