## Principles of Corporate Finance Global Edition By Richard Brealey Stewart 10th Edition- Test Bank

Chapter 11

Investment, Strategy, and Economic Rents

Multiple Choice Questions

1. One way to uncover forecasting errors in NPV estimates is by looking at:

I) Book values

II) Liquidating values

III) Market values

A. I only

B. II only

C. III only

D. I and II only

2. A new grocery store cost $50 million in initial investment. It is estimated that the store will generate $5 million after-tax cash flow each year for five years. At the end of 5 years it can be sold for $60 million. What is the NPV of the project at a discount rate of 10%?

A. $2.42 million

B. $10 million

C. $6.21 million

D. None of the above

3. A new grocery store cost $50 million in initial investment. It is estimated that the store will generate $5 million after-tax cash flow each year for five years. At the end of 5 years it can be sold for $55 million. What is the NPV of the project at a discount rate of 10%?

A. $2.42 million

B. $5 million

C. $3.1 million

D. None of the above

4. A rental property is providing 13% rate of return. Next year’s rent is expected to be $1.0 million and is expected to grow at 3% per year forever. What is the current value of the property?

A. $7.7 million

B. $10 million

C. $33.3 million

D. none of the above

5. A building is appraised at $1 million. This estimate is based on a forecast of net rent of $100,000 per year discounted at 10% [PV = 100,000/ 0.1 = 1,000,000]. The rent is the net of repair and maintenance costs and taxes. Suppose the building is currently in disrepair and it takes one year and $250,000 to bring it into rent able condition. How much would you be willing to pay for the building today?

A. $1,000,000

B. $681,818

C. $750,000

D. None of the above

6. USGOLD Company has an opportunity to invest in a gold mine. The initial investment is $250 million. The mine is estimated to produce 100,000 ounces of gold per year for the next ten years. The extraction cost of gold per ounce is $150 and it is expected to remain at that level. The current price of gold is $600 per ounce and it is expected to increase by 4% per year for the next 10 years. What is the NPV of the project at a discount rate of 10%? (Ignore taxes.)

A. $ – 3.8 million.

B. $240.8 million.

C. $257.8 million.

D. None of the above.

7. Suppose the current price of gold is $600 per ounce. The price of gold is expected to grow at 4% per year for the foreseeable future. If the appropriate discount rate is 10%, then the current value of gold per ounce is:

A. Less than $600 per ounce

B. $600 per ounce

C. Greater than $600 per ounce

D. Not enough information

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