Answers to End–of–Chapter Problems
B–85
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 Schneider’s salary in the computation of the PV of his contract.
The expected value of
McRae’s salary in years one through three is:
PV = $5,000,000 + $7,000,000
2
1375
.
0
A
+ [($3,000,000
7
1375
.
0
A
)/ 1.1375
2
] + 1,000,000
2
1375
.
0
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.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '08
 Wood
 Net Present Value, NPVGO

Click to edit the document details