Exam 11: How to Ensure That Projects Truly Have Positive Npvs

The NPV of a project can be thought of as the present value of its

The expected rise in the price of a mineral less extraction costs should equal the cost of capital.

According to Warren Buffett, which of the following is the most important lesson on growth and profitability?

When markets become competitive, economic rents

For a stock that pays no dividends, today's price is the present value of next year's price.

The best way to uncover forecasting errors contained within NPV estimates is by looking at I.book values; II.historical values; III.market values

The manufacture of herbal health tonic is a competitive industry. The manufacturing facilities have an annual output of 100,000 gallons. Operating costs are $2 per gallon. A 100,000-gallon capacity plant costs $500,000 to build and has an indefinite life, with no salvage value. The cost of capital is 20 percent (assume no taxes). Your company has discovered a new process that lowers the operating cost per gallon to $1.00. Assuming that the competition will catch up in three years and the market demand is sufficiently high, what is the net present value of building a new plant with new technology?

The cash forecasts for a positive NPV project is more reliable if the managers of the firm can identify the economic rents associated with the project.

A building is appraised at $1 million. This estimate is based on forecasted net rent of $100,000 per year discounted at a 10 percent cost of capital [PV = 100,000/ 0.1 = 1,000,000]. The rent is the net of repair and maintenance costs and taxes. Suppose the building is currently uninhabitable. It will take one year and $250,000 of work (spent at the end of the year)to bring it into rentable condition. How much would you be willing to pay for the building today?

Suppose the current price of gold is $600 per ounce and the price of gold is expected to increase at a rate of 5 percent per year for the foreseeable future. What is the current value of 0.2 million ounces of gold to be produced each year for the next five years (the discount rate is 8 percent per year)?

The manufacture of folic acid is a competitive business. A new plant costs $100,000 and lasts for three years. The cash flow from the plant is as follows: year 1: +$43,300; year 2: +$43,300; and year 3: +$58,300. (Assume no taxes.)If the discount rate is 20 percent, what is the value of the plant at the end of year 1?

The NPV of an investment is the discounted value of the economic rents that it is expected to produce.

Long-lasting competitive advantages include I.proprietary technology; II.protected markets with high barriers to entry for other firms; III.strategic assets that competitors cannot easily duplicate

A rental property is providing an acceptable market rate of return of 13 percent. You expect next year's rent to be $1 million and that rent is expected to grow at 3 percent per year forever. What is the current value of the property?

In a competitive market, most firms can earn high economic rents.

Briefly explain the main difference between the capital budgeting process and the strategic planning process.

Briefly explain the two general methods for forecasting the PVs of cash flows.

According to Michael Porter, managers can secure a competitive advantage for their firms within their industry in three ways: They are by cost leadership, by product differentiation, and by focusing on a particular market niche.

Sometimes the gains from new technology are completely offset by the losses on existing plants.

If an asset is worth more to others than it is to you, you should generally attempt to buy it from them.