**preview**has

**blurred**sections. Sign up to view the full version! View Full Document

**Unformatted text preview: **8-2.a. Payback on this bond is 25 years. You pay $1,000. You receive $40 a year for 25 years, a total of$1,000.b. The bond is not necessarily a bad investment. Payback does not take time value of money into account,nor does it account for cash flows received after the payback period. It is more appropriate to calculate theNPV of an investment. Given the risk level of the bond, is 4% a fair return? If the answer is yes, then thebond may be a good investment.c. The discounted payback, using a 4% discount rate, is 30 years. This shows that unless the acceptablepayback period is decreased when discounted payback is used, vs. regular payback, then projects whichreturn money late in the life of the investment are even more disadvantaged under discounted paybackthan under regular payback. NPV is a more appropriate method to use to determine the value of aninvestment project.8-9.ProjectIRRABCD17.4%8.7%27.2%21.4%10-1a.Cost of Equity = 6% + [1.6(11%-6%)]= 14%10-3.Pepsico has a higher operating leverage as per the attached excel sheetSalesOperating incomeDOLCoca-Cola20062005$24.09$23.10$6.09$6.310.81Pepsi2006$35.14$6.441.112005$32.56$5.92...

View Full Document