1.In calculating the risk associated with two potential projects (A & B), which
ID: 2717709 • Letter: 1
Question
1.In calculating the risk associated with two potential projects (A & B), which of the following statistical calculations indicates that the projects are equally risky?
The standard deviation of A is 100, and the coefficient of variation of A is 80.912
The standard deviation of B is 1,000, and the coefficient of variation of B is 809.12
The variance of A’s possible outcomes is 258.10, and the standard deviation of A is 100
The variance of B’s possible outcomes is 2,581, and the standard deviation of B is 1,000
iii and iv
ii and iii
i and ii
i and iv
None of the above
The value for "a" in the regression equation Y = a + b(X) + e is shown in Excel as
the slope
the forecasted variable
the intercept
the independent predictor variable
none of the above
Use the information below for the next problem .
Depreciation 27,000
EBIT 150,000
Investment in Operating Assets 50,000
Tax Rate 35%
Free Cash Flow ?
4. Calculate the free cash flow
Use the following information for the next problem
Risk Free X Market
Beta 0.00 1.5 1
Expected 3.00% ? 10.00%
5. What is the expected return for Security X?
Use the following information for the next three problems,
PV of
Year
Cash Flow
Cash Flows
1
$14,000
$12,726
2
$14,000
$11,564
3
$10,000
$7,510
4
$10,000
$6,830
5
$8,000
$4,968
6. What is the NPV of above project if the initial investment was $35,000?
7. Calculate the IRR assuming a cost of capital of 12%.
8. Calculate the MIRR of the project assuming a cost of capital of 12%
PV of
Year
Cash Flow
Cash Flows
1
$14,000
$12,726
2
$14,000
$11,564
3
$10,000
$7,510
4
$10,000
$6,830
5
$8,000
$4,968
Explanation / Answer
1. In calculating the risk associated with two potential projects (A & B), iii & iv indicates that the projects are equally risky.
Working:
Coefficient of variation (CV): Coefficient of Variation measures risk per unit of return.
Coefficient of Variation (CV) = Standard Deviation / Expected Return
Project A (CV) = 100 / 258.10 = 0.387
Project B (CV) = 1000 / 2,581 = 0.387
Hence both project have equal risk under situation iii and iv
2. The value for "a" in the regression equation Y = a + b(X) + e is shown in Excel as (C) the intercept
3. Free Cash Flow = EBIT (1-tax) + Depreciation – Capital Expenditure – Change in Working Capital
= $150,000 (1-0.35) + $27,000 - $50,000 = $74,500
4. Expected Return for Security X = Risk Free Return + Beta (Market Return – Risk Free Return)
Expected Return for Security X = 3% + 1.5(10% - 3%) = 3% + 10.5% = 13.50%
5.
NPV of the project at 10% cost of capital = PV of Cash Flows – PV of Cash Outflows = $43,598 - $35,000 = $8,598
NPV of Project at 12% cost of capital = $41,666 - $35,000 = $6,666
IRR = Lower Rate + NPV at lower rate / NPV at lower rate – NPV at higher rate x (Higher Rate – Lowe Rate)
= 16% + $3,208 / $3,208 – (-$494) x 5% = 16% + 0.8665 x 5% = 16% + 4.33% = 20.33%
Year
Cash Flow
PV of Cash Flows @ 10%
PVIF @ 12%
PV of Cash Flows @ 12%
PVIF @ 16%
PV of Cash Flows @ 16%
PVIF @ 21%
PV of Cash Flows @ 21%
1
$14,000
$12,726
0.893
$12,502
0.862
$12,068
0.826
$11,564
2
$14,000
$11,564
0.797
$11,158
0.743
$10,402
0.683
$9,562
3
$10,000
$7,510
0.712
$7,120
0.641
$6,410
0.564
$5,640
4
$10,000
$6,830
0.635
$6,350
0.552
$5,520
0.466
$4,660
5
$8,000
$4,968
0.567
$4,536
0.476
$3,808
0.385
$3,080
Total PV of All Cash flows
$43,598
$41,666
$38,208
$34,506
Less: PV of Cash Outflows
($35,000)
($35,000)
($35,000)
($35,000)
Net Present Value
$8,598
$6,666
$3,208
($494)
Year
Cash Flow
PV of Cash Flows @ 10%
PVIF @ 12%
PV of Cash Flows @ 12%
PVIF @ 16%
PV of Cash Flows @ 16%
PVIF @ 21%
PV of Cash Flows @ 21%
1
$14,000
$12,726
0.893
$12,502
0.862
$12,068
0.826
$11,564
2
$14,000
$11,564
0.797
$11,158
0.743
$10,402
0.683
$9,562
3
$10,000
$7,510
0.712
$7,120
0.641
$6,410
0.564
$5,640
4
$10,000
$6,830
0.635
$6,350
0.552
$5,520
0.466
$4,660
5
$8,000
$4,968
0.567
$4,536
0.476
$3,808
0.385
$3,080
Total PV of All Cash flows
$43,598
$41,666
$38,208
$34,506
Less: PV of Cash Outflows
($35,000)
($35,000)
($35,000)
($35,000)
Net Present Value
$8,598
$6,666
$3,208
($494)
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