# 42 an investment will pay 100 at the end of each of

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42. An investment will pay \$100 at the end of each of the next 3 years, \$200 at the end of Year 4, \$300 at the end of Year 5, and \$500 at the end of Year 6. If other investments of equal risk earn 8% annually, what is this investment’s present value? Its future value? 4. Bond and Valuation 43. A bond that matures in 5 years has a par value of \$1,000, an annual coupon payment of \$80, and a market interest rate of 9%. What is its price? 44. A bond has a 5-year maturity, an 8% annual coupon paid semiannually, and a face value of \$1,000. The going nominal annual interest rate (r) is 6%. What is the bond’s price? 45. “Short-term interest rates are more volatile than long-term interest rates, so short term bond prices are more sensitive to interest rate changes than are long-term bond prices.” Is this statement true or false? Explain. 46. The real risk-free rate of interest is 4%. Inflation is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasury securities? 47. Differentiate between interest rate risk and reinvestment rate risk? 48. How do bond ratings affect default risk premium? 49. Assume that the real risk-free rate is r* = 3% and that the average expected inflation rate is 2.5% for the foreseeable future. The DRP and LP for a bond are each 1%, and the applicable MRP is 2%. What is the bond’s yield? 50. a. How does a bond’s current yield differ from its total return? b. Could the current yield exceed the total return? Cash Flow Estimation and Risk Analysis

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51. What are the some differences in the analysis for a replacement project versus that for a new expansion project? 52. Explain the following terms: incremental cash flow, sunk cost, opportunity cost, externality, cannibalization, and complementary project. 53. Differentiate between sensitivity analysis and scenario analysis. What advantage does scenario analysis have over sensitivity analysis? 54. Allen Air Lines is now in the terminal year of a project. The equipment originally cost \$20 million, of which 80% has been depreciated. Carter can sell the used equipment today to another airline for \$5 million, and its tax rate is 40%. What is the equipment’s after-tax net salvage value? 55. Would a project’s NPV for a typical firm be higher or lower if the firm used accelerated rather than straight-line depreciation? Explain. The Basics of Capital Budgeting 56. A project has the following expected cash flows: CF0 = −\$500, CF1 = \$200, CF2 = \$200, and CF3 = \$400. If the project’s cost of capital is 9%, what is the PI? 57. What two characteristics can lead to conflicts between the NPV and the IRR when evaluating mutually exclusive projects? 58. Project P has a cost of \$1,000 and cash flows of \$300 per year for 3 years plus another \$1,000 in Year 4. The project’s cost of capital is 15%. What are P’s regular and discounted paybacks? If the company requires a payback of 3 years or less, would the project be accepted? Would this be a good accept/reject decision, considering the NPV?
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• Summer '14
• Prof Gter
• Economics, Ratio, total assets, inventory turnover ratio

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