1. a. Calculate (write down a formula) the net present value of the following pr
ID: 2617082 • Letter: 1
Question
1. a. Calculate (write down a formula) the net present value of the following project for discount rates of 0, 50, and 100 percent:
Cash Flows ($) C0 C1 C2
–6,750 4,500 18,000
2. What is the IRR of the project (write down a formula)?
3.Suppose you have the following investment opportunities, but only $90,000 available
for investment. Which projects should you take?
Project NPV Investment
1 5,000 10,000
2 5,000 5,000
3 10,000 90,000
4 15,000 60,000
5 15,000 75,000
6 3,000 15,000
4.Calculate WACC.
Source of capital
Cost
Sum
Loan 1
12%
14000
Loan 2
15%
6000
Equity
20000
Estimate the cost of equity through CAPM. Company’s beta is 1.2, market portfolio rate of return is 15%, risk-free rate of return is 7%.
5.What is VaR? How it can be calculated?
6.Construct after-tax cash flows.Working capital is estimated as 20% of sales.
1
2
3
4
5
Revenues
3000000
3 600000
4200000
4500000
5000000
Operating Expenses
Salaries
300000
330000
360000
390000
400000
Raw Material
1500000
1900000
2200000
2500000
2800000
Depreciation
200000
200000
200000
200000
200000
Operating Income
Taxes (20%)
Operating Income After Taxes
0
1
2
3
4
5
Capital Expenditure
-10000000
After tax operating Income
Depreciation
Change in Working Capital
After-tax Cash Flows
7. A piece of land produces an income that grows by 5 percent per annum. If the first
year’s flow is $10,000, what is the value of the land? The interest rate is 10 percent.
Source of capital
Cost
Sum
Loan 1
12%
14000
Loan 2
15%
6000
Equity
20000
Explanation / Answer
1.
At 0% discount rate NPV of project is calculated below:
Net Present value = [$4,500 / (1 + 0%)] + [$18,000 / (1 + 0%) ^ 2] - $6,750
= ($4,500 + $18,000) - $6,750
= $22,500 - $6,750
= $15,750
Net Present value of project at 0% discount rate is $15,750.
Again,
At 50% discount rate NPV of project is calculated below:
Net Present value = [$4,500 / (1 + 50%)] + [$18,000 / (1 + 50%) ^ 2] - $6,750
= ($4,500 / 1.50) + ($18,000 / 2.25) - $6,750
= ($3,000 + $8,000) - $6,750
= $11,000 - $6,750
= $4,250
Net Present value of project at 50% discount rate is $4,250.
Again,
At 50% discount rate NPV of project is calculated below:
Net Present value = [$4,500 / (1 + 100%)] + [$18,000 / (1 + 100%) ^ 2] - $6,750
= ($4,500 / 2.00) + ($18,000 / 4) - $6,750
= ($2,250 + $4,500) - $6,750
= $6,750 - $6,750
= $0
Net Present value of project at 100% discount rate is $0.
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