1. A capital investment of $90,000 is expected to generate an after-tax cash flow of $50,000 one year from today and a cash flow of $55,000 two years from today. The cost of capital is 12 percent. The internal rate of return is closest to:

A. 7.89 percent.
B. 13.45 percent.
C. 10.74 percent.

 

2. A company that sells energy drinks is evaluating an expansion of its production facilities to also produce soda drinks. The company’s marketing department recommended producing soda drinks as it would increase the company’s energy drinks sales because of an increase in brand awareness. What impact will the cash flows from the expected increase in energy drinks sales most likely have on the NPV of the soda drinks project?

A. Decrease.
B. Increase.
C. No effect.

 

3. A perpetual after-tax cash flow stream of $2,000 is created by an investment of $15,000. The required rate of return is 8 percent. The investment’s profitability index is closest to:

A. 1.50.
B. 1.67.
C. 1.25.

 

1. C
Enter the following values in a financial calculator: CF0= -90,000, CF1=50,000, CF2=55,000, CPT IRR. IRR = 10.74 percent.

 

2. B
The increase in energy drinks sales represents a positive externality that will increase the NPV of the project and should be included in the NPV analysis

 

3. B
The present value of future cash flows is  PV = \frac{2,000}{0.08} = 25,000 The profitability index is  PI = \frac{PV}{Investment} =  \frac{25,000}{15,000} = 1.67.

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