## Objective Types Questions

Objective Types Questions in \$7 only

1. Which statement is CORRECT?

a) The IRR method assumes that Cash flows are reinvested at the firm’s WACC

b) The use of Accelerated Depreciation methods (instead of Straight-Line) results in higher operating cash flows in a projects early years.

c) For independent projects with normal cash flows, the NPV, Payback and IRR methods will always lead to the same decision.

d) For normal projects, lower costs of capital lead to lower NPVs.

2. Which of the following is true for normal projects if the cost of capital is positive?

a) If a project’s IRR is positive, then its NPV will always be positive

b) If a project’s NPV is negative, then its Modified IRR will be negative

c) If a project’s NPV is positive, then its Profitability Index will always be positive

d) If a project’s IRR is positive, then its Discounted Payback Period will exist

## FIN 534 Quiz 1 (30 questions)

FIN 534 Quiz 1 (30 questions)  Got 100%

Question 1

Which of the following statements is CORRECT?

One defect of the IRR method is that it does not take account of cash flows over a project’s full life.

One defect of the IRR method is that it does not take account of the time value of money.

One defect of the IRR method is that it does not take account of the cost of capital.

One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future.

One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.
2 points
Question 2

## Clark Paints: Calculate Annual cash flows, Payback Period NPV & IRR

Clark Paints: Calculate Annual cash flows, Payback Period NPV & IRR

Clark Paints: The production department has been investigating possible ways to trim total production costs. One possibility currently being examined is to make the paint cans instead of purchasing them. The equipment needed would cost \$200,000, with a disposal value of \$40,000, and it would be able to produce 5,500,000 cans over the life of the machinery. The production department estimates that approximately 1,100,000 cans would be needed for each of the next five years.

The company would hire three new employees. These three individuals would be full-time employees working 2,000 hours per year and earning \$12.00 per hour. They would also receive the same benefits as other production employees, 18% of wages, in addition to \$2,500 of health benefits.

It is estimated that the raw materials will cost 25¢ per can and that other variable costs would be 5¢ per can. Since there is currently unused space in the factory, no additional fixed costs would be incurred if this proposal is accepted.

## Mini Case: The Power to Cool Off in Florida (Indiantown Cogeneration Project)

CFM3 Ch 10 Minicase The Power to Cool Off in Florida             in \$19 only

Objective:
This case demonstrates the use of NPV, IRR, and financial ratios for evaluating a capital budgeting project.
Case Discussion:
The Indiantown Cogeneration Project involved the construction and operation of a coal-fired plant in Martin County, Florida, that produces electricity and steam. The capital cost (including interest during construction) was approximately \$770 million. Since completion, it has an electric generating capacity of 330 megawatts (net) and a steam capacity of 175,000 pounds per hour. The project sells the electric power to Florida Power & Light Company (FPL) under a 30-year contract and the steam to Caulkins Indiantown Citrus Company under a 15-year contract.

FPL’s electricity payments have two parts: one for electric capacity and the other for the electric energy that it receives.

The project’s financing consisted of \$630 million of 30-year 9% APR interest rate debt and \$140 million of equity. The debt requires equal annual sinking fund payments of \$31.5 million beginning in year 11. Depreciation is straight line to zero over 20 years. The tax rate is 40%. Other information about the project includes: