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11) If a business was considering an investment of $350,000 and the Net Present Value (NPV) of its expected cash flow at 12% was ($25,000) this would mean that the business should A) Take on the project and expect $25000 less profit than projected B) Not take on the project as the company will lose its investment of $375,000 C) Take on the project only if it can invest $25,000 less D) Take on the project as it is worth the equivalent of $25,000 today E) Not take on the project as returns do not adequately compensate investors 12) Which of the following best describes the discount rate that when applied to the future cash flows makes them equal to the initial cash expenditures? A) Payback Period B) Internal Rate of Return C) Marginal Rate of Return D) Net Present Value E) Accounting Rate of Return 13) Fandango Company limited is considering purchasing one of three warehouse data management systems. The initial capital investment for System 1 is $9 million and improvements to net income before depreciation are estimated at being $500,000, $2.5 million and $3.5 million in the first three years and $5 million for the remaining system lifetime of six years. System 2, costing $10 million will yield income improvements of $1.5 million and $3.5 million in the first two years and $5 million for the remaining six years. System 3 costs $12 million and provides savings of $2 million, $3 million, and $4 million in the first three years and $5 million thereafter for six years. The best alternative judging by the payback method of investment appraisal is A) System 1 which pays back by the end of Year 3 B) System 1 which pays back by the end of Year 2 C) System 2 which pays back by the end of Year 2 D) System 2 which pays back by the end of Year 3 E) System 3 which pays back by the end of Year 3 14) A business would like to buy a large piece of equipment that will improve their cash flow over the next ten years by $30,000 annually. If the company’s hurdle rate is 14% and they expect no residual value at the end of the period, how much should the company be willing to pay for the equipment? A) $8,091 B) $98,745 C) $156,483 D) $187,839 E) $580,119 15) Net Present Value is the only method of investment appraisal that A) Considers the time value of money B) Uses all the relevant cash flows in the analysis C) Deals with cash outflows exceeding inflows after the start of the project D) Uses the company’s cost of capital to establish a discount rate E) Considers the investment’s direct impact on shareholder’s wealth 16) A municipality is considering the purchase of two large lawn mowers which will be used to maintain baseball diamonds, soccer fields, parks and road boulevards. Increased fuel efficiency and improved speed, reducing employee hours, contribute to savings. Both machines have a useful life of six years. Machine A, costing $5,000, offers savings of $1000 a year and disposal value of $500. The Machine B costs $7,000, offers saving of $1,300 a year and a disposal value of $1,500. The municipality uses a 7% discount factor to assess its capital purchases. A) Purchase Machine A as it has shorter payback period, 4 years. B) Purchase neither machine because both have negative net present values. C) Purchase Machine B as it has a higher NPV, $195.90. D) Purchase Machine B as it has a shorter payback period, 3.5 years. E) Purchase Machine A as it has a lower NPV, $99.65. 17) Ridman Academy is considering replacing their heating, ventilation and air conditioning (HVAC) A) 10% B) 11% C) 12% D) 13% E) 14% 18) If, when calculated IRR through interpolation, over a 10-year investment horizon, the NPV, using an interest rate of 12%, is ($3,752.76) and the NPV, using an interest rate of 3%, is $6,360.04, IRR for the project is A) 9.2% B) 5.3% C) 4.5% D) 5.8% E) 8.7% 19) LaVeryndre Ltd. needs to replace the roof and re-insulate a small manufacturing facility at a cost of $70,000. Based on degree-days data, the company expects to save $17,600, $19,200, $15,700, $17,100 and $14,000 over the next five years. Using 4% and 12% as trial discount rates, determine the internal rate of return on the investment. A) 4.5% B) 6.5% C) 9.0% D) 7.2% E) 5.2% 20) The first trial of an IRR interpolation used an interest rate of 15% and produced a NPV of ($81,450) and the second trial of IRR at 6% produced an NPV of $56,000. Assuming a straight-line relationship between IRR and NPV, what percent reduction from 15% would result in the project’s IRR? A) 5.3% B) 11.1% C) 9.8% D) 7.6% E) 13.1%

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