1. Hiram Finnegan Inc. is considering a capital investmentproject. This project will cost $10 million today. Managers expectthat net cash flows will be $15 million at the end of year 1 and$40 million at the end of year 2. After year 2, the project will befinished. The appropriate annual discount rate for projects of thisrisk is 12% per year. What is the net present value of thisproject? Should the firm accept this project? (Choose the bestanswer.)

A. $55.0 mil.; accept because NPV > 0.

B. $35.3 mil.; accept because NPV > 0.

C. -$10.0 mil.; reject because NPV < 0.

D. -$45.0 mil.; reject because NPV < 0.

E. $45.3 mil.; accept because NPV > 0.

2. Diane Badame, a financial analyst at Kaufman & Broad, areal estate firm, has been asked to make a recommendation aboutwhether Kaufman & Broad should invest in a piece of land thatwould cost $85,000 in cash today. The investment rate of return onsimilar alternative investments is 10% per year, compoundedannually. Diane estimates that the land can be sold next year for$91,000. Assuming that her forecast is correct, what should sherecommend, and why?

Hint: this problem is implicitly a one-period NPVproblem.

A. Do not buy the land, because its present value is $86,842.25,which is greater than the purchase price.

B. Do not buy the land, because its present value is $82,727.27,which is less than the price.

C. Buy the land, because it will be worth $6,000 more in oneyear’s time, so Kaufman & Broad can sell it for a profit.

D. Buy the land, because its present value is $82,727.27, whichis a bargain compared to $85,000.