| none of the above 3. A firm plans to purchase equipment for $1.5 million. It will cost 200,000 to modify it for use in the firm's facility. The equipment is in the 3-year MACRS class. Calculate depreciation expense for Year 3. | none of the above 4. A proposed project is much riskier than average. The best way to account for its added risk is: | Ignoring it because project risk cannot be measured accurately. | | Decreasing the discount rate to account for the higher risk | | Increasing the discount rate to account for the higher risk | | Reducing the NPV by 5% to account for the higher risk | | none of the above 5. A company needs to decide whether to invest in a project now or wait a year until better information is available. The project has a positive expected NPV, but it could be negative if cash flows are less than expected. No competitors are likely to invest in a similar project if the company decides to wait. Which of the following best describes the issues the company is facing in making its decision? | The more uncertainty about the future cash flows, the more reason to go ahead with the project today. | | NPV should be even higher by waiting a year, since it is positive today. | | The project should be adopted now to lock in the expected positive NPV. | | Waiting would probably reduce the project's risk. | | none of the above 6. A stock is currently selling for $25. A 6-month call option on the stock has a strike price of $30 and sells for $0.50. Calculate the exercise value of the option? | none of the above 7. Which of the following is not a real option? | The option to switch the type of vehicle manufactured in a plant | | The option to expand into a foreign country | | The option to buy shares of stock if its price goes up. | | The option to abandon a project. | | none of the above 8. The current price of a stock is $22, and at the end of one year its price will be either $27 or $17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binominal model, what is the option's value? | $3.62 9. A company purchases equipment for $5 million, incurs shipping costs of $30,000 and installation costs of $50,000. It also requires additional net working capital of $100,000. What is the depreciable base? | none of the above 10. Which of the following is an example of a real option? | An option to buy stock at a specified price for a specified period of time | | An option to sell stock at a specified price for a specified period of time | | An option to invest in a project today or to wait a year. | | An option to buy either an American or European option | | | | | | | | |
