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

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