1) You areconsidering an investment opportunity that costs $234,000 and willreturn 12% on your investment. There are higher returning investmentsavailable in the financial markets that are comparable to thisinvestment opportunity in terms of risk. However, a bank offers to lendyou up to $234,000 at 9% with no conditions. Should you undertake thisinvestment opportunity?

a. Yes because the return on the investment opportunity is greater than its opportunity cost of capital

b. No because the return on the investment is less than its opportunity cost of capital.

2) Youare considering two insurance settlement offers. The first offer areannual payments of $50,000 for 5 years with the first payment made atthe end of the first year. The other offer is the payment of one lumpsum amount today. You are trying to decide which offer to accept giventhe fact that your discount rate is 12 percent. What is the minimumamount that you will accept today if you are to select the lump sumoffer?

a. $195,618.19

b. $201,867, 47

c. $180.238.81

d. $197,548.43

e. $214,142.50 3)

Which of the following statements is (are) true?

(I)Managers should not focus on current stock value because doing so willlead to an overemphasis on short term earnings at the expense of longterm investments.

(II) Other stakeholders will generally agreethat the primary goal of the firm should be to maximize shareholders’wealth because they have a prior claim over shareholders to the firm’scash flow and liquidation value.

(III) Corporations dominate theeconomy in terms of their numbers (number of businesses organized ascorporations), their sales, and their profits.

(IV) We valueinvestment assets by valuing their cash flow streams. Cash flow streamsare unique in terms of the size of their cash receipts, their timing,and their risk.

a. (III)

b. (I)

c. (II) and (IV)

d. (IV)

e. (I) and (III)

f. (II) 4)

Threealternative machine models are being considered for an ongoingoperation. The three alternatives will be used in the production of thesame product. Therefore, the selection among the three will be based ontotal costs. Model A costs $105,000 and will last 4 years. Its realoperating cost is $10,200/year. Model B costs $110,000 and will last 5years. Its real operating cost is $9,400/year. Model C costs $125,000and will last 6 years, Its real operating cost is $9,600/year. It isdetermined that the real opportunity cost of capital is 7%. Rank thethree models from the best choice to the least choice.

a. Best A, B, C Least

b. Best C, B, A Least

c. Best B, A, C Least

d. Best A, C, B, Least

e. Best C, A, B Least

f. Best B, C, A Least 5)

Youare considering an investment with the following cash flows. If therequired rate of return for this investment is 13.5%, should you acceptit based solely on the internal rate of return rule? Why or why not?

Year Cash Flow
0 -$14,000
1 $8,500
2 $96000
3 -$2,300

a. yes; because the IRR exceeds the required return

b. yes; because the IRR is a positive rate of return

c. no; because the IRR is less than the required return

d. no; because the IRR is a negative rate of return

e. You can not apply the IRR rule in this case because there are multiple IRRs