A firm is evaluating two projects that are mutually exclusive with initial investments and cash flows as follows:
Project: A Project: B
Initial End-of-Year Initial End-of-Year
Investment Cash Flows Investment Cash Flows
$40,000 Year1- $20,000 $90,000 $40,000
Year 2- 20,000 40,000
Year 3- 20,000 80,000
You are a financial analyst in the firm and you don't like the payback approach. Your recommendation would be to (Suppose the firm's required rate of return is 15%)
a- accept projects A and B.
b- accept project A and reject B
c- reject project A and accept B.
d- reject both.
A company's fixed operating costs are $500,000, its variable costs are $3.00 per unit, and the product's sales price is $4.00. What is the company's breakeven point, i.e., at what unit sales volume would its income equal its costs?
A stock just paid a dividend of $1. The required rate of return is rs = 11%, and the constant growth rate is 5%. What is the current stock price?
Michigan Mattress Company is considering the purchase of land and the construction of a new plant. The land, which would be bought immediately (at t = 0), has a cost of $100,000 and the building, which would be erected at the end of the first year (t = 1), would cost $500,000. It is estimated that the firm's after tax cash flow will be increased by $100,000 starting at the end of the second year, and that this incremental flow would increase at a 10 percent rate annually over the next 10 years. What is the approximate payback period?
a- 2 years
b- 4 years
c- 6 years
d 8 years
e- 10 years
1. Since the payback period is not to be used, we calculate the NPV of the project and accept the project if the NPV is positive.
NPV of Project A is -40,000+20,000/1.15 + 20,000/1.15^2 + 20,000/1.15^3 = $5,664.50
NPV of Project B is -90,000 + 40,000/1.15 + 40,000/1.15^2 + 80,000/1.15^3 = $27,629.65
Since the projects are mutually exclusive we can select only 1 and so ...
The solution explains some multiple choice questions relating to capital budgeting