{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Ross5eChap08sm

# Ross5eChap08sm - Chapter 8 Net Present Value and Capital...

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

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.

{[ snackBarMessage ]}

### Page1 / 3

Ross5eChap08sm - Chapter 8 Net Present Value and Capital...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online