Trading and Transaction Comps Modelling
EF Assignments 4 - 6 Questions and Answers
Other things held constant, an increase in the cost of capital discount rate will result in a
B
decrease in a project's IRR. - ANSWER False
LU
Chesapeake Energy company uses a required return of 12.5% to evaluate most projects of
average risk. Suppose the company is looking at a new energy project that is of
YC
lower-than-average-risk, and the CEO thinks the discount rate should be risk adjusted.
What effect will this have on the project's NPV? - ANSWER Increase NPV
D
Aaron McIntire Inc., a large alternative energy firm operating out of Valdez, Alaska, has a
new energy project it is considering. The project has a cost of $275,000 and is expected
TU
to provide after-tax annual cash flows of $73,306 for eight years. The firm's management
is uncomfortable with the IRR reinvestment assumption and prefers the modified IRR
approach. You have calculated a cost of capital for the firm of 12 percent. What is the
ES
project's MIRR? - ANSWER 16.0%
Williams Companies Inc is considering a natural gas project which has the following cash
C
flows. The cost of capital is 10%. What is the NPV of the project?
A
Williams is considering the following project and is computing the IRR. The firm has a
cost of capital of 10%. What is the IRR for this project?
Year Project Cash Flows
0 -$1,000
B
1 400
LU
2 300
3 500
4 400 - ANSWER 21.22%
YC
Jeff Patterson has a solar panel energy savings project which has the following cash
flows:
D
Year Cash Flow
TU
0 -$245,454
1 100,000
2 100,000
ES
3 150,000
4 40,000
5 25,000
C
The cost of capital is 10 percent. What is the project's discounted payback period? -
A
ANSWER 2.64 years
In evaluating project risks in the energy industry, which of the risks listed below is
considered an "intangible risk", and is not a "tangible risk"? [Hint: This question is from
the presentation on Capital Budgeting and Risk Analysis in the Oil and Gas Industry.] -
ANSWER Weather
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