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Master

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Submitted By kema5155
Words 8296
Pages 34
Chapter 11
Investment, Strategy, and Economic Rents

Multiple Choice Questions 1. | The best way to uncover forecasting errors contained within NPV estimates is by looking at:
I) book values; II) historical values; III) market values A. | I only | B. | II only | C. | III only | D. | I and II only | | 2. | A new grocery store requires $50 million in initial investment. You estimate that the store will generate $5 million of after-tax cash flow each year for five years. At the end of five 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. | $10.82 million | C. | $6.21 million | D. | $2.82 million | | 3. | A new grocery store requires $50 million in initial investment. You estimate that the store will generate $5 million of after-tax cash flow each year for five years. At the end of five years, it can be sold for $55 million. What is the NPV of the project at a discount rate of 10%? A. | $2.4 million | B. | $5.0 million | C. | $3.1 million | D. | $0.0 million | | 4. | A rental property is providing an acceptable market rate of return of 13%. You expect next year's rent to be $1.0 million and that rent is expected to grow at 3% per year forever. What is the current value of the property? A. | $7.7 million | B. | $10.0 million | C. | $33.3 million | D. | $50.0 million | | 5. | A building is appraised at $1 million. This estimate is based on forecasted net rent of $100,000 per year discounted at a 10% cost of capital [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 uninhabitable. It will take one year and $250,000 of work (spent at the end of the year) to bring it into rentable condition. How much would you be willing to

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