Multiple choice | Accounting homework help

1. Taj Mahal Tour Company proposes to invest \$3 million in a new tour package project. Fixed costs are \$1 million per year. The tour package costs \$500 and can be sold at \$1500 per package to tourists. This tour package is expected to be attractive for the next five years. If the cost of capital is 20%, what is the NPV break-even number of tourists per year? (Ignore taxes, give an approximate answer)

a. 1000

b. 2000

c. 15000

d. None of the above

2. Hammer Company proposes to invest \$6 million in a new type of hammer-making equipment. The fixed costs are \$0.5 million per year. The equipment is expected to last for five years. The manufacturing cost per hammer is \$1and the selling price per hammer is \$6. Calculate the break-even (i.e. NPV = 0) volume per year. (Ignore taxes.)

a. 500,000 units

b. 600,000 units

c. 100,000 units

d. None of the above

3. Hammer Company proposes to invest \$6 million in a new type of hammer-making

equipment. The fixed costs are \$1.0 million per year. The equipment is expected to last for five years. The manufacturing cost per hammer is \$1 and the selling price per hammer is \$6. Calculate the break-even (i.e. NPV = 0) volume per year. (Ignore taxes.)

a. 500,000 units

b. 600,000 units

c. 100,000 units

d. None of the above

4. Everything else remaining the same, an increase in fixed costs: I) Increases the break-even point based on NPV II) Increases the accounting break-even point III) Decreases the break-even point based on NPV IV) Decreases the accounting break-even point

a. I and III only

b. III and IV only

c. II and III only

d. I and II only

5. Petroleum Inc. owns a lease to extract crude oil from sea. It is considering the construction of a deep-sea oil rig at a cost of \$50 million (I0) and is expected to remain constant. The price of oil is \$50 /bbl and the extraction costs are \$20 /bbl. The quantity of oil Q = 200,000 bbl per year forever. The risk-free rate is 10% per year, which is also the cost of capital (Ignore taxes). Calculate the NPV to invest today

a. +10,000,000

b. +6,000,000

c. +4,000,000

6. Petroleum Inc. owns a lease to extract crude oil from sea. It is considering the construction of a deep-sea oil rig at a cost of \$50 million (I0) and is expected to remain constant. The price of oil is \$50 /bbl and the extraction costs are \$20 /bbl. The quantity of oil Q = 200,000 bbl per year forever. The risk-free rate is 10% per year which is also the cost of capital (Ignore taxes). Suppose the oil price is uncertain and can be \$70 /bbl or \$40 /bbl next year and then expected NPV of the project if postponed by one year is:

a. +10,000,000

b. +25,000,000

c. +5,000,000

d. None of the above

7. Petroleum Inc. owns a lease to extract crude oil from sea. It is considering the construction of a deep-sea oil rig at a cost of \$50 million (I0) and is expected to remain constant. The price of oil is \$50 /bbl and the extraction costs are \$20 /bbl. The quantity of oil Q = 200,000 bbl per year forever. The risk-free rate is 10% per year which is also the cost of capital (Ignore taxes). Suppose the oil price is uncertain and can be \$70 /bbl or \$40 /bbl next year. If the project if postponed by one year, calculate the value of the option to wait for one year:

(approximately)

a. +15,000,000

b. +40,000,000

c. +10,000,000

d. None of the above

8. You are planning to produce a new action figure called “Hillary “. However, you are very uncertain about the demand for the product. If it is a hit, you will have net cash flows of \$50 million per year for 3 years (starting next year). If it fails, you will only have net cash flows of \$10 million per year for 2 years (starting next year). There is an equal chance that it will be a hit or failure (probability = 50%) You will not know whether it is a hit or a failure until the first year’s cash flows are in. You have to spend \$80 million immediately for equipment and the rights to produce the figure. If the discount rate is 10%, calculate the NPV without the abandonment option.

a. -9.15

b. +13.99

c. +9.15

d. -14.4

9. You are planning to produce a new action figure called “Hillary”. However, you are very uncertain about the demand for the product. If it is a hit, you will have net cash flows of \$50 million per year for 3 years (starting next year). If it fails, you will only have net cash flows of \$10 million per year for 2 years (starting next year). There is an equal chance that it will be a hit or failure (probability = 50%) You will not know whether it is a hit or a failure until the first year’s cash flows are in. You have to spend \$80 million immediately for equipment and the rights to produce the figure. If you can sell your equipment for \$60 million once the first year’s cash flows are received, calculate the NPV with the abandonment option. (The discount rate is 10%)

a. -9.1

b. +9.1

c. +13.99

d. -14.4

10. You are planning to produce a new action figure called “Hillary”. However, you are very uncertain about the demand for the product. If it is a hit, you will have net cash flows of \$50 million per year for 3 years (starting next year). If it fails, you will only have net cash flows of \$10 million per year for 2 years (starting next year). There is an equal chance that it will be a hit or failure (probability = 50%) You will not know whether it is a hit or a failure until the first year’s cash flows are in. You have to spend \$80 million immediately for equipment and the rights to produce the figure. .If you can sell your equipment for \$60 million once the first year’s cash flows are received, calculate the value of the abandonment option. (The discount rate is 10%)

a. -9.15

b. +13.99

c. +23.14

d. None of the above