SOLUTIONS CHAPTER 14

SOLUTIONS CHAPTER 14 - CHAPTER 14 CAPITAL BUDGETING UNDER...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 14 CAPITAL BUDGETING UNDER UNCERTAINTY 14-1 (a) R A = (900)(0.50) + (500)(0.30) + (350)(0.20) = $670 R B = (700)(0.50) + (700)(0.30) + (550)(0.20) = $670 σ A = [(900 - 670) 2 (0.50) + (500 - 670) 2 (0.30) + (350 - 670) 2 (0.20)] 1/2 = $236 σ B = [(700- 670) 2 (0.50) + (700 - 670) 2 (0.30) + (550 - 670) 2 (0.20)] 1/2 = $60 CV A = 236 ÷ 670 = 0.35 CV B = 60 ÷ 670 = 0.09 (b) The two projects have the same expected value, but Project B has a smaller degree of risk as measured by the standard deviation and the coefficient of variation. Hence, Project B is better than Project A. 14-2 (a) R = 1,000(0.20) + 2,000(0.10) + 3,000(0.30) + 4,000(0.40) = $2,900 (b) or by financial calculator: Hit CF; key in 2800 for CFo, then +/-, then hit enter and scroll down; key 2900 for CO1, hit enter, scroll down; key in 3 for F01, hit enter; hit NPV, key in 10 for I and hit enter; scroll down to NPV screen and hit compute = NPV = $4411.87 (c) σ = [(1,000 - 2,900) 2 (0.20) + (2,000 - 2,900) 2 (0.10) + 3,000 - 2,900) 2 (0.30) + (4,000 - 2,900) 2 (0.40)] 1/2 = $1,136 14-3 (a) Standard Net Present Coefficient of Project Deviation Value Variation Rank A$1,400 $7,000 0.20 5 B 6,300 70,000 0.09 1 C 2,800 21,000 0.13 3 D 4,900 35,000 0.14 4 E 2,100 21,000 0.10 2 (b) Project C and E have an equal net present value of $21,000, but Project E has the smaller standard deviation than Project C. This leads us to conclude that Project E is better than Project C. Thus, to choose between Projects C and E only, we do not need to use the coefficient of variation. 14.4 (a)NPV = $8000/(1.12) 1 + $9000/(1.12) 2 + $10000/(1.12) 3 + $11000/(1.12) 4 - $15000 = $13433
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
or by financial calculator: Hit CF; key in 12000 for CFo, then +/-, then hit enter and scroll down; key 8000 for CO1, hit enter, scroll down to CO2; key in 9000, hit enter; scroll down to C03, key in 10000, hit enter; scroll down to C04, key in 11000, hit enter; hit NPV, key in 12 for I and hit enter; scroll down to NPV screen and hit compute = NPV = 13426.10 (b) or by financial calculator: NPV = $9008.49 14.5 NPV = $900(0.75)/(1.06) 1 + $1000(0.55)/(1.06) 2 + $1400(.035)/(1.06) 3 - $1400 = $138 or by financial calculator: NPV = $137.70 14-6 (a) Because the expected net cash flows for both projects are $4,000 or ($8,000 x 0.50 + $0 x 0.50), their net present values are computed as follows: NPV F = $4,000 / (1.10) - $3,000 = $636.36 PV G = $4,000 / (1.10) - $4,000 = -$363.64 (b) The standard deviation of these two projects can be computed using Equation (14-2): σ F = [(8,000 - 4,000)) 2 (0.50) + (0 - 4,000) 2 (0.50)] 1/2 = $4,000 σ G = [(0 - 4,000) 2 (0.50) + (8,000 - 4,000) 2 (0.50)] 1/2 = $4,000 (c)Portfolio NPV = $636 + (-$364) = $272 The portfolio standard deviation is zero (0) because the portfolio produces a net present value of $272.
Background image of page 2
CHAPTER 15 INVESTMENT BANKERS AND CAPITAL MARKETS
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 10

SOLUTIONS CHAPTER 14 - CHAPTER 14 CAPITAL BUDGETING UNDER...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online