Test 1

9. You want to purchase a business with the following cash flows. How much would you pay for this business today assuming you needed a 14% return to make this deal?

e) Maintenance contracts - Maintenance costs should be included as incremental cash flows because they could change the NPV of the project if the maintenance costs are significantly different for each of the different projects.

B) What is the project’s net present value (NPV)? Explain the meaning of the NPV.

The project has a positive net present value of $46.59 million. As such, the project should be accepted. The reasoning behind this is that the company should accept any project if the NPV is above 0. The NPV reflects value added to the company. Management, therefore, should pursue any project that adds value to the company and that means pursuing projects with a positive NPV. A positive NPV will increase shareholder wealth, and a negative NPV will reduce shareholder wealth (Baker, 2000).

* 12. Assume that the consensus required rate of return on common stocks is 14 percent. In

received a dividend of $2.25 during the year. What is your total rate of return?

1- Basically we first have to find the incremental cash flows and then calculate the NPV. If the NPV is higher than zero; we are going to accept the Project. In order to find the cash flows we need to do the following steps:

10. Suppose the firm 's WACC is stated in nominal terms, but the project 's expected cash flows are expressed in real dollars. In this situation, if prices are expected to increase, the calculated NPV would a. b. c. d. e. Be correct. Be biased downward. Be biased upward. Possibly have a bias, but it could be upward or downward. More information is needed; otherwise, we can make no reasonable statement.

8. How sensitive is the Net Present Value of the project to the cost of capital?

The company's beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%.  What is the company's current stock price?

Part II: A. The NPV for this project would be, with the following discount rates:

As the WACC decreases due to the cost advantage of debt, the present value of the cash flows generated by the project will increase, consequently the NPV of the project will increase.

Consider a project with the following cash flows: Time 0 1 2 3 CF -100 -50 30 200 and a discount rate of 10% had an NPV of 29.6 @ 10%. So what? This project profile implies an NPV of

a) If the NPV of the project is positive, the firm should undertake the investment.

Given the present value of cash inflow above, the project's NPV will be given by;