This exam comprises three sections and few tew questions You can choose any comb
ID: 2724003 • Letter: T
Question
This exam comprises three sections and few tew questions You can choose any combination of questions you wish up to a total of 30 marks Be careful not to choose fewer or more questions Show all of your work Calculators together with the present value-future value tables handed out in class are permitted m the exam. Budget your time carefully, The present value of a perpetuity is equal to the payment. C. divided by the interest rate, r. PV = C/r. What is the future value of a perpetuity of C per year? Explain What is the present value of a BD 1H perpetuity if the interest rate is 7%?What is the present value of the perpetuity if the interest rate doubles to 14%? Why is the NPV of a relatrvely long-term project (one for which cash hows occur in the distant future) more sensitive to changes in the discount rate than that of a short-term project? What is a mutually exclusive project? How should managers rank mutually exclusive projects? Project X is very risky and has an NPV of BO 3 Mahon Project Y is very safe and has an NPV of BD 2 5 million They are mutually exclusive Project risk has been properly considered in the NPV analyses Which protect Should be chosen?Why? What is the annual percentage rate (APR)? (1 mark) Is it the same as the effective annual rate (EAR)? Explain. (1 mark) tf you were comparing the costs of loans from different lenders, could you use the APRs to determine the loan with the lowest EAR? ExplainExplanation / Answer
Q No.1: Future Value for 'n' years at 'c' value = c(1+r)n
Q.No.2: Present Value of perpetuity at 7% ROI= Fixed Amount / rate of interest = 100 / 0.07 = 1428.57
Present Value of perpetuity at 14% = 100 / 0.14 = 714.28
Q.No.3: If the time of the project is more, it is more sensitive. Because as the period of project increases, estimation of correct cash flows carries risk. We cannot easily estimate the cash flows easily as we can estimate the cash flows of short term project.
Q.No 4: Projects are said to be mutually exclusive when accepting one investment means rejecting others, even though the latter standing alone may pass muster as good investments, i.e. have a positive NPV and a high IRR. Mutually exclusive projects are ranked based on Capital Rationing, IRR & NPV technologies.
Q.No.5: Since project risk is properly considered in the NPV analysis, we can select the project which has highest NPV. Hence project X with NPV BD 3millions can be selected even the project is risky.
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