Capital Budgeting Solutions6

# Capital Budgeting Solutions6 - CFj = CFj = CFj = Nj = CFj =...

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Old Exam Questions - Capital Budgeting - Solutions Page 51 of 96 Pages CFj = 0 CFj = 100 CFj = 0 Nj = 5 CFj = 200 Nj = 4 CFj = 250 Nj = 6 CFj = 0 Nj = 2 CFj = 400 Nj = 2 I/YR = 12 Solve for NPV = \$815.90 49. Assume that Project A will have an initial outlay in Year 0 of \$60,000, followed by cash inflows of \$23,000 in Years 1-5, while Project B will have an initial outlay of \$50,000 at Year 0, followed by cash inflows of \$20,000 in Years 1-5. Also assume that the risk- free rate is 5 percent, that the expected return on the market is 9 percent, and that an appropriate covariance matrix for Project A, Project B, and the market is given below. As you can calculate, the beta for Project A is 1.05 and its required rate of return is 9.20 percent. Given this information, determine the difference in the NPV between Project A and Project B. Covariance Project A Project B Market Project A 0.00490 0.00473 0.00378 Project B 0.00473 0.00810 0.00324 Market 0.00378 0.00324 0.00360 A. \$373.08 B. \$365.17 C. \$381.93 D. \$350.50 * E. \$392.48 β A = .00378 / .00360 = 1.05 β B = .00324 / .00360 = 0.90 K A = .05 + (.09 - .05)*(1.05) = 9.20% K B = .05 + (.09 - .05)*(0.90) = 8.60% Calculate NPV A : CFj = -\$60,000 CFj = \$23,000 Nj = 5

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Old Exam Questions - Capital Budgeting - Solutions Page 52 of 96 Pages I/YR = 9.20 Solve for NPV = \$28,999.65 Alternatively, N = 5; I/YR = 9.2; PMT = 23,000; Solve for PV = \$88,999.65 NPV = \$88,999.65 - \$60,000.00 = \$28,999.65 Calculate NPV B : CFj = -\$50,000 CFj = \$20,000 Nj = 5 I/YR = 8.60 Solve for NPV = \$28,607.17 Alternatively, N = 5; I/YR = 8.6; PMT = 20,000; Solve for PV = \$78,607.17 NPV = \$78,607.17 - \$50,000.00 = \$28,607.17 Difference = \$28,999.65 - \$28,607.17 = \$392.48 50. Assume that you are at Year 0 and have forecasted the following cash flows if your firm takes on Project A. Year Project A 1 \$10,000 2 \$20,000 3 \$30,000 4 \$20,000 5 \$20,000 Also assume that this project will cost your firm \$51,250 to take on at Year 0 and the correct risk-adjusted discount rate (WACC) to use for this project is 12 percent. Based on this information, determine the net present value (NPV) of this project at Year 0. A. \$19,254.59 B. \$19,459.28 C. \$19,148.83 D. \$19,393.17 * E. \$19,034.76 CFj = -51,250 CFj = 10,000 CFj = 20,000
Old Exam Questions - Capital Budgeting - Solutions Page 53 of 96 Pages CFj = 30,000 CFj = 20,000 CFj = 20,000 I/YR = 12 Solve for NPV = \$19,034.76 YOU ARE GIVEN THE FOLLOWING INFORMATION FOR PROBLEMS 51-53: Year Cash Flow 0 - \$100,000.00 1 \$25,000.00 2 \$35,000.00 3 \$45,000.00 4 \$40,000.00 5 \$25,000.00 51. Assuming that the cost of capital for this project is 10 percent, determine the net present value (NPV) for this project. A.

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## This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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Capital Budgeting Solutions6 - CFj = CFj = CFj = Nj = CFj =...

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