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Support costs in Finance

1. Which of the following would be the best investment based on present value? Assume an annual discount rate of 16%

a. An investment that pays $5,000 at the end of each year for 6 years, assuming annual compounding.
b. An investment that pays $1,225 at the end of each quarter for 6 years, assuming quarterly compounding
c. An investment that pays $1,200 at the beginning of each quarter 6 years, assuming quarterly compounding?
d. $19,000 today.
e. The answer cannot be determined from the information given.

Use the following data to solve questions 2, 3, 4, and 5:

Year Undiscounted free cash flows
0 (380,000)
1 20,000
2 30,000
3 200,000
4 175,000
5 130,000
6 145,000

Required rate of return 15%

2. The net present value of the investment is closest to which of the following answers?

a. negative 5,000
b. 19,000
c. 6,100
d. 399,000
e. none of the above are within 1,000 of the correct answer. (Please provide the correct answer.)

3. The internal rate of return is closest to which of the following answers?

a. 20.50%
b. 18.20%
c. 16.45%
d. 14.25%
e. none of the above are within 1% of the correct answer. (Please provide the correct answer.)

4. The undiscounted payback period is closest to which of the following answers?

a. 3.7 years
b. 5.7 years
c. 7.2 years
d. 10.0 years
e. None of the above is within one year of the correct answer.

5. Assume the required rate of return decreases to 12%. The net present value of the investment would

a. increase
b. decrease
c. stay the same
d. become negative
e. both "b" and "d", above.

6. Support costs have increased in today's manufacturing environment because:

(a) managers have let them get out of control
(b) there is now a shift toward greater automation
(c) fewer direct materials are being used in production
(d) direct labor costs have increased

Solution Summary

Support costs are investigated.

$2.19