SOLVED

11) The Oakley-Brown, a frozen food processor, is considering buying a curly-fry extruder with potato preparation attachments for $90,000. It expects to sell 2,500 cases the first year and 4,500 cases for four years after that while the craze lasts. Price per case will be $30. Cost of goods, selling and administration expenses equal $62,500 in the first year and $100,500 in the subsequent years. What price drop will bring NPV to near zero if the company’s hurdle rate is 14%? A) $0.06 B) $0.15 C) $0.67 D) $1.00 E) $1.50 12) The Oakley-Brown, a frozen food processor, requires an additional refrigeration unit. The company is considering a premium model at a cost of $52,000. Expected life for the unit is five years with a residual value of $18,500. The incremental income before depreciation is expected to be $14,500 a year. The company’s cost of capital is 14%. Using 14% and 25% as trial values, what increase in the cost of capital will eliminate the unit from consideration? A) 0.6% B) 11% C) 2.0% D) 5.1% E) 19.7% 13) Sensitivity analysis provides a manager with A) Clear decision rules about accepting or rejecting a project B) A measure how much a project factor can change before the project becomes unprofitable C) A dynamic picture of the interaction of risks involved with all the project factors D) A single scenario modeling the projected values for all the project’s factors E) A net measure of the financial impact of the simultaneous change in the main project factors 14) A modeling process that uses equations to show the interrelationships among key factors influencing cash flows and helps managers understand the nature of the project and the issues that need to be resolved is called A) Risk assessment B) Expected value analysis C) Scenario analysis D) Simulations E) Portfolio analysis 15) When measuring satisfaction on a 20 point scale, an individual receives $500 and registers a satisfaction rating of 3. An additional $500 rates a 7 in satisfaction and yet another $500, increases the individual’s satisfaction rating to 12. A reduction in wealth of $1000 would bring about a dissatisfaction rating of 5. It could be concluded that the individual is A) Risk-seeking B) Risk-avoiding C) Risk-adverse D) Risk neutral E) Risk-attracting 16) An investment opportunity with identified risks and returns has been consistently rejected in competition with other opportunities. This is most likely because A) The project is available over the next few years and so can be delayed B) The project would require the hiring of new staff C) The project is not offering sufficient compensation for its risks D) A company cannot invest in all the opportunities it faces E) The project is outside the usual business of the company 17) Currently 90-day Treasury bills are trading at 7% per annum and inflation is running at 4.5%. A company is issuing bonds with a face value of $1,000 and an annual interest rate of 8% and maturity in 25 years. What can be concluded about the market’s view of the company’s level of riskiness? A) It is risky because the term of the bond is 25 years. B) It is not risky as the risk premium attached to the bond is 1%. C) It is risky as the risk premium attached to the bond is 3.5%. D) It is risky as the risk premium attached to the bond is 77% of the risk-free rate. E) It is not risky as the risk premium attached to the bond is 14.3%. 18) A company faces a hurdle rate of 12%. It has three possible outcomes to an investment opportunity: a realistic NPV of $17,500, an optimistic NPV of $21,300 and a pessimistic NPV of $4,530. The probabilities associated with the outcomes are 55%, 22% and 23%. What is the company’s ENPV? A) $13,071 B) $13,708 C) $14,443 D) $14,879 E) $15,353 19) Two or more investment opportunities score the same ENPV. What should the company do with respect to the projected cash flows on which the analysis is based? A) Not consider the cash flows as risk has already been factored in the analysis and will be double counted. B) Consider the cash flows on which ENPV was created as the option with the largest cash flow is the appropriate choice. C) Always delay the project until more information resolves the tie. D) Consider the cash flows as risk-adverse investors will choose the project with the lowest potential loss. E) Not consider the cash flows and select the project on qualitative features alone. 20) Li’l Lucy’s Fried Chicken would like to invest $2 million to buy land and build a a restaurant in an area that has been rezoned from agricultural to residential. The company expects a 9% return. The company believes there is a 15% probability that the neighbouring land will be fully developed into family homes resulting in income before depreciation of $800,000 a year. It also believes in a 60% chance that the neighbouring land will be gradually developed resulting in Year 1 income of $150,000, Year 2 income of $200,000, Years 3, 4 and 5 income of $500,000 and Years 6 and 7 income of $800,000. There exists a 25% chance that there will be no development resulting in an income of $150,000 a year from an alternative use of the land. Based on ENPV, should Li’l Lucy’s Fried Chicken build the restaurant? A) Yes, ENPV equals $164,207 B) Yes, ENPV equals $250,654 C) Yes, ENPV equals $452,170 D) No, ENPV equals ($5) E) No, ENPV equals ($483,899)