AF
AF3313 Sem 2 Midterm Solutions(1).pdf

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

• Test Prep
• 2

This preview shows pages 1–2. Sign up to view the full content.

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.

This preview has intentionally blurred sections. Sign up to view the full version.

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
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern