ACT349 F08 TT2 solution - Family name, comma, personal...

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ACT349 F08 TT2 v07 post test for web Privacy Code A Page 1 of 13 Family name, comma, personal names:____________________________________ Your student ID:______________________________________________________ Your signature: ______________________________________________________ UNIVERSITY OF TORONTO Faculty of Arts and Science ACT349 F08 TERM TEST 2, OCTOBER 29, 2008 Duration – 50 Minutes Aids: All calculators allowed. Scrap paper OK if needed. Instructor: Keith Sharp PhD FSA CFA NOTES: 1. Please identify your Privacy Code in the page footer (small letters at bottom of this page, A, B, C or D) and blob it as the answer for the question after the last real question (so blob as question 11 for a 10-question term test, as question 25 for a 24 question final). 2. Any scrap paper is to be handed in with this book. It’s OK to write on book. 3. This is a closed book exam. 4. Multiple choice: only your letter answer mark sense sheet will be graded. 5. Mark sense sheets: please write in both the blobs and eye-readable identifiers 6. Mark sense sheets: pencil preferred, ink might have to be hand-graded 7. Each question: 10 points correct, two if blank, zero points if wrong 8. So expectation if you guess is the same as leaving a blank. 9. Make sure you’ve indicated your letter answers on the mark sense sheet before time’s up 10. Please stay in your seats and don’t talk till all materials have been collected. 11. Photo ID on desk during exam 12. Name and student ID and signature on this question paper and on mark sense sheet 13. Good luck!
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ACT349 F08 TT2 v07 post test for web Privacy Code A Page 2 of 13 1. The manufacture of herbal health tonic is a competitive industry. The manufacturing facilities have an annual output of 100,000 gallons. Operating costs are $2 per gallon. A 100,000 gallon capacity plant costs $500,000 at time 0 to build and have an indefinite life, with no salvage value. The cost of capital is 20% (assume no taxes). Your company has discovered a new process that lowers the operating cost per gallon to $1.00. Assume that the competition lets you have five years before it catches up and that the market demand is sufficiently high. What is the net present value of building a new plant with new technology? Assume that all non-building costs and production are at the end of each year. (A) Less than $250,000.00 (B) $250,000.00 but less than $300,000.00 (C) $300,000.00 but less than $350,000.00 (D) $350,000.00 but less than $400,000.00 (E) $400,000.00 or more (B)Solution l Old plant, breakeven perpetuity: -500,000 + (100,000 (P - 2))/(0.2) = 0; P - 2 = 1; P = $3/ per gallon; New plant: economic rents for five years, then plant worth same as the other new tech plants then being built -500,000 +(3-1) *100000* a 5 Ր + (500,000/1.2^5) = 100000* a 5 (=advantage over old tech) = $299,061
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ACT349 F08 TT2 v07 post test for web Privacy Code A Page 3 of 13 2. Historical returns data for the past four years for Stock C and the stock market portfolio returns are:
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ACT349 F08 TT2 solution - Family name, comma, personal...

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