Question 1 Multiple Choice Problem 1 Big Bucks Mines is considering a project with start-up costs of $16 million, expected after tax cash flows of $2…

Question 1 Multiple ChoiceProblem 1Big Bucks Mines is considering a project with start-up costs of $16 million, expected after tax cash flows of $2 million per year for 30 years, and a shut down cost of $45 million to be paid to a contractor at the start of year 31. BBM has a cost of capital (discount rate) of 9.5% (EAR).For what range of IRR does the project have positive NPV?Answer a. 0.000% to 10.333% b. 0.211% to 10.300% c. 0.255% to 10.318% d. 0.000% to 15.427% e. 0.000% to 3.574% f. 3.574% to 10.456% g. All RRR greater than 0% h. All RRR greater than 1% Question 2 Multiple ChoiceProblem 1 Continued…Is the project worthwhile for BBM? Answer a. Yes b. No c. Insufficient Information 2Question 3 Multiple ChoiceProblem 1 Continued…The government, annoyed by several mining companies going broke before paying the clean-up costs, introduced new legislation requiring new mines to pay an equal amount each year into a trust fund in order to fully fund the estimated clean-up costs. The trust fund pays a guaranteed rate of interest of 8% (EAR). What will be BBM’s annual payment? Answer a. $0.397 Million b. $1.5 Million c. $0.472 Million d. $0.514 Million e. $0.433 Million f. $0.431 Million g. $0.365 Million h. Insufficient information i. $3.997 Million Question 4 Multiple ChoiceProblem 1 Continued…Given that the new legislation has been passed. What is the new NPV of BBM’s project?Answer a. -$0.587 Million b. $0.0815 Million c. -$0.237 Million d. $0.713 Million e. -$0.802 Million f. -$0.741 Million g. -$3.759 Million h. $0.587 Million i. -$35.639 Million j. Insufficient information 3Question 5 Multiple ChoiceProblem 1 Continued…If you have solved question 4 correctly, you will notice that the new regulation has lead to a decline in the NPV. Why has the NPV declined? Answer a. Because the new legislation requires firms to invest in the trust fund at less than their cost of capital. b. Because government interference is always bad. c. Because the Cleanup exercise imposes costs (without conferring any benefits) on the firm. d. Because firms don’t get any time value on the trust fund payments. e. Because the time values of the payments are now captured by thetrust fund. f. Because BBM’s cost of capital is too high. g. Insufficient information to answer this question.

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