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Unformatted text preview: Answers to EndofChapter Problems B85 Chapter 8: Net Present Value and Capital Budgeting 8.2 Since there is uncertainty surrounding the bonus payments, which Lemieux might receive, you must use the expected value of Schneiders salary in the computation of the PV of his contract. The expected value of McRaes salary in years one through three is: PV = $5,000,000 + $7,000,000 2 1375 . A + [($3,000,000 7 1375 . A )/ 1.1375 2 ] + 1,000,000 2 1375 . A = $5,000,000 + $11,563,820.79 + $10,019,111 + $1,651,974.39 = $28,234,906.20 8.4 The price will rise by the NPVGO per share EPS = $600,500 / 275,000 = $2.18 NPVGO = ($1,100,000 + $1,800,000) / 275,000 = $2.54 Price = EPS / r + NPVGO = [$2.18 / 0.18] + $2.54 = $14.68 8.6 PV = $150,000 / {0.11 (0.07)} = $833,333.33 8.8 The simplest approach to this problem is to discount the real cash flows. Since the revenues and costs are growing perpetuities, the formula for computing the PV of such a stream can be used. The first year amounts of the revenues and costs are stated in nominal terms. Since the growth rate and discount rate are real rates, adjust the initial amounts. For revenues, labour costs and the other costs, those amounts are $170,000 / 1.04, $95,000 / 1.04and $37,000 / 1.04, respectively....
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This note was uploaded on 06/11/2011 for the course ACTSC 371 taught by Professor Wood during the Spring '08 term at Waterloo.
 Spring '08
 Wood

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