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

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