ESSAY. Write your answer in the space provided or on a separate sheet of paper.
Use the table for the question(s) below.
Consider two mutually exclusive projects with the following cash flows:
Project C/F0C/F1C/F2C/F3C/F4C/F5C/F6
A$(41,215) $12,500 $14,000 $16,500 $18,000 20,000 N/A
B$(46,775) $15,000 $15,000 $15,000 $15,000 $15,000 $15,000
63)
Assuming that the discount rate for project A is 16% and the discount rate for B is 15%, then given that these are
mutually exclusive projects, which project would you take and why?
Use the information for the question(s) below.
Your firm is preparing to open a new retail strip mall and you have multiple businesses that would like lease space in it.
Each business will pay a fixed amount of rent each month plus a percentage of the gross sales generated each month. The
cash flows from each of the businesses has approximately the same amount of risk. The business names, square footage
requirements, and monthly expected cash flows for each of the businesses that would like to lease space in your strip mall
are provided below:
Business Name Square Feet
Required
Expected Monthly
Cash Flow
Videos Now 4,000 70,000
Gords Gym 3,500 52,500
Pizza Warehouse 2,500 52,500
Super Clips 1,500 25,500
30 1/2 Flavors 1,500 28,500
S–Mart 12,000 180,000
WalVerde Drugs 6,000 147,000
Multigular Wireless 1,000 22,250
64)
If your new strip mall will have 15,000 square feet of retail space available to be leased, to which businesses
should you lease and why?
65)
You are considering an investment in an everlasting gobstopper machine. This machine will cost $10 million
and will produce cash flows of $1 million and the end of every year forever. The appropriate cost of capital is
8%. Compute the economic value added (EVA) for this project. Calculate the PV of the EVAs for this project.
Use the table for the question(s) below.
Consider two mutually exclusive projects with the following cash flows:
Project C/F0C/F1C/F2C/F3C/F4C/F5C/F6
A$(41,215) $12,500 $14,000 $16,500 $18,000 20,000 N/A
B$(46,775) $15,000 $15,000 $15,000 $15,000 $15,000 $15,000
66)
What is the incremental IRR for project B over project A? Would you feel comfortable basing your decision on
the incremental IRR?
67)
You are considering purchasing a new automated forklift system for your firm’s warehouse. The automated
forklift will cost $500,000 and generate cash flows of $125,000 per year. The forklift will depreciate evenly over
the five years, at which point it must be replaced. The cost of capital is 8% per year. Based upon the EVA
investment rule, should you invest in the automated forklift?
Use the table for the question(s) below.
Consider two mutually exclusive projects with the following cash flows:
Project C/F0C/F1C/F2C/F3C/F4C/F5C/F6
A$(41,215) $12,500 $14,000 $16,500 $18,000 20,000 N/A
B$(46,775) $15,000 $15,000 $15,000 $15,000 $15,000 $15,000
68)
If the discount rate for project A is 16%, then what is the NPV for project A?
69)
Consider the following list of projects:
Project Investment NPV
A405,000 18,000
B600,000 90,000
C375,000 60,000
D450,000 6,000
E525,000 30,000
F225,000 30,000
G240,000 27,000
H600,000 60,000
I150,000 12,000
J270,000 30,000
You are given a budget of only $1,800,000 to invest in projects. Which projects will you select, in what order
will you select them, and why?
Use the information for the question(s) below.
Larry the Cucumber has been offered $14 million to star in the lead role of the next three Larry Boy adventure movies. If
Larry takes this offer, he will have to forgo acting in other Veggie movies that would pay him $5 million at the end of each of
the next three years. Assume Larry’s personal cost of capital is 10% per year.
70)
Explain why the NPV decision rule might provide Larry with a different decision outcome than the IRR rule
when evaluating Larry’s three movie deal offer.
Use the information for the question(s) below.
Your firm is preparing to open a new retail strip mall and you have multiple businesses that would like lease space in it.
Each business will pay a fixed amount of rent each month plus a percentage of the gross sales generated each month. The
cash flows from each of the businesses has approximately the same amount of risk. The business names, square footage
requirements, and monthly expected cash flows for each of the businesses that would like to lease space in your strip mall
are provided below:
Business Name Square Feet
Required
Expected Monthly
Cash Flow
Videos Now 4,000 70,000
Gords Gym 3,500 52,500
Pizza Warehouse 2,500 52,500
Super Clips 1,500 25,500
30 1/2 Flavors 1,500 28,500
S–Mart 12,000 180,000
WalVerde Drugs 6,000 147,000
Multigular Wireless 1,000 22,250
39
71)
If your new strip mall will have 16,000 square feet of retail space available to be leased, to which businesses
should you lease and why?
Use the table for the question(s) below.
Consider two mutually exclusive projects with the following cash flows:
Project C/F0C/F1C/F2C/F3C/F4C/F5C/F6
A$(41,215) $12,500 $14,000 $16,500 $18,000 20,000 N/A
B$(46,775) $15,000 $15,000 $15,000 $15,000 $15,000 $15,000
72)
If the discount rate for project B is 15%, then what is the NPV for project B?
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