QUESTION 1 You purchased land 3 years ago for $60000 and believe its market valu

Question

QUESTION 1

You purchased land 3 years ago for $60000 and believe its market value is now $90000. You are considering building a hotel on this land instead of selling it. To build the hotel, it will initially cost you $150000, an expense that you plan to depreciate straight line over the next three years. Wells Fargo offered you a loan for $60,000 at an 8% interest rate to be repaid over the next 4 years. You anticipate that the hotel will earn revenues of $165000 each year, while expenses will be a mere $30000 each year. The initial working capital requirement will be $7000 which will be recovered in the last year. The tax rate is 35%. Your estimated cost of capital is 10%. What is the net present value of this project?

$24,918.55

$20,000.38

$38,020.13

$45,200.80

$33,869.93

10 points   

QUESTION 2

The NPV rule states that you should accept an investment if the NPV:

is negative.

is positive.

is less than or equal to zero.

is less than the investment's initial cost.

exceeds the investment's initial cost.

5 points   

QUESTION 3

The payback period is the period of time it takes an investment to generate sufficient cash flows to:

earn the required rate of return.

produce the required net income.

produce a yield equal to or greater than the market rate on similar investments.

have a cash inflow, rather than an outflow, for the year.

recover the investment's initial cost.

5 points   

QUESTION 4

A proposed project will increase a firm's accounts payables. This increase:

should be ignored when conducting scenario analysis.

is a cash outflow at time zero.

is an initial cash inflow only.

is a sunk cost and should be ignored.

is a cash inflow at time zero and a cash outflow at the end of the project.

5 points   

QUESTION 5

What is the net present value of a project with the following cash flows if the discount rate is 7 percent?

Year 0: $-3500

Year 1: $1200

Year 2: $1000

Year 3: $900

Year 4: $0

-$1,112.30

$305.75

-$770.40

$2,007.99

$946.31

10 points   

QUESTION 6

The change in a firm's future cash flows that results from adding a new project are referred to as _____ cash flows.

eroded

deviated

incremental

direct

residual

$24,918.55

$20,000.38

$38,020.13

$45,200.80

$33,869.93

Explanation / Answer

2) exceeds the investment's initial cost

3) recover the investment's initial cost.

4) is a cash outflow at time zero.

5)

6) incremental

Market value $90,000 cost $150,000 Total cost of the project =cost of the land+150,000+cost of loan+expenses depreciation $50,000 loan @ 8% 60,000 cost of loan 81,629 cash inflows 165000 expenses 30,000 initial working capital 7000 cost of capital 10% tax rate 35% Year cash flows discount factor @ 10%` Present value 0 381,629 1 165000 0.909 149985 2 165000 0.826 136290 3 165000 0.751 123915 410190 Net present value of the project = $ 28,561

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