# Assignment 2 Due on November 18, 2010 Part 1 M…

Assignment 2 Due on November 18, 2010 Part 1 Multiple Choice Questions 1. Which of the following is NOT a true statement of the Net Present Value (NPV) analysis? A. The NPV of a project is the sum of the present value of all future after-tax incremental cash flows generated by an initial cash outlay, minus the present value of the investment outlays. B. Projects that have a positive NPV should be accepted, and projects that have a negative NPV should be rejected. C. The NPV is the present value of the expected cash flows net of the costs needed to generate them. D. The firm?s after-tax marginal cost of capital is the appropriate discount rate for all projects. 2. Suppose the Canadian Space Agency has two mutually exclusive projects: landing a woman on Mars and landing a man on Venus. Project Mars has an IRR of 12 percent and project Venus has an IRR of 15 percent. The crossover rate is 9 percent. The project?s appropriate discount rate is 18 percent. A. Accept project Mars. B. Accept project Venus. C. Accept both projects. D. Accept neither project. 3. Consider a five-year project that costs \$20,000 today, which is expected to generate \$6,000 at the end of the second year and then the cash flows will increase by \$1,000 per year for each of the subsequent years. The cost of capital is 8 percent. What are the project?s NPV and IRR? A. NPV = \$1,083.24; IRR = 8.96% B. NPV = \$2,706.35; IRR = 11.93% C. NPV = \$3,824.56; IRR = 14.87% D. NPV = \$4,522.85: IRR = 17.09% 4. Consider a project that requires an immediate cash outflow of \$100,000 and provides a perpetual annual inflow of \$15,000 starting two years from today. The cost of capital is 12 percent. What is the project?s PI? A. 1.04 B. 1.12 C. 1.25 D. 1.33 5. Which of the following is a TRUE statement? A. The tangent portfolio is the risky portfolio on the efficient frontier whose tangent line cuts the horizontal axis at the risk-free rate. B. The new (or super) efficient frontier represents the portfolios composed of the risk-free rate and the tangent portfolio that offers the highest expected rate of return for any given level or risk. C. Separation theorem states that the investment decision, that is, how to construct the portfolio of risky assets, is not separate from the financing decision, that is, how much should be invested or borrowed in the risk-free asset. D. The market portfolio is a portfolio that contains some risky securities in the market. 6. Which of the following investments would a risk averse investor prefer if the risk free rate is zero? Value of Investment if: Investment Cost Today Market Return > 0% Probability: 40% Market Return

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