1) John Jenkins is considering an investment in an energy extraction project wit
ID: 2654626 • Letter: 1
Question
1) John Jenkins is considering an investment in an energy extraction project with a producing revenue steam. His initial investment would require purchasing the existing mineral rights and excavation machinery of $4,000,000 and he has a personal required rate of return of 12%. The future cash flows have been thoroughly evaluated on a conservative basis of $1,200,000 in year 1; $1,300,000 in year 2; $1,300,000 in year 3, $1,300,000 in year 4. At the end of the fourth year, the well is expected to be dry but there is a $500,000 salvage price on the machinery in place.
A) The internal rate of return on the potential investment is 13.96%, so it’s above his required return.
B) The internal rate of return on the potential investment is 16.34.96%, so it’s above his required return.
C) The internal rate of return on the potential investment is 8.69%, so it’s below his required return
D) The internal rate of return on the potential investment is 9.71%, so it’s above his required return.
E) Can’t be determined with the given information.
2) Common valuation models include all of the following except:
A) Asset Approach: A – L = OE
B) Income Approach: NOI
C) Asset multiple minus weighed IR, AM - IR
D) Market Approach: multiple or “willing buyer/seller”
E) Intrinsic Value
3. In order to use industry ratio analysis effectively, the analyst must:
A) Redo the calculations herself to make sure they are correct
B) Compare ratios of the target company against its nearest competitors to get a gauge of who is operating more efficiently
C) Compare the ratios against prior years of the target company in order to see if an improvement tend or decline in exits
D) Common ratios include liquidity, asset turnover, and profitability
E) Both B & C
Explanation / Answer
1)correct option is "A" - The internal rate of return is 13.96%, soits above its required return.
2)correct option is "C" - Asset multipled minus weighed.
3)correct option is "E" -Both B and c is correct.
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