Spring 2011, test 3, question 9, version 4, modified by adding IRR & NPV 1. The following table presents information on a potential project with conventional cash flows currently being evaluated by SDA. Which of the statements are true? Expected cash flows (number of years from today) | Cost of capital | 0 | 1 | 2 | 3 | 4 | | -60,000 | 28,000 | 18,000 | 35,000 | 9,000 | 14.0% |
Statement 1: SDA would accept the project based on the project’s payback period and the payback rule if the payback threshold is 2.25 years
Statement 2: SDA would accept the project based on the project’s discounted payback period and the discounted payback rule if the discounted payback threshold is 2.85 years
Statement 3: SDA would accept the project based on the project’s NPV and the NPV rule
Statement 4: SDA would accept the project based on the project’s IRR and the IRR rule

Spring 2011, test 3, question 7, version 4
2. Karim’s Kabobs is evaluating a project that would last for 3 years. The project’s cost of capital is 10.0 percent, its NPV is $20,000, and the expected cash flows are presented in the table. What is X? Years from today | 0 | 1 | 2 | 3 | Expected cash flow (in $) | -65,000 | 50,000 | -20,000 | X |

3. Kiwi operates juice shops in New Zealand. The firm is evaluating the Auckland project, which would involve opening a new juice shop in Auckland. During year 2, Kiwi would have total revenue of $476,000 and total costs of $286,000 if it pursues the Auckland project, and the firm would have total revenue of $379,000 and total costs of $272,000 if it does not pursue the Auckland project. Depreciation taken by the firm would be $82,000 if the firm pursues the project and $23,000 if the firm does not pursue the project. The tax rate is 30%. What is the relevant net income for year 2 of the Auckland project that Kiwi should use in its NPV analysis