for cumulative profies from a projeet to equal the initsal oua b the muimber of
ID: 2803027 • Letter: F
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for cumulative profies from a projeet to equal the initsal oua b the muimber of years required for the cumulative cash flows from a project to equal the unitial outlay e the number of ycars roquired for the cumulative cash flows from a project to equal the average investasent in the project, when depreciation is considered d a period of time sufficient to carn a rate of rcturn equal to the firm's cost of capital NSWER 12 Ifa net present value analysis for a normal project gives an NPV greater than zero, an internal rate of return caleulation on the same project would yield an intemal rate of return of retum for the firm the required rate greater than b less than c equal to d cannot be determined from the information given ANSWER 13. The risk-free rate of return is 5,5 percent, which includes an expected inflation premium of 2 5 percent The expected return on the market is 12 8 percent What is the required rate of retum for Envoy's common stock, which carries a beta of 1.35 a, 70% b 164% c 15.4% 12.8% ANSWER 14 The risk premium in Problem #15 above is: a 128% b. 99% C. 5596 d. 15.4% ANSWER IS. A-Z's new IBM mainframe machine costs $30,000 with is expected useful life of 10 years and a one- time installation expense of $1000. The machine will be depreciated on a straight-line basis over 10 ycars to a zero estimated salvage value at the end of the period. This machine is expected to reduce the firm's cash operating costs by $4,500 per year. If the firm is in the 40 percent marginal tax bracket, determine the annual net cash flows generated by the mainframe machine is a. $4,500 b $3,940 c $5,700 d $3,900 ANSWERExplanation / Answer
Q12: Sol: answer (a) If NPV for a mormal project is grater than zero, the IRR calculation would yield the IRR greater than the required rate of return for the firm because as per the decision rule NPV is inversely related to required rate of return and here we have NPV which is greater than zero, which means IRR has to be greater than the required rate of return which means IRR has to be greater than the required rate of return Q13: Sol: Required rate of return can be calculated with the below formula: Ri = Rf+(Rm-Rf) where; Ri = Required rate of return Rf = risk free rate = Beta Rm = Market expected return So, Ri = 5.51+1.35*(12.8-5.5) = 15.4 (%) answer Q14: Sol: Asset risk premium = (Rm-Rf) 1.35*(12.8-5.5) = 9.9 (%) answer Q15: Sol: Revenue 0 Operating Cost 4500 Depreciation 30000/10 = 3000 Tax 1-0.4 = 0.6 NCF (0+4500-300`0)*0.60+3000 = 3,900 Answer
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