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19. A financial analyst in Bookman’s Book Company just analyzed a capital budgeting project and realized...

19. A financial analyst in Bookman’s Book Company just analyzed a capital budgeting project and realized that the IRR of 12% on the project was identical to the company’s discount rate of 12%. Which of the following is true regarding the net present value of the project?

A. The NPV of the project is positive

B. The NPV of the project is zero

C. The NPV of the project is negative

D. More information is needed to answer the question

20. When a company’s discount rate increases, which of the following is true for a project that currently has a net present value of $105,325.69 and an IRR of 15.66%?

A. The company’s IRR will increase

B. The company’s IRR will decrease

C. The company’s net present value will increase

D. The company’s net present value will decrease

26. You have received a settlement from an insurance company which will pay you $100,000 per year for 12 years at the end of each year and J.G. Wentworth wants to buy your annuity. What is JG Wentworth’s annual rate of return (interest rate) if they are willing to pay you $500,000 today?

A. 7.56%

B. 18.21%

C. 16.94%

D. Interest rate cannot be calculated.

36. The preferred method to use in capital budgeting analysis is:

A. Return on equity

B. Net present value

C. Internal rate of return

D. All of the above are equally acceptable methods to use in capital budgeting analysis

Solutions

Expert Solution

19.Correct option is (B)

Explanation:- Net present value is equal to present value of cash inflows discounted using appropriate discount rate less Initial investment and IRR is the rate at which NPV is equal to 0 .Therefore when we use discount rate equal to IRR for calculating NPV then NPV will always be 0

20.Correct option is (D)

As we discussed above NPV is equal to present value of cash inflows discounted using appropriate discount rate less Initial Investment .Hence when we increase discount rate then present value of cash inflows will decrease and hence NPV will decrease

26.

36.Correct option is (B)

Explanation:-Net present value is an absolute measure which tells us how much value a project is going to add to the value of firm .It is calculated as Present value of cash inflows less Initial Investment

jeff jeffy answered 1 year ago

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