Corp Fin Solution

Corporate Finance: The Core (Berk/DeMarzo)
Chapter 3 - Arbitrage and Financial Decision Making

7)

You have an investment opportunity in Germany that requires an investment of $250,000 today and will produce a cash flow of €208,650 in one year with no risk. Suppose the risk-free rate of interest in Germany is 6% and the current competitive exchange rate is €0.78 to $1.00. What is the NPV of this project? Would you take the project?
A)

NPV = 0; No
B)

NPV = 2,358; No
C)

NPV = 2,358; Yes
D)

NPV = 13,650; Yes
Answer:

C
Explanation:

A)

B)

C)

NPV = -250,000 + (€208,650 / 1.06) × $1.00 / €0.78 = 2358, so since NPV > 0, accept
D)

Diff: 3
Topic: 3.3 Present Value and the NPV Decision Rule
Skill: Analytical Use the table for the question(s) below.

Project | Cash flow today | Cash flow in one year | "eenie" | -10 | 15 | "meenie" | 10 | -8 | "minie" | -15 | 20 | "moe" | 10 | -15 |

10)

If the risk-free interest rate is 10%, then of the four projects listed, if you could only invest in one project, which on e would you select?
A)

Eenie
B)

Meenie
C)

Minie
D)

Moe
Answer:

A
Explanation:

A)

Eenie has highest NPV
NPV Eenie = -10 + 15 / 1.1 = 3.64
NPV Meenie = 10 - 8 / 1.1 = 2.73
NPV Minie = -15 + 20 / 1.1 = 3.18
NPV moe = 10 - 15 / 1.1 = -3.64
B)

C)

D)

Diff: 2
Topic: 3.3 Present Value and the NPV Decision Rule
Skill: Analytical 11)

If the risk-free interest rate is 10%, then of the four projects listed, which project would you never want to invest in?
A)

Eenie
B)

Meenie
C)

Minie
D)

Moe
Answer:

D
Explanation:

A)

B)

C)

D)

Moe has negative NPV
NPV Eenie = -10 + 15 / 1.1 = 3.64
NPV Meenie = 10 - 8/1.1 = 2.73
NPV Minie = -15 + 20 / 1.1 = 3.18
NPV moe = 10 - 15 / 1.1 = -3.64
Diff: 2
Topic: 3.3 Present Value and the NPV Decision Rule
Skill: