Deck 16: Investment Decision Applications

Question 1

A company has two investment choices. Alternative A requires an immediate outlay of $4000.00 and offers a return of $14 000.00 after seven years. Alternative B requires an immediate outlay of $3600.00 in return for which $500.00 will be received at the end of every six months for the next seven years. If the rate of return is 6% compounded semi-annually, determine which alternative is preferable.

Answer 1

Alterative A:
PV of 14 000: n = 7(2)= 14; i = = 0.03; FV = 14 000; I/Y = 6; P/Y = C/Y = 2
PV = 14000 = $9255.65
Programmed solution: NPVA = 9255.65 - 4000.00 = $5255.65 = $5256
Alternative B:
PMT = 500; n = 7(2)= 14; i = 0.03; I/Y = 6; P/Y = C/Y = 2
PV = 500 = $5648.04
Programmed solution: NPVb = 5648.04 - 3600.00 = $2048.04 = $2048
Since NPVA > NPVB, alternative A is preferred.

Question 2

A telephone system with a disposable value of $4200 after five years can be purchased for $16 600. Alternatively, a leasing agreement is available that requires an immediate payment of $1900 plus payments of $150.00 at the beginning of each month for five years. If money is worth 9.6% compounded monthly, should the telephone system be leased or purchased?

Answer 2

PMT = $150; P/Y = C/Y = 12; n = 5(12)= 60; I/Y = 9.6%; i = 0.008
PV of Purchase: = 16 600 - 4200(1.008)-60
= 16 600 - 4200(.6199663)= 16600.00 -2603.86 = $13 996
PV of Lease: = 1900 + 150 (1.008)
= 1900 + 150(47.5042142)(1.008)= 1900 + 7182.64 = $9083
At 9.6% monthly the present value of the decision to lease is smaller than the present value of the decision to buy. The telephone system should be leased.

Question 3

A piece of property may be acquired by making an immediate payment of $125 000 and payments of $37 500 and $50 000 three and five years from now respectively. Alternatively, the property may be purchased by making quarterly payments of $11 150 in advance for five years. Which alternative is preferable if money is worth 12.2% compounded semi-annually?

Answer 3

ALT. 1 = 125000.00 + 37500.00(1.061)-6 + 50000.00(1.061)-10
= 125000.00 + 37500.00(.7009833)+ 50000.00(.5531541)
= 125000.00 + 26286.87 + 27657.71 = $178944.58 = $178 945.
ALT. 2: I/Y = 12.2%; P/Y = 4; C/Y = 2; c = = 0.5; n = 4(5)= 20; p = -1 = .03004854
PV of ALT.2 = 11 150. (1.03004854)
= 11150.00(14.87080004)(1.03004854)= $170791.75 = $170 792
Since the present value of the Alternative 2 is smaller than the present value of the Alternative 1, Alternative 2 is preferable.

Question 4

An investment project requires an initial expenditure of $160 000.00 with a salvage value of $30 000.00 after ten years. It is estimated that it will have annual returns of $21 000.00 for ten years. Should the company undertake this project if it wants to achieve a 9% rate of return?

Question 5

Replacing old equipment at an immediate cost of $75 000 and an additional outlay of $10 000 six years from now will result in savings of $3120 per quarter for 11 years. The required rate of return is 11.4% compounded annually. Use the net present value method to determine whether the company should replace old equipment or not.

Question 6

A new car costs $21 000. Alternatively, the car can be leased for three years by making payments of $360 at the beginning of each month and can be bought at the end of the lease for $10 000. If interest is 8% compounded semi-annually, which alternative is preferable?

Question 7

An obligation can be settled by making a payment of $16 000 now and a final payment of $30 000 in 3 years. Alternatively, the obligation can be settled by payments of $2500 at the end of every three months for four years. Interest is 12% compounded quarterly.
Compute the present value of each alternative and determine the preferred alternative according to the discounted cash flow criterion.

Question 8

A wireless telephone system with a disposable value of $5 000 after five years can be purchased for $15 000. Alternatively, a leasing agreement is available that requires an immediate payment of $2000 plus payments of $100.00 at the beginning of each month for five years. If money is worth 6% compounded monthly, should the telephone system be leased or purchased?

Question 9

An obligation can be settled by making a payment of $7500.00 now and a final payment of $10 000.00 in five years. Alternatively the obligation can be settled by payments of $750.00 at the end of every three months for five years. If interest rate is 10% compounded quarterly, determine the preferred alternative.

Question 10

You win a lottery and have a choice of taking $200 000.00 immediately or taking payments of $8000.00 at the end of every three months for ten years. Which offer is preferable if interest is 8% compounded quarterly?

Question 11

Replacing old equipment at an immediate cost of $75 000 and an additional outlay of $10 000 six years from now will result in savings of $3120 per quarter for 11 years. The required rate of return is 8% compounded annually. Use the net present value method to determine whether the company should replace old equipment or not.

Question 12

A contract is estimated to yield net returns of $7000.00 quarterly for seven years. To secure the contract, an immediate outlay of $80 000.00 and a further outlay of $60 000.00 three years from now are required. If interest is 6% compounded quarterly, determine if the investment should be accepted or rejected.

Question 13

Tamia Industries plans to replace the outdated equipment that will cost the company $100 000.00 now and $60 000.00 six years from now. This replacement will result in revenues of $6000.00 at the end of each quarter for twelve years. At an interest rate of 9% compounded annually and using the Net Present Value criterion, should the company replace this equipment or not?

Question 14

An expenditure may be met by outlays of $1700 now and $2210 at the end of every six months for 6 years or by making monthly payments of $500 in advance for seven years. Interest is 11% compounded annually.
Compute the present value of each alternative and determine the preferred alternative according to the discounted cash flow criterion.

Question 15

A car costs $29 700. Alternatively, the car can be leased for three years by making payments of $540 at the beginning of each month and can be bought at the end of the lease for $14 750. If interest is 9.2% compounded semi-annually, which alternative is preferable?

Question 16

Sean and Jessica want to sell their interest in a small business. They have received two offers. If they accept Offer A they will receive $40 000 immediately and $30 000 in two years. If the accept Offer B they will receive $50 000 now and $2000 at the end of every six months for 5 years. If interest is 8%, which offer is preferable?

Question 17

Donna and Keith want to sell their business. They have received two offers. If they accept Offer A they will receive $61 000 immediately and $20 000 in three years. If the accept Offer B they will receive $37000 now and $3000 at the end of every six months for 5 years. If interest is 6.67%, which offer is preferable?

Question 18

An obligation can be settled by making a payment of $12 000 now and a final payment of $32 000 in 4 years. Alternatively, the obligation can be settled by payments of $2700 at the end of every three months for five years. Interest is 10% compounded quarterly.
Compute the present value of each alternative and determine the preferred alternative according to the discounted cash flow criterion.

Question 19

A selection has to be made between two investment alternatives. The first alternative offers a net return of $47 000.00 after three years, $30 000.00 after five years and $26 000.00 after seven years. The second alternative provides a net return of $13 000.00 per year for seven years. Determine the preferred alternative according to the discounted cash flow criterion if money is worth 11%.

Question 20

An expenditure may be met by outlays of $3000 now and $1000 at the end of every six months for 5 years or by making monthly payments of $250 in advance for three years. Interest is 12% compounded annually.
Compute the present value of each alternative and determine the preferred alternative according to the discounted cash flow criterion.

Question 21

A restaurant may be purchased for $250 000. Annual net income from the operation of the restaurant is expected to be $61 000 for each of the first 4 years and $30 000 for each of the next three years. After 7 years, the restaurant can be sold for $315 000. Determine the rate of return on the investment correct to the nearest tenth of a percent.
a)Use linear interpolation to find the approximate value of the rate of return.
b)Find the answer using Cash Flow and IRR.

Question 22

LD Winery expects a demand of 10 000 bottles per year for a special purpose wine for six years. Net return per unit is $6.10. To produce the wine, LD must buy equipment costing $200 000 with a life of six years and a salvage value of $10 000 after six years. The company estimates that repair costs will be $8000 per year during Years 2 to 6. Should LD invest in the equipment if it requires a return of 16% on its investment?

Question 23

A special chemical development project requires an immediate outlay of $110 000 and $50 000 at the end of each year for 3 years. Net returns are nil for the first 3 years and $60 000 per year thereafter for fourteen years. What is the net present value of the project at 17%?

Question 24

The introduction of a new product requires an immediate outlay of $145 000 and has a residual value of $30 000 after 10 years. The anticipated net returns from the marketing of the product are expected to be $25 500 per year for ten years. What is the rate of return on the investment (correct to the nearest tenth of a percent)?
a)Use linear interpolation to find the approximate value of the rate of return.
b)Find the answer using Cash Flow and IRR.

Question 25

A project requires an initial outlay of $350 000 and a further outlay of $100 000 after one year. Net returns are $105 000 per year for five years. What is the net present value of the project at 9.9%?

Question 26

Assume that the net present value of a project is $ 220 at 22%, and -$305 at 24%. Use linear
interpolation to compute the rate of return correct to the nearest tenth of a percent.

Question 27

A once in a lifetime project requires an immediate outlay of $100 000 and $25 000 at the end of each year for 3 years. Net returns are nil for the first 3 years and $30 000 per year thereafter for fourteen years. What is the net present value of the project at 16%?

Question 28

An investment of $180 000 yields annual net returns of $27 700 for seven years. What is the rate of return on the investment (correct to the nearest tenth of a percent)if part of the initial investment, in the amount of, $80 000 is recovered at the end of 7 years?
a)Use linear interpolation to find the approximate value of the rate of return.
b)Find the answer using Cash Flow and IRR.

Question 29

Assume that the net present value of a project is $ 3870 at 10%, and -$1853 at 12%. Use linear interpolation to compute the rate of return correct to the nearest tenth of a percent.

Question 30

Suppose you are offered two investment alternatives. If you choose Alternative 1, you will have to make an immediate outlay of $26 000. In return, you will receive $1500 at the end of every three months for the next ten years. If you choose Alternative 2, you will have to make an outlay of $14 000 now and $8000 in two years. In return, you will receive $60 000 ten years from now. Interest is 8.22% compounded semi-annually. Compute the net present value for each alternative and determine which investment should be accepted or rejected according to the net present value criterion.

Question 31

Big Sky Company expects a demand of 30 000 units per year for a special purpose component for six years. Net return per unit is $4.10. To produce the component, the company must buy a machine costing $245 000 with a life of six years and a salvage value of $47 000 after six years. The company estimates that repair costs will be $18 000 per year during Years 2 to 6. If Big Sky company requires a return on investment of 15.5%, should it market the component?

Question 32

Replacing old office equipment at an immediate cost of $3000 and $4000 four years from now will result in savings of $400 semi-annually for ten years. Should the old equipment be replaced
a)at 8% compounded annually?
b)at 12% compounded annually?

Question 33

Replacing old equipment at an immediate cost of $5000 and $7000 six years from now will result in a savings of $3000 semi-annually for ten years. At 11% compounded annually, should the old equipment be replaced?

Question 34

The SHREK Company has to make a decision about expanding its production facilities. Research indicates that the desired expansion would require an immediate outlay of $160 000 and an outlay of a further $60 000 in five years. Net returns are estimated to be $25 000 per year for the first five years and $20 000 per year for the following 9 years. Find the net present value of the project. Should the expansion project be undertaken if the required rate of return is 10% compounded annually?

Question 35

A new venture that requires outlays of $127 000 for each of the first two years will yield net returns of $85 000 in each year for years 3 to 6 and $70 000 for each of the following four years. A residual value of $130 000 can be recovered at the end of the last income period. Should the venture be undertaken if a yield of 11.56% is required?

Question 36

A company is considering a project that will require a cost outlay of $17 200 per year for 3 years. At the end of the project the salvage value will be $15 000. The project will yield returns of $60 000 in Year 4 and $20 000 in Year 5. There are no returns after Year 5. Alternative investments are available that will yield a return of 14.2%. Should the company undertake the project?

Question 37

Project A requires an immediate investment of $18 000 and another $16 000 in three years. Net returns are $4500 after two years, $13 000 after four years, and $8900 after six years. Project B requires an immediate investment of $4000, another $6000 after two years, and $4000 after four years. Net returns are $3375 per year for 8 years. Determine the net present value at 11%. Which project is preferable according to the net present value criterion?

Question 38

A company is considering a project that will require a cost outlay of $30 000 per year for three years. At the end of the project, the company expects to salvage the physical assets for $50 000. The project is estimated to yield net returns of $60 000 in Year 4, $40 000 in Year 5, and $15 000 for each of the following five years. Alternative investments are available yielding a rate of return of 14.5%. Compute the net present value of the project.

Question 39

A commitment on the project requires an initial outlay of $10 000.00 and a further outlay of $5000.00 after one year. Net returns are $5 000.00 per year for five years. What is the net present value of the project at 16%?

Question 40

A company is considering a project that will require a cost outlay of $25 000 per year for 3 years. At the end of the project the salvage value will be $15 000. The project will yield annual net returns of $17 500 for 5 years. Alternative investments are available that will yield a return of 15%. Should the company undertake the project?

Question 41

A house is on sale in Markham. Marlene has an option to pay $575 000 lump sum or pay $6000 at the end of every month for the next 10 years. If money earns 5% compounded monthly, which option has a better economic advantage?

A)Paying monthly has an advantage of $9312 in PV
B)Paying lump sum has an advantage of $9312 in PV
C)Paying monthly has an advantage of $85 129 in PV
D)Paying lump sum has an advantage of $85 129 in PV
E)Both options are the same. Choose any.

Question 42

The introduction of a new product requires an initial outlay of $610 000. The anticipated net returns from the marketing of the product are expected to be $92 300 per year for 12 years. Find the rate of return (correct to the nearest tenth of a percent).

Question 43

A company spends $117 500 today and has positive cash inflows of $34 000 for each of the next 6 years. What is the Internal Rate of Return (IRR)?

A)14.87%
B)18.47%
C)17.48%
D)16.84%
E)15.87%

Question 44

A company buys equipment for $15 000 today and has annual net cash inflows of $6000 for 3 years. The discount rate is 12% compounded annually. What is the Net Present Value (NPV)?

A)-$525.90
B)$552.90
C)$992.50
D)$652.90
E)-$652.90

Question 45

Molly needs to decide whether to buy a water heater for $2200 cash and enter a service contract requiring a payment of $30 at the end of every 3 months for 10 years or to enter a 10 years lease requiring a payment of $90 at the beginning of every 3 months. If the leased water heater can be bought after 10 years for $80, should Molly buy or lease the water heater, if money is compounded quarterly at 2.5%?

Question 46

Nick has a choice to pay $1499 for a TV now or pay $1599 3 years from now. What should be the minimum interest rate at which Nick should invest $1499 to make a decision to pay 3 years from now?

A)2.176%
B)6.528%
C)0.725%
D)6.67%
E)3%

Question 47

The Radium Hot Springs plans to install a swimming pool. Construction of the lift is estimated to require an immediate outlay of $420 000. The life of the pool is estimated to be 20 years with a salvage value of $20 000. Cost of preparing the area is expected to be $30 000 for each of the first 2 years of operation. Net cash inflows from the pool are expected to be $49 000 for each of the first five years and $90 000 for each of the following 15 years. Find the rate of return (correct to the nearest tenth of a percent).

Question 48

A company needs to spend $15 000 for each of the next three years. Net returns beginning in Year 4 are estimated at $2500 per year for ten years. The required rate of return is 9.75% compounded annually. The NPV is?

A)-$27 521.41
B)-$27 721.41
C)-$25 721.41
D)$25 217.41
E)$27 521.41

Question 49

A company has cash outflows of $21 275 starting today for each of the next 5 years. After that they will have cash inflows of $16 000 for each of the following 7 years. The discount rate is 9% compounded annually. What is the NPV?

A)-$30 415.15
B)-$34 015.15
C)-$4015.15
D)-$341.51
E)-$41.51

Question 50

A company has the following pattern of cash flows. Today -$47 000, Year 1 -$15 500, Year 2 + $16 000, Year 3 + $35 000, Year 4 + $57 000. What is the IRR?

A)9.301%
B)29.301%
C)19.301%
D)39.301%
E)49.301%

Question 51

A project requires an initial outlay of $100 000 and promises net returns of $18 500 per year over a twelve-year period. If the project has a residual value of $4000 after twelve years, what is the rate of return?

Question 52

A project requiring an immediate investment of $150 000 and a further outlay of $60 000 after four years has a residual value of $50 000 after nine years. The project yields a negative net return of $10 000 in Year 1, a zero net return in Year 2, $60 000 per year for the following four years, and $70 000 per year for the last three years. Find the rate of return (correct to the nearest tenth of a percent).

Question 53

Billy Bob wants to convert his farm into a ski resort. He asked you to determine his rate of return based on the following estimates.
- Development cost for each of the first 2 years, $87 000.
- Construction of a chalet in Year 3, $1 240 000.
- Upon his retirement in fifteen years, improvements in the property will yield him $270 000.
- Net returns from the operation of the golf course will be nil for the first three years and $200 000 per year afterwards until his retirement.

Question 54

Kevin needs to decide whether to buy a Honda Civic for $19 900 with a salvage price of $6500 after 5 years or lease the car for 5 years making monthly payments of $269 at the beginning of each month. If money is worth 5% compounded annually, should Kevin buy or lease?

Question 55

A company has the following net cash inflows. Today -$7000, Year 1 -$15 000, Year 2 -$9000, Year 3 + $12 000, Year 4 -$3000, Year 5 + $19 000. Compute the net present value if the required rate of return is 7.22% compounded annually.

A)-$4709.89
B)-$3000.00
C)-$7009.89
D)-$7409.89
E)$4709.89

Question 56

A company has an immediate cash outlay of -$325 000 and additional subsequent cash outlays of -$6000 per year for the life of the project. They will receive cash inflows in year 3 for + $77 000 and increasing by $3000 per year until the project ends 7 years later (total of 10 years). What is the IRR?

A)9.79%
B)0.79%
C)7.79%
D)10.91%
E)3.79%

Question 57

A company is planning on investing the following monies. They spend Today -$26 000, Year 1 -$7000, Year 4 -$11 000, and Year 7 -$10 100. Their cash inflows are Years 1-3 inclusive + $12 000, Years 4-9 inclusive + $16 000. What is their IRR?

A)15.18%
B)25.18%
C)5.18%
D)35.18%
E)10.18%

Question 58

A company is looking to invest in a very risky project. They have a required rate of return of 27% compounded annually. The project has the following cash inflows: Year 1 $17500, Year 2 $15000, Year 3 $27500. It also has the following cash outflows: Immediately -$10 000, Year 1 -$15 000, Year 3 -$9500. What is the NPV?

A)$9718.06
B)$7918.06
C)$7819.06
D)$9918.06
E)-$9718.06

Question 59

What is the IRR for the following net annual cash flows today -$45 000, Year 1 + $12 000, Year 2 + $37 000, Year 3 + $12 000, Year 4 + $17 000?

A)26.722%
B)16.722%
C)6.722%
D)36.722%
E)46.722%

Question 60

The owner of a music store is considering remodelling the store in order to carry a larger inventory. The cost of remodelling and additional inventory is $43 200. The expected increase in net profit is $7000 per year for the next 3 years and $10 000 each year for the following 7 years. After ten years, the owner plans to retire and sell the business. She expects to recover the additional $40 000 invested in inventory but not the $43 200 invested in remodeling. Compute the rate of return.

Question 61

If Ontario decides to build two new units of nuclear power plants, the overnight cost of construction is $15 billion. The annual net rate of return from the two units is $1 billion every year for the next 60 years, at which time the plants should be decommissioned and have no residual value. Should Ontario decide to build the two units of nuclear power plants if the required rate of return is 7%?

Question 62

Jasmine has two investment choices. Alternative 1 requires an immediate outlay of $150 000 and offers a return of $417 000 after seven years. Alternative 2 requires an immediate outlay of $180 000 in return for which $25 000 will be received at the end of every six months for the next seven years. Alternative 3 requires an immediate outlay of $200 000 in return for which $60 000 will be received at the end of every year for the next seven years. The required rate of return on investment is 6.58% compounded semi-annually. What is Jasmine's most preferred option?

A)Alternative 1
B)Alternative 2
C)Alternative 3
D)Alternative 3 or Alternative 2, as both are essentially same
E)Alternative 1 or Alternative 2, as both are essentially same

Question 63

A local community church is contemplating installment of solar cells on its roof and sell the access electricity to the Ontario grid via a power purchase agreement. The project requires an initial investment of $75 000 with a residual value of $2000 after 10 years. It is estimated to yield annual net returns of $15 000 for 10 years. What is the NPV of the project given a rate of return of 7%?

A)-$31 370
B)$32 387
C)$31 370
D)-$32 387
E)$1017

Question 64

Jeremy has a number of outstanding credit cards debts. He seeks help from BDO to consolidate his debts and make it easy for him to make the debt payments. BDO offers him two alternatives. In the first alternative, the debt can be settled by making a payment of $30 000 now and a final payment of $42 000 in 3 years. Alternatively, the obligation can be settled by payments of $8400 at the end of every three months for three years. Which alternative is preferred if the interest is 8.5% compounded quarterly.

A)Alternative 1
B)Alternative 2
C)Neither Alternative
D)Don't take offer from the BDO
E)Alternative 1 or Alternative 2, as both are essentially same

Question 65

Simion Inc is considering to build a new office in Clagary, which requires an immediate investment of $78 million and another $35 million in one year. Being near to the customers, it is expected a revenue of $2 million in Year one, $10 million in year 2 and then a steady stream of $15 million revenue each year in the subsequent 12 years. However, if they simply expand their current offices in Toronto and build a satellite office in Calgary, it requires an immediate investment of $30 million, another $15 million after one year, and $10 million after two years. Net returns are $expected to be $10 million per year from year 2 to year 14. Determine the net present value at 7.4%. Which option is preferable according to the net present value criterion?

A)Build a new office with NPV of $21 million
B)Expand current office with NPV of $9 million
C)Build a new office with NPV of -$21 million
D)Expanding current office is $30 million better in NPV compared to building a new office
E)Either B or D

Question 66

A firm invests $200 000 in machinery that yields net after-tax cash flows of $90 000 at the end of each of the next three years. The opportunity cost of capital is 12%. What is the net present value of the project (to the nearest thousand dollars)?

A)-$16 000
B)-$8000
C)$0
D)$8000
E)$16 000

Question 67

Jasmine has two investment choices. Alternative 1 requires an immediate outlay of $150 000 and offers a return of $417 000 after seven years. Alternative 2 requires an immediate outlay of $180 000 in return for which $25 000 will be received at the end of every six months for the next seven years. Alternative 3 requires an immediate outlay of $200 000 in return for which $60 000 will be received at the end of every year for the next seven years. The required rate of return on investment is 7.4% compounded semi-annually. What is Jasmine's most preferred option?

A)Alternative 1
B)Alternative 2
C)Alternative 3
D)Alternative 3 or Alternative 2, as both are essentially same
E)Alternative 1 or Alternative 2, as both are essentially same

Question 68

Suleiman must make a choice between two investment alternatives. Alternative 1 will provide him returns of $300 000 at the end of second year and $700 000 at the end of fifth year. Alternative 2 will provide him returns $180 000 at the end of each of the next six years. Alternative 3 will provide him returns $370 000 at the end of second, fourth and sixth years. Which alternative is preferable if money is worth 5.5556%?

A)Alternative 1
B)Alternative 2
C)Alternative 3
D)Alternative 2 or Alternative 3, as both are essentially the same
E)Alternative 1 or Alternative 3, as both are essentially same

Question 69

Korea Nuclear tritium removal facility (TRF)project requires an immediate investment of $33 million with a residual value of $7 million at the end of the project. It is expected to yield a net return of $1 million in Year 1 from the sale of immobilized tritium to ITER, $5 million dollars in Year 2, $8 million per year for the following six years, and $7 million per year for the remaining four years. Find the rate of return using Excel's IRR function.

Question 70

Jasmine has two investment choices. Alternative 1 requires an immediate outlay of $150 000 and offers a return of $417 000 after seven years. Alternative 2 requires an immediate outlay of $180 000 in return for which $25 000 will be received at the end of every six months for the next seven years. Alternative 3 requires an immediate outlay of $200 000 in return for which $60 000 will be received at the end of every year for the next seven years. The required rate of return on investment is 6.3% compounded semi-annually. What is Jasmine's most preferred option?

A)Alternative 1
B)Alternative 2
C)Alternative 3
D)Alternative 3 or Alternative 2, as both are essentially same
E)Alternative 1 or Alternative 2, as both are essentially same

Question 71

CGI Inc. is developing a new software platform, which requires an immediate investment of $780 000 and another $260 000 in three years. Net returns expected are $450 000 after two years, $313 000 after four years, and $889 000 after six years. However, if they simply upgrade their current platform, it requires an immediate investment of $400 000, another $260 000 after two years, and $340 000 after four years. Net returns are $187 500 per year for 8 years. Determine the net present value at 5.9%. Which project is preferable according to the net present value criterion?

A)New Software platform by $53 309
B)Upgrade by $53 309
C)Upgrade by $277 277
D)New Software platform by $70 203
E)New Software platform by $76 599

Question 72

Saint Mary's is offered a contract, which offers a net present value of $15 000 if the required rate of return is 12%. Alternatively, net present value is -$12 000 if the required rate of return is 18%. At what rate of return, would the NPV be zero?

A)13%
B)13.7%
C)14%
D)14.5%
E)15%

Question 73

Assume that the net present value of a project is $74.3 million at 6%, and -$21.2 million at 9%. Use linear interpolation to compute the rate of return correct to the nearest hundredth of a percent.

A)2.33%
B)8.33%
C)6.67%
D)4.2%
E)10.2%

Question 74

Jeremy has a number of outstanding credit cards debts. He seeks help from BDO to consolidate his debts and make it easy for him to make the debt payments. BDO offers him two alternatives. In the first alternative, the debt can be settled by making a payment of $30 000 now and a final payment of $42 000 in 3 years. Alternatively, the obligation can be settled by payments of $8400 at the end of every three months for three years. Which alternative is preferred and by how much if the interest is 13.5% compounded quarterly.

A)Alternative 1
B)Alternative 2
C)Neither Alternative
D)Don't take offer from the BDO
E)Alternative 1 or Alternative 2, as both are essentially same

Question 75

Suleiman must make a choice between two investment alternatives. Alternative 1 will provide him returns of $300 000 at the end of second year and $700 000 at the end of fifth year. Alternative 2 will provide him returns $180 000 at the end of each of the next six years. Alternative 3 will provide him returns $370 000 at the end of second, fourth and sixth years. Which alternative is preferable if money is worth 9.4%?

A)Alternative 1
B)Alternative 2
C)Alternative 3
D)Alternative 2 or Alternative 3, as both are essentially same
E)Alternative 1 or Alternative 3, as both are essentially same

Question 76

Saint Mary's is offered a contract, which requires an immediate investment of $25 million. The estimated returns are $5 million per year for 20 years. Compute the rate of return.

A)19.42%
B)99.9%
C)7.75%
D)12.45%
E)13.79%

Question 77

LG expects a demand of 10 000 headphones per year for a special purpose headphone for six years. Net return per unit is $6.10. To produce the headphones, LG must buy equipment costing $200 000 with a life of six years and a salvage value of $10 000 after six years. The company estimates that repair costs will be $8000 per year during Years 2 to 6. Should LG invest in the equipment if it requires a return of 16% on its investment? Calculate the NPV.

A)Yes, NPV = $2679
B)Yes, NPV = $6783
C)No, NPV = -$5530
D)No, NPV = -$2679
E)No, NPV = -$6783

Question 78

Pfizer is planning to embark on developing a new medicine for the cure of common cold. If undertaken, the project requires $10 million dollar on R&D, every year for 5 years. The medicine will be marketed in Year 6 and net returns are estimated to be $10 million for the next 5 years at the end of which Pfizer plans to sell the formula to its competitor for $1 million. If corporation requires a ROI of 15%, what is the NPV for the project?

A)$16.6 million
B)-$16.6 million
C)$16.85 million
D)-$16.85 million
E)$0.123 million