Question

8. Med, Inc. is a specialty firm in the medical equipment field with a cost of capital of 13.7 percent. With the aging of America, the firm recognize the opportunities that exist in the medical field and is considering expansion in this area. At present, there is an opportunity for the firm to be involved in a new medical devices project. The project will require an initial investment of $8.4 million with annual returns of $2.2 million per year for seven years. Should the firm become involved in the new projects? (short answer, need computation)
9. The expected (average) return for an individual security is based on which one of the following types of risk?
10. 1. Total
11. 2. Surprise
12. 3. Diversifiable
13. 4. Systematic
14. 5. Unsystematic
15. Portfolio diversification eliminates which one of the following?
16. 1. Total investment risk
17. 2. Portfolio risk premium
18. 3. Market risk
19. 4. Unsystematic risk
20. 5. Reward for bearing risk
21. An investment has all positive future cash flows and a profitability index of 1.0. Given this, which one of the following must be true?
22. 1. The internal rate of return exceeds the required rate of return.
23. 2. The investment never pays back.
24. 3. The net present value is equal to zero.
25. 4. The net present value is greater than 1.0.

Answer 1

You have asked a subjective question followed by 3 unrelated multiple choice questions. I have addressed the first subjective question. Please post the balance questions separately.

Cost of capital, R = 13.7%

Initial investment, C₀ = $ 8.4 million

Annual cash flows, C = $ 2.2 million per year for N = 7 years

Hence, NPV = - C₀ + C / R x [1 - (1 + R)^-N] = - 8.4 + 2.2 / 13.7% x [1 - (1 + 13.7%)^-7] = 1.121388503 = $ 1.12 million

Since, it's leading to a positive NPV project, hence the firm should become involved in the new project as its NPV is positive.