Question

1. What factors should the financial manager include when computing the incremental free cash flows of an investment decision. Multiple.

A) Sunk costs

B) Opportunity costs

C) Project externalities

D) Financing costs

2. Metal Ltd is looking at producing power boards. The company is considering alternative production methods. The costs (in million) and lives associated with each are:

Model	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Model 1	-$90	-$2	-$2	-$2
Model 2	-$80	-$8	-$8	-$8	-$8	-$8

Assume the discount rate is 10%, which model should Metal buy?

Metal Ltd should choose Model 1 as its annual equivalent cost is higher.

B) Metal Ltd should choose Model 2 as its annual equivalent cost is lower.

C) Metal Ltd should choose Model 1 as its annual equivalent cost is lower.

D) Metal Ltd should choose Model 2 as its annual equivalent cost is higher.

3. A pine plantation returns nothing to its owner in the first 3 years.  In the following 2 years, the returns are $100,000 (year 4) and $150,000 (year 5), respectively, and then the return is $200,000 per year perpetuity.  The returns can be invested at 8% per annum.  What is the present value to the owner (the value in year 0)?

A) The present value to the owner is $1,877,048.46.

B) The present value to the owner is $2,189,389.32.

C) The present value to the owner is $2,364,540.47.

D) The present value to the owner is $2,027,212.33.

4. You are offered an investment that will pay you $200 in year 1, $400 in year 2, $600 in year 3 and $800 in year 4. You can earn 10% per annum on very similar investment. Calculate the present value of this investment.

A) The present value of investment is $1660.56.

B) The present value of investment is $2000.

C) The present value of investment is $963.19.

D) The present value of investment is $1509.60.

5. Hope bonds have a coupon rate of 7% and mature in 7 years. Assuming semi-annual coupons with face value of $100, what is the value of this bond? Similar bonds yield 6%.

A) The value of this bond is $106.58.

B) The value of this bond is $105.65.

C) The value of this bond is $94.54.

D) The value of this bond is $39.54.

Answer 1

1)

Opportunity costs are the relevant cash flows of the project. All the cash flows must be considered as incremental or decremental cash flows while evaluating project decisions.

Hence, correct option is (B) Opportunity costs.