26.

If the projects are mutually exclusive, and cost of capital is 10%,the company should:
Project A Project B
NPV 1.2 million 1.8 million
IRR 20% 16%
A. Reject both projects
B. Accept project A and reject project B
C. Reject project A and accept project B
D. Accept both projects

28. Two mutually exclusive projects are being considered:

Project A has an NPV of $47m and is expected to last three years.
Project B has an NPV of $58m and is expected to last four years.

It is anticipated that if either project is chosen it will be possible to repeat it for the foreseeable
future.
The cost of capital of the company is 13% per year.

Calculate which project the company should accept?

-----------------------------

29. Which of the following statements are TRUE or False?

A Asset replacement decisions include sales, variable cost and TRUE FALSE
incremental working capital as relevant cash flows.
B Realizable value is a relevant cost when evaluating finance lease TRUE FALSE
compared to operating leasing

C If capital is rationed, divisible investment projects can be ranked by the TRUE FALSE
combination of projects and identify the combination generating highest
NPV.

D Interest cost is calculated on after tax basis and included in after tax TRUE FALSE
cash flow
30. Tyson operates a set of machines and is considering replacing them on a 1, 2 and 3-
year basis. Each machine costs $30,000. The operating cost of the machine and resale
value at the end of each year are as follows:
Year 1 Year 2 Year 3
Operating Cost 8000 10000 12000
Resale Value 24000 18000 8000
The cost of capital is 5% per annum.
No operating cost will be paid in the year of sale.

What is the equivalent annual cost of replacing machine every three years? ?(Round off to
nearest hundred)

-----------------------

32. A car costs $82,000 and has a life of 3 years. The running costs are as follows:
Year Cost
1 7,500
2 9,200
3 12,500
The estimated salvage values are as follows:
After Year 1 30000
2 18000
3 12000
The cost of capital is 12%
What is the equivalent annual cost if the car is replaced at the end of year 2?
A. $47,699
B. $43,334
C. $48,332
D. $45,988
34. Which of the following option regarding the net present value and internal rate of
return (IRR) is least accurate?
A. the NPV tells how much the value of the firm will increase/decrease if you accept the project

B. for independent projects, the internal rate of return IRR and the NPV methods always yield
the same accept/reject decisions

C. for mutually exclusive projects, you must accept the project with the highest NPV regardless
of the sign of the NPV calculation.

D. IRR can be calculated regardless of the cost of capital.

35. Apple Industries, a firm with unlimited funds, is evaluating five projects. Projects A
and B are independent and Projects C, D, and E are mutually exclusive. The projects are
listed with their rate of return and NPV. Assume that the applicable discount rate is 10%.

Project Status Rate of Return Net Present Value

A Independent 14% $10,500

B Independent 12% $13,400

C Mutually Exclusive 11% $16,000

D Mutually Exclusive 15% $14,000

E Mutually Exclusive 12% $11,500

Rank the projects the firm should select.

A. Project A, Project B, and Project D.

B. Project A, Project B, and Project C.

C. All positive NPV projects should be selected

D. None of the above option

36. Garner Corporation is investing $30 million in new capital equipment. The present value of
future after-tax cash flows generated by the equipment is estimated to be $50 million. Currently,
Garner has a stock price of $28.00 per share with 8 million shares outstanding.
Assuming that this project represents new information and is independent of other
expectations about the company, what should be the new stock price?
---------------------

37. The Seattle Corporation has been presented with an investment opportunity which will yield
cash flows of $30,000 per year in years 1 through 4, $35,000 out flow in year 5 then $35,000
inflow per year in years 6 through 9, and $40,000 in year 10. This investment will cost the firm
$150,000 today, and the firm's cost of capital is 10%.
The discounted payback period for this investment is closest to:
(answer should be in years rounded off to 2 decimal points)

38. Which of the following statements regarding the internal rate of return (IRR) are True
or false? The IRR:

A assumes that the TRUE FALSE

reinvestment rate of
the cash flows is the
cost of capital

B can lead to multiple TRUE FALSE

IRR rates if the cash
flows extend past the
payback period

C and the net present FALSE

value (NPV) method
TRUE
lead to the same
accept/reject decision
for independent
projects
D IRR is technically TRUE FALSE
superior method than
NPV

39. Mason makes the following statements to his boss, DeWalt about the principles of
capital budgeting.
Statement 1: Opportunity costs are not true cash outflows and should not be considered in a
capital budgeting analysis.

Statement 2: Cash flows should be analyzed on an after-tax basis.

Should DeWalt agree or disagree with Mason's statements?

Statement 1 Statement 2

A Agree Agree

B Disagree Agree

C Disagree Disagree

D Agree Disagree

104.A machine costs $72,000 and has a maximum life of 3 years. The running costs each
year are as follows:

Year Running Cost Estimated Scrap Value

1 7,200 24,000
2 9,600 16,600
3 12,000 9,600

The cost of capital is 15% how often should the machine be replaced?

A. Replace every 1 Year

B. Replace every 2 Year
C. Replace every 3 Year
D. None of the above