1.Which of the following statements is CORRECT?a.An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank’s other offices toÿincrease.b.The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV.c.Identifying an externality can never lead to an increase in the calculated NPV.d.Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not.e.An externality is a situation where a project would have anÿadverseÿeffect on some other part of the firm’s overall operations. If the project would have aÿfavorableÿeffect on other operations, then this isÿnotÿan externality.2.Desai Industries is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise with inflation. The project should last for 3 years, it will be depreciated on a straight-line basis, and there will be no salvage value. No change in net operating working capital would be required. This is just one of many projects for the firm, so any losses on this project can be used to offset gains on other firm projects. What is the project’s expected NPV?ÿDo not round the intermediate calculations and round the final answer to the nearest whole number.WACC10.0%Net investment cost (depreciable basis)$200,000Units sold58,000Average price per unit, Year 1$25.00Fixed op. cost excl. depr. (constant)$150,000Variable op. cost/unit, Year 1$20.20Annual depreciation rate33.333%Expected inflation rate per year5.00%Tax rate40.0%3.How much money will you have in a savings account that earns 18% annually in 10 years if you invest $5000 per year?
