Finc6001

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 |

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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 |

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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 |

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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 |

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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 pay for the building today? 

A.  | $1,000,000 |

B.  | $681,818 |

C.  | $750,000 |

D.  |...