Problem 1: Nob-Orrow Inc. is considering an investment in a project that is similar in risk to its existing projects. The firm makes no use of debt and is entirely financed by common stock with a beta of 1.4. The expected return on the market portfolio is 10 percent and the risk-free rate is 4 percent. The required rate of return on this project is:
a. 14%
b. 6%
c. 12.4%
d. 10%
e. None of the above
Problem 2: Given the following information with regard to a proposed project:
Inventory increase of $45,000
Cash falls by $4,500
Depreciation increases by $2,000
Accounts payable increase by $10,000
Accounts receivable increase by $10,000
The working capital investment required for this project is:
a. $40,500
b. $38,500
c. $30,500
d. $50,500
e. none of the above
Problem 3: Everafter, Inc. is considering two substitutable devices to replace aging, low-tech equipment. The first device costs less initially, will last 7 years, and has higher maintenance costs than the second device. The second device will last 8 years. When evaluating these alternatives, it would be most efficient to find the device with:
a. the lowest equivalent annual cost (EAC)
b. the highest equivalent annual cost (EAC)
c. the lowest net present value (NPV)
d. the highest net present value (NPV)
e. the lowest maintenance costs