AF3313 Sem 2 Midterm Solutions(1).pdf

AF3313 Sem 2 Midterm Solutions(1).pdf - Solutions Q1 a[Use...

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Solutions: Q1 a) [Use Growing Annuity Formula to find T] r 12 =(1.1^(1/12)-1) = 0.00797414 (5 marks) b) T = ln(1-(239037/1000*( r 12 -0.005)))/ln(1.005/(1+ r 12 )) = 420 months (15 marks) Q2 (5 marks for each part) a. Project A Discounted CFs Project B Discounted CFs Year 0 -$15,000 -$30,000 Year 1 $9,000 8108.11 $6,000 5405.41 Year 2 $8,000 6492.98 $10,000 8116.22 Year 3 $5,000 3655.96 $18,000 13161.44 Year 4 $4,000 2634.92 $22,000 14492.08 Project A. Payback period: 1+ (15000-9000)/8000=1.75 Project B. Payback period: 2+(30000-6000 -10000 )/18000=2.78 Choose A b. Profitability index. Project A. 8108.11+6492.98+3655.96+2634.92 /15000=1.39 Project B. 5404.41+8116.22+13161.44+14492.08 /30000=1.37 Choose A c. NPV NPV Project A= -15000+ 8108.11+6492.98+3655.96+2634.92=5891.97 NPV Project B= -30000+5404.41+8116.22+13161.44+14492.08 = 11175.16 Choose B. d. Due to the scale problem, project A was chosen under a) and b). However, for mutually exclusive projects, the company should use the NPV rule and choose project B.
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Q3. (30 marks) We will need the aftertax salvage value of the equipment to compute the EAC. Even though the equipment for each product has a different initial cost, both have the same salvage value. The aftertax salvage value for both is: Both cases: aftertax salvage value = $20,000(1 – 0.35) = $13,000
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