average risk WACC of 12%. Which of the followi accept? ua is average-risk projec
ID: 2803865 • Letter: A
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average risk WACC of 12%. Which of the followi accept? ua is average-risk projects have a w projects have a WACC of 8%, andits above-average risk projects ave ng projects (A, B, and C) should the company Project B, which is of below-average risk and has a return of 85%. b. Project C, which is of above-average risk and has a return d c. Project A, which is of average risk and has a return of 9% d. None of the projects should be accepted. e. All of the projects should be accepted of1196. Lorraine Jackson won a lottery. She will have a choice of receiving $25,000 at the end of each year for the next 30 years, or a lump sum today. If she can earn a return of 10 percent on any investment she makes, what is the minimum amount she should be willing to accept today as a lump-sum payment? (Round to the nearest hundred dollars.) 9. a. $750,000 b. $334,600 c· $212,400 d. $235,700 e. $108,744 Your grandmother has promised to gi is expecting you to graduate two this gift if you delay your graduation by one year and graduate three years from now? 10. grandmother has promised to give you S5,000 when you graduate from college. She of What happens to the present value years from now a. Remains constant b. Increases c. Decreases d. Becomes negative e. Cannot be determined from the information provided Suppose you inherited $715,000 and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years? 11 a. $71,217.00 b. $74,184.38 c. $80,119.13 d. $57,121.97 e. $84,570.19Explanation / Answer
9.
Payment per period = $ 25,000
PV of future cash flow = Payment per period x PVIFA (30yr, 10%)
= $ 25,000 x 9.42691 = $ 235,672.75 or $ 235,700 (rounding 100th $)
Lorraine Jackson should not accept less than the present value of future 30 years payment amount as lump-sum.
Hence option “d. $ 235,700” is correct answer.
10.
On completing graduation, you will get the gift as $ 5,000. You will get the amount after three year in place of expected two year. PV of future $ 5,000 for 3 years is less than that of 2 years.
Delay on graduation from your side means the present value of $ 5,000 will decrease.
Hence option “c. Decreases” is correct answer.
11.
Future cash flow can be calculated using formula for present value future annuity as:
PV = P x [1 – (1 + r)-n/r]
P = PV/[1 – (1 + r)-n/r]
Where,
PV = Present value of ordinary annuity = $ 715,000
P = Payment per period
r = rate per period = 8.25 % or 0.825 p.a.
n = no. of periods = 20
$ 715,000 = P x [1-(1+0.0825)-20/0.0825]
P = $ 715,000/[1-(1+0.0825)-20/0.0825]
= $ 715,000/[1-(1.0825)-20/0.0825]
= $ 715,000/[1-(0.204852798)/0.0825]
= $ 715,000/(0.795147202/0.0825)
= $ 715,000/9.638147907
= $ 74,184.37722 or $ 74,184.38
Hence option “b. $ 74,184.38” is correct answer.
[Answered Question No. 9 through 11 as No. 8 is not visible completely]
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