Principles Of Corporate Finance Global Edition 10th Edition By Richard Brealey Stewart Myers Franklin Allen -Test Bank

Multiple Choice Questions

1. One way to uncover forecasting errors in NPV estimates is by looking at:
   I) Book values
   II) Liquidating values
   III) Market values
   A.I only
   B. II only
   C. III only
   D. I and II only

2. A new grocery store cost $50 million in initial investment. It is estimated that the store will generate $5 million after-tax cash flow each year for five years. At the end of 5 years it can be sold for $60 million. What is the NPV of the project at a discount rate of 10%?
   A.$2.42 million
   B. $10 million
   C. $6.21 million
   D. None of the above

NPV = -50 + 5/1.1 + 5/(1.1^2) + 5/ (1.1^3) + 5/ (1.1)^4 + 65/(1.1^5) = +6.21

3. A new grocery store cost $50 million in initial investment. It is estimated that the store will generate $5 million after-tax cash flow each year for five years. At the end of 5 years it can be sold for $55 million. What is the NPV of the project at a discount rate of 10%?
   A.$2.42 million
   B. $5 million
   C. $3.1 million
   D. None of the above

NPV = -50 + 5/1.1 + 5/(1.1^2) + 5/(1.1^3) + 5/(1.1 ^4) + 60/(1.1^5) = +3.1

4. A rental property is providing 13% rate of return. Next year’s rent is expected to be $1.0 million and is expected to grow at 3% per year forever. What is the current value of the property?
   A.$7.7 million
   B. $10 million
   C. $33.3 million
   D. none of the above

Value = 1.0/(.13 – .03) = 10 million

5. A building is appraised at $1 million. This estimate is based on a forecast of net rent of $100,000 per year discounted at 10% [PV = 100,000/ 0.1 = 1,000,000]. The rent is the net of repair and maintenance costs and taxes. Suppose the building is currently in disrepair and it takes one year and $250,000 to bring it into rent able condition. How much would you be willing to pay for the building today?
   A.$1,000,000
   B. $681,818
   C. $750,000
   D. None of the above

Price: (1,000,000 – 250,000)/(1.1) = $681,818

6. USGOLD Company has an opportunity to invest in a gold mine. The initial investment is $250 million. The mine is estimated to produce 100,000 ounces of gold per year for the next ten years. The extraction cost of gold per ounce is $150 and it is expected to remain at that level. The current price of gold is $600 per ounce and it is expected to increase by 4% per year for the next 10 years. What is the NPV of the project at a discount rate of 10%? (Ignore taxes.)
   A.$ – 3.8 million.
   B. $240.8 million.
   C. $257.8 million.
   D. None of the above.

NPV = -250 +(0.1)(600)(10) – (PV of $15 million per year at a 10% discount rate);
NPV = -250 + 600 – 92.2 = $257. 8 million 

7. Suppose the current price of gold is $600 per ounce. The price of gold is expected to grow at 4% per year for the foreseeable future. If the appropriate discount rate is 10%, then the current value of gold per ounce is:
   A.Less than $600 per ounce
   B. $600 per ounce
   C. Greater than $600 per ounce
   D. Not enough information

8. Suppose the current price of gold is $650 per ounce. The price of gold is expected to grow at 5 % per year for foreseeable future. If the appropriate discount rate is 8%, the present value of gold is:
   A.Less than $650 per ounce
   B. Greater than $650 per ounce
   C. $650 per ounce
   D. None of the above

9. Suppose the current price of gold is $600 per ounce and the price of gold is expected to increase at a rate of 5% per year for the foreseeable future. What is the current value of 0.2 million ounces of gold to be produced each year for the next five years (the discount rate is 8% per year)?
   A.$600 million
   B. $521.64 million
   C. $690.86 million
   D. None of the above

Current value = (0.2)(5)(600)= 600 million

10. Goldsmith labs recover gold from printed circuit boards. It has developed new equipment for the purpose. The following data is given.
    (1.) Equipment costs $250,000
    (2.) It will cost $200,000 per year to run
    (3.) It has an economic life of 5 years and is depreciated using straight-line method
    (4.) It will recover 300 ounces of gold per year
    (5.) The current price of gold is $600 per ounce and it expected to increase at a rate 4% per year for the foreseeable future
    (6.) The tax rate is 30%
    (7.) The cost of capital is 8%
    What is NPV of the equipment?
    A.$430,400
    B. $520,510
    C. $470,400
    D. None of the above

-250,000 + [PV of (0.3)(50,000) for 5 years at 8%] + (5)(900)(600)(1 – 0.3)
– PV of (1 – 0.3)(200,000) for 5 years at 8% = -250,000 + 59,890 + 900,000 – 279,490
= 430,400