1. ?(NPV with varying required rates of return?)
Gubanich Sportswear is considering building a new factory to produce aluminum baseball bats. This project would require an initial cash outlay of ?$4,000,000 and would generate annual free cash inflows of ?$1,000,000 per year for 7 years. Calculate the? project's NPV ?given:
a. A required rate of return of 9 percent
b. A required rate of return of 12 percent
c. A required rate of return of 15 percent
d. A required rate of return of 16 percent
2. Which statement is true regarding capital budgeting:
The NPV method considers time value of money, the systemic risk of the project reflects the increase in wealth resulting from this project.
The rate used to discount the cash flows associated with a capital project reflects the firm’s borrowing cost.
A project’s NPV considers the incremental earnings associated with the project.
The IRR method reflects the return that makes the project’s NPV positive.
When evaluating mutually exclusive projects, the financial analyst should always select the project with the highest IRR even if it has a lower NPV.
All the above statements are true.