Question

6. You have determined the profitability of a planned project by finding the present value of all the cash flows from that project. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows?

A. The discount rate decreases.

B. The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same.

C. The discount rate increases.

D. Answers A and B above.

7. Last year Wei Guan Inc. had $350 million of sales, and it had $270 million of fixed assets that were used at 65% of capacity. In millions, by how much could Wei Guan’s sales increase before it is required to increase its fixed assets?

$170.09

$179.04

$188.46

$197.88

8)   Suppose an investor is interested in purchasing the following income producing property at a current market price of $450,000. The prospective buyer has estimated the expected cash flows over the next four years to be as follows: Year 1 = $40,000, Year 2 = $45,000, Year 3 = $50,000, Year 4 = $55,000. Assuming that the required rate of return is 12% and the estimated proceeds from selling the property at the end of year four is $500,000, what is the NPV of the project?
A. $8,829.96
B. $9,889.56
C. $428,113.65
D. $459,889.56

9. As a firm’s sales grow, its current assets also tend to increase. For instance, as sales increase, the firm’s inventories generally increase, and purchases of inventories result in more accounts payable. Thus, spontaneously generated funds arise from transactions brought on by sales increases.

10) The discount rate is different for each investor, depending on his expectations about risk and uncertainty.

True/False

Answer 1

6. A. The discount rate decreases would cause the project to look more appealing in terms of the present value of those cash flows.

7.

Sales $350

% of capacity utilized 65%

Sales at full capacity = Actual sales/% of capacity used = $538.46

Additional sales without adding FA = Full capacity sales − Actual sales = $538.46-$350 = $188.46

8.

Year	Cash Flow	PVF @ 12%	Present Value
0	-450000	1	-450000.00
1	40000	0.892857143	35714.29
2	45000	0.797193878	35873.72
3	50000	0.711780248	35589.01
4	55000	0.635518078	34953.49
4	500000	0.635518	317759.00
		NPV	9889.52

10. The given statement is TRUE i.e. The discount rate is different for each investor, depending on his expectations about risk and uncertainty.