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### TBS 907-Spring 2005 - Tutorial 2- NPV Analysis- Solutions

Course: FIN FIN, Spring 2009
School: Baptist College of...
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907- TBS SPRING 2005 TUTORIAL 2- NPV ANALYSIS Question 1 As winner of a breakfast cereal competition, you can choose one of the following prizes: a. b. c. d. e. \$100,000 now. \$180,000 at the end of five years. \$11,400 a year forever. \$19,000 for each of 10 years \$6,500 next year and increasing thereafter by 5 per year forever. If the interest rate is 12 percent, which is the most valuable prize. Answer: a. b. c....

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907- TBS SPRING 2005 TUTORIAL 2- NPV ANALYSIS Question 1 As winner of a breakfast cereal competition, you can choose one of the following prizes: a. b. c. d. e. \$100,000 now. \$180,000 at the end of five years. \$11,400 a year forever. \$19,000 for each of 10 years \$6,500 next year and increasing thereafter by 5 per year forever. If the interest rate is 12 percent, which is the most valuable prize. Answer: a. b. c. d. PV = \$100,000 PV = \$180,000/1.125 = \$102,137 PV = \$11,400/0.12 = \$95,000 PV = \$19,000 [Annuity factor, 12%, t = 10] PV = \$19,000 5.650 = \$107,350 e. PV = \$6,500/(0.12 - 0.05) = \$92,857 Prize (d) is the most valuable because it has the highest present value. Question 2 Consider the following three stocks: a. b. c. Stock A is expected to provide a dividend of \$10 per share forever. Stock B is expected to pay a dividend of \$5 next year. Thereafter, dividend growth is expected to be 4 percent per year forever. Stock C is expected to pay a dividend of \$5 next year. Thereafter dividend growth is expected to be 20 percent a year for 5 years (i.e. until year 6) and zero thereafter. Answer: DIV1 \$10 = = \$100.00 r 0.10 DIV1 5 = = \$83.33 r - g 0.10 - 0.04 DIV1 DIV2 DIV3 DIV4 DIV5 DIV6 DIV7 1 + + + + + + 1 2 3 4 5 6 1.10 1.10 1.10 1.10 1.10 1.10 0.10 1.106 PA = PB = PC = PC = 5.00 6.00 7.20 8.64 10.37 12.44 12.44 1 + + + + + + = \$104.50 1 2 3 4 5 6 1.10 1.10 1.10 1.10 1.10 1.10 0.10 1.10 6 At a capitalization rate of 10 percent, Stock C is the most valuable. For capitalization a rate of 7 percent, the calculations are similar. The results are: PA = \$142.86 PB = \$166.67 PC = \$156.48 Therefore, Stock B is the most valuable. Question 3 The furniture division of Playfurn Ltd., a profitable, diversified company, purchased a machine 5 years ago for \$7,500. When it was purchased the machine had an expected useful life of 15 years and an estimated value of zero at the end of its life. The machine currently has a market value of \$1000. the division manager reports that he can buy a new machine for \$16,000 ( including installation) which, over its 10-year life, will result in an expansion of sales from \$10,000 to \$11,000 per annum. In addition, it is estimated that the new machine will reduce annual operating costs from \$7,000 to \$5,000. If the required rate of return is 10 percent per annum, should Playfurn buy the new machine? Answer: Compare machines over a life of 10 years. Assume that at the end of 10 years, the scrap value of the new machine is zero. Continue to operate old machine: Net Cash Flow : \$10,000 - \$7,000 = \$3,000 per year for 10 years 1 10 1 - 1.1 - \$1000 = \$17,434 NPV = \$3000 0.10 Purchase New Machine now: Cost Disposal of Old Machine Net Cash Flow = \$16,000 = \$1,000 = \$11,000 - \$5,000 = \$6,000 1 10 1 - 1.1 - \$1000 = \$21,867 NPV = -\$16,000 + \$1,000 + \$6000 0.10 As the NPV of purchasing the new machine exceeds the NPV of continuing to operate the old machine, the new machine should be purchased now.
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CHAPTER 3 ENGINEERING CIRCUIT ANALYSIS 1. 3. 5. 7. 9. 11. Circuit diagram not shown. (a) 4 nodes; (b) 5 branches; (c) yes, path; no, loop. (a) 4; (b) 5; (c) yes,no,yes,no,no (a) 3 A; (b) -3 A; (c) 0 ix = 1 A; iy = 5 A.SELECTED ANSWERSIf the DMM a
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Solution to Problem Set VChapter 4, Problem 36. Determine each mesh current in the circuit of Fig. 4.65.12 0.1vx 5 + 6V+ 11 vx +12 2V 3 +1.5 VFIGURE 4.65Chapter 4, Solution 36. We define a clockwise mesh current i3 in the upper righ