# fm12 10 - = 8 to solve for IRR = 15.29 Expected IRR = 15.29...

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c. The portfolio effects from Project B would tend to make it less risky than otherwise. This would tend to reinforce the decision to accept Project B. Again, if Project B were negatively correlated with the GDP (Project B is profitable when the economy is down), then it is less risky and Project B’s acceptance is reinforced. 12-9 a. First, note that with symmetric probability distributions, the middle value of each distribution is the expected value. Therefore, Expected Values Sales (units) 200 Sales price \$13,500 Sales in dollars \$2,700,000 Costs (200 x \$6,000) 1,200,000 Earnings before taxes \$1,500,000 Taxes (40%) 600,000 Net income \$ 900,000 =Cash flow under the assumption used in the problem. 0 = = + 8 1 t t ) IRR 1 ( 000 , 900 \$ - \$4,000,000. Using a financial calculator, input the following: CF 0 = -4000000, CF 1 = 900000, and N j
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Unformatted text preview: = 8, to solve for IRR = 15.29%. Expected IRR = 15.29% ≈ 15.3%. Assuming complete independence between the distributions, and normality, it would be possible to derive σ IRR statistically. Alternatively, we could employ simulation to develop a distribution of IRRs, hence σ IRR . There is no easy way to get σ IRR . b. Using a financial calculator, input the following: CF = -4000000, CF 1 = 900000, N j = 8, and I = 15 to solve for NPV = \$38,589.36. Again, there is no easy way to estimate σ NPV . c. (1) a. Calculate developmental costs. The 44 random number value, coming between 30 and 70, indicates that the costs for this run should be taken to be \$4 million. b. Calculate the project life. The 17, being less than 20, indicates that a 3-year life should be used. Answers and Solutions: 12 - 10...
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