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

Frequently, the financial manager can observe market values for real assets (e.g., real estate values, values of precious metals, etc.). However, they have no place in the capital budgeting analysis. For that purpose, discounted cash flow is the only proper tool.

The total NPV of a new plant is equal to the NPV of the new plant plus the change in the present value of existing plants due to the impact of the new plant.

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 salvage value at the end of year 2 is $60,000, should you scrap the plant at the end of year 2?

In order to generate a positive NPV project, a firm must have an economic advantage over its competitors.

Investing in gold is like investing in I.a stock that pays quarterly dividends; II.a stock that pays annual dividends; III.Treasury bonds; IV.a stock that pays no dividends

A strategy of deliberately slowing down the rate of introduction of new products by well-established and technologically advanced firms is best described as

Explain the economic concept that reduces firms' chances of earning economic rents.

Price cutting in a competitive market will usually not lead to the creation of economic rents.

What is the NPV of a project in a perfectly competitive environment?

Briefly explain the effect of competition on economic rents.

Suppose the current price of gold is $600 per ounce. The price of gold is expected to grow 4 percent per year for the foreseeable future. If the appropriate discount rate is 10 percent, then the current value of gold per ounce is

You inherited 100 acres of Iowa farmland. There is an active market in this type of land, and similar properties currently sell for $10,000 per acre. If the land is planted with corn, you expect that the land will deliver net cash flows of $800 per acre forever. If the discount rate is 10 percent, how much is the land worth per acre?

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 five years and the market demand is sufficiently high, what is the net present value of building a new plant with new technology?

Which of the following is not one of Michael Porter's five forces?

Why are economic rents important to a manager?

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 $1.50. Assuming that the competition will never catch up and the market demand is sufficiently high, what is the net present value of building a new plant with new technology?

Briefly explain how investing in gold is like investing in a stock that pays no dividends.

A positive NPV forecast for a new project is reliable only if it is based on

Long-lasting competitive advantages include I.patents; II.brand names; III.economies of scale

A new grocery store requires $50 million in initial investment. You estimate that the store will generate $5 million of after-tax cash flow each year for five years. At the end of five years, it can be sold for $55 million (ignore taxes). What is the NPV of the project at a discount rate of 10 percent?