1. You own an undeveloped piece of property upon which you can build an office c
ID: 1170231 • Letter: 1
Question
1. You own an undeveloped piece of property upon which you can build an office complex. Twenty years ago you paid $40,000 for the land. Similar properties are now selling for $200,000. To build the complex will require an initial investment of $150,000 and the offices would generate rental income of $24,000 a year forever. If the discount rate is 14%, should you build the office complex? Why or why not? A. 20,886 B. $21,429 C. $22,996 D. $20,812 2. Suppose a firm is considering moving its headquarters to a new city. Last year it paid $500,000 for an option to buy a building in the city: the option gives it the right to buy the building at a cost of $3,000,000, so that its total expenditure will be $3,500,000 if indeed it buys the building. Now it finds that a comparable building has become available in the same city at a price of $3,250,000. Which building should it buy? A. Building in the new city B. Building in the same city C. None of the buildings Not enough information provided 3. You bought a stock a year ago for $100 and sold it today for $130. Thus, your holding period return is 30%. But if inflation over the same period was 12%, what is your real rate of return? A. 16.07% B. 15.07% C. 13.07% D. 10.07% 4. A proposed new investment has projected sales of $450,000. Variable costs are 40% of sales, and fixed costs are $100,000. Depreciation is $75,000. Prepare a pro forma income statement assuming a tax rate of 40%. What is the projected net income? What is the operating cash flow? A. 122,000 B. 132,000 C. 150,000 D. 180,000Explanation / Answer
1)
Net present value (NPV) = Present value of cash inflows-Present value of cash outflows.
= $24,000/14%-$150,000
= $171,429-$150,000
= $21,429
Hence, correct option is (B) $21,429
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