A3 - poorly and will generate only $350,000 in cash flow...

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ACTSC 371 Assignment #3 DUE: Friday July 6 th , 4:00 p.m. 1. Text Questions 8.10, 8.11, 8.17 2. Text Questions 9.5, 9.10 3. ABC Inc is deciding between two photocopiers, the XJ4 and the RS3. The XJ4 will last 3 years and the RS3 will last 5 years. Assume the net cash expenses incurred from each copier are as below (paid at the beginning of the year), and which ever copier is purchased, it will be replaced at the end of its life. Which copier should ABC Inc. purchase? (Assume a discount rate of 8%) Year 1 Year 2 Year 3 Year 4 Year 5 XJ4 1200 100 200 RS3 1100 150 200 300 500 4. SuperFashions Inc has spent $3 million on an extensive marketing campaign to promote its new product MegaGreen hair dye. The MegaGreen hair dye product is ready to go into production immediately with an investment of $ 5 million. The marketing department thinks there is a 40% chance that the product will perform
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Unformatted text preview: poorly and will generate only $350,000 in cash flow per year in perpetuity, and a 60% chance that it will perform well and generate $1 million in cash flow per year. (Assume a discount rate of 12%). (a) Should SuperFashion put MegaGreen into production? (b) Now suppose Superfashion can sell the MegaGreen production line for $3 million if it is a failure. What is the value of this option to abandon? 5. Suppose the current one-year swap rate is 9% and the two-year swap rate is 10%. (a) What is the forward rate over year 2? (b) Assume that you buy a $1000 zero coupon bond at the two-year spot rate. Now suppose that one year from now, the one year spot rate is 8%, and you sell the bond at this time. How much is the bond worth? What was your rate of return on this investment?...
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This note was uploaded on 04/27/2010 for the course ACTSC 371 taught by Professor Wood during the Spring '08 term at Waterloo.

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