Suppose you are looking to add more capacity to your current manufacturing plant. The new project will cost $6 million up front and is projected to increase revenue $1.5 million a year for each of the next 5 years. If the interest rate is 8%, what is this project's NPV and is it a profitable investment?
A. $10,935; yes it is profitable
B. -$10,935; no it is not profitable
C. $944,444; yes it is profitable
D. -$944,444; no it is not profitable
B. -$10,935; no it is not profitable
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The smaller the fraction of an investment financed by borrowing
A) the greater the potential return and the smaller the potential loss on that investment. B) the greater the potential return and potential loss on that investment. C) the smaller the potential return and potential loss on that investment. D) the smaller the potential return and the greater the potential loss on that investment.
Why does the NPV of a college education tend to be positive but relatively small?
A) College students tend to be young and poor, so their opportunity cost of capital is high. B) College graduates typically have limited on-the-job skills, so their initial returns from the education investment tend to be small. C) There are few barriers to entry for a college education. D) Most of these studies are based on nominal interest rates, so the NPV is smaller than we would achieve under real interest rates.
Harvard University once paid two financial managers, who helped manage Harvard's $20 billion endowment, each about $25 million. Harvard defended their pay "as normal in the community of hedge-fund managers with which Harvard Management competes for talent." An economist probably would say that these pay levels:
A. make sense if the value of their marginal product exceeds $25 million. B. make sense if their marginal factor costs exceed $25 million. C. does not make sense because Harvard has the option of simply putting its funds into a random selection of assets that would do as well. D. makes sense if their efficiency value calculates out to that level.
The chemical industry has a Lerner index of 0.67. Based on this information, a firm with marginal cost of $10 should charge a price of:
A. $30.30. B. $14.93. C. $3.30. D. $6.70.