UMUC FIN 610 Week 4 Quiz with Answers

UMUC FIN 610 Week 4 Quiz with Answers



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1. A firm is planning an investment in a project. The initial investment is 240,000. The project returns $100,000 cash at the end of one year. At the end of second year the project returns cash of amount $F. These are only cash flows from the project. If the IRR for the project is 10%, what is the amount $F?
2. This question will require you to use Excel's IRR function. A firm invests $100,000 in a project today. It receives $15,000 a year from now, $20,000 two years from now, and $95,000 three years from now and nothing more. What is the IRR of the project?
3. This question will require you to use Excel's Rate function.You can use the IRR function, but in case of an Annuity with a large number of periods, it can become cumbersome.
A firm purchases Treasury bonds for  $250,000. The Face Value of the bonds are $300,000. It receives yearly coupons of $12,000 for 8 years. At the end of 8 years the firm receives the Face Value of $300,000 plus the coupon payment for the 8th year, and then the bonds are extinguished.
What is the IRR from the investment in the bonds?
4. This is a Growing perpetuity formula. Remember the rate of discount and rate of return are one and the same thing.
A firm has invested $140,000 in a project. The project will return cash of $2,000 at the end of the first year, and every year in the future with a growth rate of 5%. That is, it will return $2,100 at the end of the second year, $2,205 at the end of the third year and so on.
What is the IRR for the project?
5. A firm is evaluating a product. The market demand for the product can be low or high.
The product requires an investment of $1,060.
If the market demand is low, then there is a 70% chance that the product will sell for $800 and a 30% chance it will sell for $1,200.
What is the NPV of the project if the market demand is low?
6. A firm is evaluating a product. The market demand for the product can be low or high.
The product requires an investment of $1,030.
If the market demand is high, then there is a 40% chance that the product will sell for $900 and a 60% chance it will sell for $1,250.
What is the NPV of the project if the market demand is high?
7. You are evaluating a product. The market demand for the product can be low or high.
The product requires an investment of $500.
If the market demand is high, the product will have a payoff of $800. If the market demand is low, the product will have payoff of $300.
You do not know whether the market demand is high or low, but you know the probability that the market demand will be high is 75%, and that it will be low is 25%.

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