Question

ZYZ Inc. is considering a project with the following cash flows: Year Cash Flow (CF) 0 -$200,000 1 $30.000 2 $40,000 3 $50,000 4 $60,000 5 $70.000 If the discount rate is 5%, what is the NPV of the proposed project? $12.253.47 O $21,009.43 $10,572.99 $11,572.99 Question 22 (2 points) The primary idea behind the net present value rule is that an investment: O is worthwhile if it creates value for the owners. must have total cash flows that equal zero. should be accepted if it enhances management's position. should break-even from an accounting point of view. None of the above. Question 23 (2 points) According to the trade-off theory, a firm's optimal capital structure: O is found by locating the mix of debt and equity which causes the earnings per Share to equal exactly $1. exists when the debt-equity ratio is 0.50. O is the debt-equity ratio that exists at the point where the firm's weighted after- tax cost of debt is minimized. O is the debt-equity ratio that results in the lowest possible weighted average cost of capital Question 24 (2 points) QWE Corporation just paid a dividend of $2 a share. The dividends are expected to grow at 10% a year for the next 3 years, and the 5% per year thereafter. The required rate of return on QWE stock is 12%. What is the current price of QWE?

Answer 1

First question is being answered here:

1. Option (a) is correct

Net Present value (NPV) is the present value of future cash inflows minus the initial investment.

First we will calculate the present value of cash inflows as per below:

Here we will use the following formula:

PV = FV / (1 + r%)ⁿ

where, FV = Future value, PV = Present value, r = rate of interest = 5%, n= time period

For calculating the present value the given cash flows, we will calculate the present values of all the years and add them up. Now,putting the values in the above equation, we get,

PV = $30000 / (1 + 5%)+ $40000 / (1 + 5%)² + $50000 / (1 + 5%)³ + $60000 / (1 + 5%)⁴ + $70000 / (1 + 5%)⁵

PV = $30000 / (1 + 0.05)+ $40000 / (1 + 0.05)² + $50000 / (1 + 0.05)³ + $60000 / (1 + 0.05)⁴ + $70000 / (1 + 0.05)⁵

PV = $30000 / (1.05)+ $40000 / (1.05)² + $50000 / (1.05)³ + $60000 / (1.05)⁴ + $70000 / (1.05)⁵

PV = $28571.43+ ($40000 / 1.1025) + ($50000 / 1.57625) + ($60000 / 1.21550625) + ($70000 / 1.27628)

PV = $28571.43 + $36281.18 + $43191.88 + $49362.15 + $54846.90

PV = $212253.47

So, required present value is $212253.47

Initial investment = $200000

Net present value (NPV) = Present value of cash flows - Initial investment

Net Present value (NPV) = $212253.47 - $200000 = $12253.47