1) An investment project costs $100,000 today and will return two payments, $50,

Question

1)An investment project costs $100,000 today and will return two payments, $50,000 in 1 year and $75,000 in two years. Is this project worth considering?

Select one:

a. No, the net present value is negative.

b. The net present value is zero, so the firm would be indifferent.

c. Yes, if the interest rate is 20%.

d. Yes, if the interest rate is 10%.

e. Yes, if the interest rate is 25% or higher.

2)A firm is considering a number of investment projects but has a finite amount of funds. The firm should choose

Select one:

a. the projects that have the lowest cost.

b. any project that has a positive present value.

c. the project that has the largest future payment.

d. the projects with the highest net present value.

e. any project that has a positive net present value.

3)A firm is considering three investment projects. Each requires spending $50,000 now, and will yield the following returns:

I. Two payments of $25,000, at the end of Year 1 and Year 2
II. Two payments of $30,000 at the end of Year 1 and Year 2
III. Three payments of $20,000 at the end of Year 1, Year 2, and Year 3

If the interest rate is 10%, and the firm has the funds for all three projects, which of the projects should it invest in?

Select one:

a. II and III

b. II

c. All three projects are desirable.

d. None of the projects is desirable at the current interest rate.

e. III

4)A firm is considering three investment projects. Each requires spending $50,000 now, and will yield the following returns:

I. Two payments of $25,000, at the end of Year 1 and Year 2
II. Two payments of $30,000 at the end of Year 1 and Year 2
III. Three payments of $20,000 at the end of Year 1, Year 2, and Year 3

5)If the interest rate is 20%, and the firm has the funds for all three projects, which of the projects should it invest in?

Select one:

a. All three projects are desirable.

b. III

c. None of the projects is desirable at the current interest rate.

d. II and III

e. II

6)A firm is considering three investment projects. Each requires spending $50,000 now, and will yield the following returns:

I. A single payment of $53,000 at the end of Year 1
II. Two payments of $30,000 at the end of Year 1 and Year 2
III. Three payments of $20,000 at the end of Year 1, Year 2, and Year 3

If the interest rate is 2%, and the firm has the funds for all three projects, which of the projects should it invest in?

Select one:

a. III

b. II

c. None of the projects is desirable at the current interest rate.

d. II and III

e. All three projects are desirable.

Explanation / Answer

1. The PW of cost PWC= 100000

PW of benefit PWB = 50000/(1+i) + 75000/(1+i)^2

So when PWB > PWC then project is worth considering

at i=0.1

PWB = 107438

PWC = 100000

So worth considering

at i=0.2

PWB = 93750

PWC = 100000

So not worth considering for 20% or above

Answer will be d. Yes, if the interest rate is 10%.

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