SOLUTIONS CHAPTER 14

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

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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

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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.
CHAPTER 15 INVESTMENT BANKERS AND CAPITAL MARKETS

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

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