5. A degree program cost $50,000 in total expenses: $30,000 in tuition and $20,0
ID: 2388674 • Letter: 5
Question
5. A degree program cost $50,000 in total expenses: $30,000 in tuition and $20,000 in housing and books. The US government provides a grant for $10,000 of the tuition. Moreover, the university pays $20,000 of the $30,000 tuition in salary to your instructors. Being in the program is so much fun; you would be willing to a net of $5,000 for the pleasure, relative to your alternatives. What is the net cost of the education to you?6. A project costs $19,000 and promises the following cash flow:
Year 1 2 3
Cash Flow $12,500 $6,000 $3,000
The appropriate discount rate is 15% per annum. Should you invest in this project?
7. Which of the following are good candidates for ascertaining the value effects with an event study, and why?
An acquirer wants to buy the firm
The CEO dies
The CEO ages
Positive earnings surprise at the annual meeting
Purchase of a new machine
A law is passed to force the company to reduce its emissions
An Ad campaign
Explanation / Answer
5 . Net cost : 20000 + 30000 - 10000 = $ 40000 $ 5000 is not included as per the money measurement principle . $ 5000 is for the pleasure but pleasure cannot be counted in value terms . 6 . We need to use the discount table to find whether the investment is profitable or not . Year 1 2 3 Investment 12500 6000 3000 * Discount rate @ 15 0.8696 0.7561 0.6575 Net return on investment 10870 4537 1097 Net revenue from investment : (10870 + 4537 + 1097 ) = 16504 - 19000 = (2496) As the investment will turn into loss , it is useless to investment rather and useful to save the money . 7. Positive earnings surprise at the annual meeting :- This means that the company is under valued in the market . Purchase of a new machine :- The company has bought the latest technology suggesting that they will be able to produce at a lower cost then in past thus increasing profits. A law is passed to force the company to reduce its emissions :- Suggests the company will be faced with taxable or potential charges if they are not able to reduce its emissions. Due to that they will need to enhance the technology which will need investment and increase their costs . Cannot think of others mate , sorry .
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